I am an Engineer. I did my Masters in Structural Engineering and then I have been working as an IT Consultant for most part of my professional life.
Speaking of life, it was a little different before I started this MBA.
Then, the discounts offered by stores meant 'discounts', memberships at movie halls and departmental stores meant convenience and special offers, stamps on loyalty cards at restaurants meant some free food as soon as I succeeded in collecting all stamps.
Now, after two terms in this MBA, and after already taking the Managerial Economics class by Prof. Gonzalo Garland - one of my favorite professors here at IE, things are just not the same anymore. By the time you finish reading this post, I am sure you will all know what I mean.
Just last week, I was walking along streets of Madrid, and on one of the traffic lights, a teenager handed over a pamphlet with a bunch of Burger King discount vouchers. As I said, earlier, this would have been just another store offering discounts - that day, even before I could notice, I was already thinking of whether this is a price discrimination implementation by Burger King. This thought led to even further thinking and ultimately I decided to share this entire chain of thoughts through this post.
When most of the people learn about price discrimination, they learn about how the airlines are using this tool or how theme parks play around this concept. When we think of monopolies, we think of Oil companies and telephone operators and some big names and brands.
But, are these savvy MBA concepts applicable to only the big corporations?
No, definitely not - I mean - the only burger restaurant in an area near International Business School, or the only theater in a Spanish town showing movies in English, or branch of a super market operating in a business district with really no other grocery stores to compete with, or a Japanese/Italian or similar foreign cuisine restaurant - aren't these all examples of monopolies in their own way?
And do we not pay a premium price at these places? The answer is YES.
And now with the changing economies and crisis times, these stores, these shops, restaurants and movie halls need to make the most from their consumers.
In terms of economics, while they are enjoying their monopoly position, if they can also reduce the deadweight/welfare loss and maximize their surplus, they should be able to perform better even in the crisis times.
Here is a supply-demand curve showing monopoly price [M], equilibrium price [E], and the deadweight loss of monopoly.
For those new to concepts, equilibrium price is the price where supply is exactly equal to the demand, monopoly price is the higher price charged by the player with monopoly, and deadweight loss is the loss of surplus [both consumer and producer] as the supply is lesser than demand or the price charged is higher than the equilibrium. Here the supplier/producer benefits because of pure geometrical excellence of the rectangular area he gains by giving up the triangular part in the deadweight loss.
One of the proposed solutions by economics to recover the deadweight loss is Price Discrimination. Charge the customers in proportion to how much they value your product and are willing to pay.
So again, does this price discrimination need complex algorithms like that deployed by the airlines industry? Yes and No.
If the variables are too many, may be we need some algorithms. But for day to day life encounters, there are so many different ways to introduce the price discrimination. The more I thought about it, the more ways I found. Let me list some of them down and you will know how much this concept of price discrimination is now embedded in our life.
1. Loyalty programs: A loyalty card of departmental store, which we can use to avail special offers and discounts is basically a tool which helps those with lower willingness to pay. I am willing to buy a product, but if the store wants me to buy two, it should give me a discount. In other words, charge more to the person who is willing to pay, and make the consumer subscribe to loyalty program to introduce them to discriminated lower price.
A stamp card for restaurants is a similar tool. Charge the customer a premium if he is willing to pay and discriminate with those who are more loyal by offering a meal free for say each 4 meals [effectively offering 25% price reduction per meal].
The discount coupons that shops and restaurant offers, valid for our next purchase is a way to do price discrimination.
If you are still doubting whether these are really the price discrimination cases, think of this. If you are willing to pay the full price even on your second visit to some such place, you would just ignore the discount coupon/loyalty card and end up paying the full price. Nevertheless, you know that you have a discount coupon, and if you use it, you know that you can get the same thing at a lower [discounted] price, which opens a possibility of price discrimination.
2. Offers: We get so many pamphlets in our mailbox every week. There are so many people distributing pamphlets - on the streets, in the restaurants, in shops, everywhere you go. And then, there are special agencies playing around with pricing schemes and offering consumers with discount deals, even while earning a premium for themselves. May it be paper version like 'Family Check' or an online version like 'Groupon', what these stores and agencies are essentially offering is a chance to pay less, for those who are not willing to pay the current price.
The most evident and also fascinating form of price discrimination that I came across recently is however on the Domino's Pizza website.
Once we select the pizza and get to the billing page, we can either press continue and pay the full price, or we can avail discount from coupon we have or we can also have a generic discount, which is available for all online customers if they click a box on left side of the screen. In effect, this page shouts at all its users - pay the full price if you are willing to, else we can discriminate prices as well, for those who hold discount coupons and also those who are not willing to pay the full price displayed.
