Monday, November 15, 2010

An example of price discrimination

I took this picture yesterday while shopping for groceries at Costco.

This is an interesting example of pricing, not only because it is price discrimination, but because it fits into the description of more than one type of price discrimination.

On one hand, Sullivan's Steakhouse (using its partnership with Costco) is bundling the two gift certificates together in a quantity discount. This is second degree price discrimination. Here's how it works in this example:

If you commit to buying two $50 certificates, you get $50 for the price of $40 on each one. As long as this menu of prices induces people to sort into high and low demand types, Sullivan's knows that the ones who go for this deal have higher demand. They can get away with charging a lower per-unit price to high-demand individuals because they'll make it up on volume. And, they know they'll make it up on volume because only a high demand individual will go for this deal.

On the other hand, Sullivan's might also be using its partnership with Costco to screen the type of customer who gets access to this deal. Because you need a membership to get into the building and to pay at the register, Sullivan's knows that you are a Costco customer if you go for this deal. Moreover, it is likely that Costco customers are more sensitive to price changes, and it makes sense to offer Costco-specific price discounts. In other words, Sullivan's segmented the market and charged different prices to different segments of the market. That's third-degree price discrimination.

For a more textbook discussion of these types of price discrimination, see my videos on the topic.

Intro to Price Discrimination

Second Degree Price Discrimination (from a different perspective from above):

Third Degree Price Discrimination

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