Price Discrimination in Real Life

Another of the topics from class last weekend was price discrimination.  From Wikipedia:

Price discrimination or price differentiation is a pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets or territories. Price differentiation is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy.  Price differentiation essentially relies on the variation in the customers’ willingness to pay.

via Price discrimination – Wikipedia, the free encyclopedia.

You see price discrimination all the time, but probably not notice it that way.  Bulk pricing is one of the most popular form of pricing for demand.  Another is student or senior discounts.

I came across a recent example of price discrimination from upstart Uber:

Without a surge pricing mechanism, there is no way to clear the market. Fixed or capped pricing, and you have the taxi problem on NYE—no taxis available with people waiting hours to get a ride or left to stagger home through the streets on a long night out. By *raising* the price you *increase* the number of cars on the road and maximize the number of safe convenient rides. Nobody is required to take an Uber, but having a reliable option is what we’re shooting for. See my post on Surge Pricing here.

via Uber Blog – Surge Pricing Followup.

Uber figured out that demand surged in particular times (like New Year’s Eve) for their services, and was able to adjust to it.  Surge pricing, when it works, can be really effective for allowing price to signal in the market.  If the price is going to surge on New Year’s, more Uber drivers, the argument goes, will party a different day and be ready to make some money driving a partially intoxicated celebrant home.  Supply and demand, right?  And higher prices will typically bring more market entries (contrary to what the FTC assumes, sadly, as I pointed out yesterday).

Another “famous” example of price discrimination is Coca-Cola’s attempt to price vending machines for beverages higher on hot days:

It was not one of the great marketing moments in the company’s history. In Internet chat rooms and newspaper editorials around the world, angry Coke drinkers denounced the idea. The word “gouging” got tossed around a lot. Pepsi gleefully accused its rival of exploiting consumers.

Coke responded by running away from the heat-seeking vending machine as fast as possible. Company spokesmen said that Mr. Ivester was talking hypothetically and there were no plans to add a summer surcharge. Coke was actually looking for ways that vending machine technology could lower the cost of a drink, they added.

via Why Variable Pricing Fails at the Vending Machine – New York Times.

And it failed.  And why?  In my opinion it was because it wasn’t really demand surging, it was an attempt to take a correlation (temperature up) and assume that it meant consumers would pay more.  But vending machines are, whether in reality or psychology, a one price shop for consumers.  We’re used to pricing changes on airline tickets, but not at the coke machine we stopped at yesterday.  It didn’t work.

The goal in price discrimination is to gain profits from consumers who are willing to pay more while gaining sales from consumers who aren’t.  If you can create a price strategy that works, you can succeed.  But be careful, because the wrong assumptions could just cost you your shirt.

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