Amazing, isn't it?
To conclude this post, all I can say is that the more examples and applications I am seeing of various concepts I am studying as part of my MBA here at IE, the more it is impressing me.
Speaking of life, it was a little different before I started this MBA.
Then, the discounts offered by stores meant 'discounts', memberships at movie halls and departmental stores meant convenience and special offers, stamps on loyalty cards at restaurants meant some free food as soon as I succeeded in collecting all stamps.
Now, after two terms in this MBA, and after already taking the Managerial Economics class by Prof. Gonzalo Garland - one of my favorite professors here at IE, things are just not the same anymore. By the time you finish reading this post, I am sure you will all know what I mean.
Just last week, I was walking along streets of Madrid, and on one of the traffic lights, a teenager handed over a pamphlet with a bunch of Burger King discount vouchers. As I said, earlier, this would have been just another store offering discounts - that day, even before I could notice, I was already thinking of whether this is a price discrimination implementation by Burger King. This thought led to even further thinking and ultimately I decided to share this entire chain of thoughts through this post.
When most of the people learn about price discrimination, they learn about how the airlines are using this tool or how theme parks play around this concept. When we think of monopolies, we think of Oil companies and telephone operators and some big names and brands.
But, are these savvy MBA concepts applicable to only the big corporations?
No, definitely not - I mean - the only burger restaurant in an area near International Business School, or the only theater in a Spanish town showing movies in English, or branch of a super market operating in a business district with really no other grocery stores to compete with, or a Japanese/Italian or similar foreign cuisine restaurant - aren't these all examples of monopolies in their own way?
And do we not pay a premium price at these places? The answer is YES.
And now with the changing economies and crisis times, these stores, these shops, restaurants and movie halls need to make the most from their consumers.
In terms of economics, while they are enjoying their monopoly position, if they can also reduce the deadweight/welfare loss and maximize their surplus, they should be able to perform better even in the crisis times.
Here is a supply-demand curve showing monopoly price [M], equilibrium price [E], and the deadweight loss of monopoly.
For those new to concepts, equilibrium price is the price where supply is exactly equal to the demand, monopoly price is the higher price charged by the player with monopoly, and deadweight loss is the loss of surplus [both consumer and producer] as the supply is lesser than demand or the price charged is higher than the equilibrium. Here the supplier/producer benefits because of pure geometrical excellence of the rectangular area he gains by giving up the triangular part in the deadweight loss.
One of the proposed solutions by economics to recover the deadweight loss is Price Discrimination. Charge the customers in proportion to how much they value your product and are willing to pay.
So again, does this price discrimination need complex algorithms like that deployed by the airlines industry? Yes and No.
If the variables are too many, may be we need some algorithms. But for day to day life encounters, there are so many different ways to introduce the price discrimination. The more I thought about it, the more ways I found. Let me list some of them down and you will know how much this concept of price discrimination is now embedded in our life.
1. Loyalty programs: A loyalty card of departmental store, which we can use to avail special offers and discounts is basically a tool which helps those with lower willingness to pay. I am willing to buy a product, but if the store wants me to buy two, it should give me a discount. In other words, charge more to the person who is willing to pay, and make the consumer subscribe to loyalty program to introduce them to discriminated lower price.
A stamp card for restaurants is a similar tool. Charge the customer a premium if he is willing to pay and discriminate with those who are more loyal by offering a meal free for say each 4 meals [effectively offering 25% price reduction per meal].
The discount coupons that shops and restaurant offers, valid for our next purchase is a way to do price discrimination.
If you are still doubting whether these are really the price discrimination cases, think of this. If you are willing to pay the full price even on your second visit to some such place, you would just ignore the discount coupon/loyalty card and end up paying the full price. Nevertheless, you know that you have a discount coupon, and if you use it, you know that you can get the same thing at a lower [discounted] price, which opens a possibility of price discrimination.
The most evident and also fascinating form of price discrimination that I came across recently is however on the Domino's Pizza website.
Once we select the pizza and get to the billing page, we can either press continue and pay the full price, or we can avail discount from coupon we have or we can also have a generic discount, which is available for all online customers if they click a box on left side of the screen. In effect, this page shouts at all its users - pay the full price if you are willing to, else we can discriminate prices as well, for those who hold discount coupons and also those who are not willing to pay the full price displayed.
Amazing, isn't it?
To conclude this post, all I can say is that the more examples and applications I am seeing of various concepts I am studying as part of my MBA here at IE, the more it is impressing me.
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