Answer to Question #286441 in Microeconomics for Sophie

Question

4. Price discrimination requires the ability to sort customers and the ability to prevent arbitrage. Explain how the following can function as price discrimination  schemes and discuss both sorting and arbitrage:  

4.1 Requiring airline travelers to spend at least one Saturday night away from home to qualify for a low fare. (3)

 4.2 Insisting on delivering cement to buyers and basing prices on buyers’  locations. (3) 

4.3 Selling food processors along with coupons that can be sent to the manufacturer for a $10 rebate. (3) 

4.4Offering temporary price cuts on bathroom tissue.Charging high-income patients more than low-income patients for plastic surgery. (3) 

Answer 1

4.1 Requiring airline passengers to spend at least one Saturday night away from home in order to qualify for a reduced rate functions as a price discrimination tool, as those who do so will be charged less than those who do not. This is a great technique of discriminating because the discount is exclusively granted to frequent flyers.

4.2 Demanding that cement be delivered to purchasers and basing pricing on their locations is another form of discrimination in which sorting is more prominent and persons might profit from location arbitrage. Because consumers can't tell who receives the discount and who doesn't, this kind of discrimination is more natural.

4.3 Those that purchase food processors first pay a higher price and then receive a discount coupon. In the retail industry, coupons are used to separate customers based on their reserve price. Individuals who collect coupons are thought to be more sensitive to a greater price than those who do not. A producer can charge a higher price to price-insensitive customers and a lower price to price-sensitive customers by supplying coupons.

4.4 Another price discrimination approach is a temporary price drop. The price of bathroom tissue has been temporarily decreased. The major goal is to attract new potential clients with a flexible need. Their desire for bathroom tissue will become inelastic after they have been accustomed to it. The price decrease will then be removed, and a higher price will be charged in its place. A segment of existing clients is price sensitive. They will purchase more tissues if the price is reduced. Others, who are less sensitive, will purchase the same quantity as they do each cycle.