Question

Disneyland also offers a discount on admissions to residents of Southern California. (You show them your zip code at the gate.) What kind of price discrimination is this? What does this imply about the elasticity of demand for Disney attractions by Southern Californians?

Short answer

This is third-degree price discrimination, indicating that Disneyland perceives Southern Californians' demand as more elastic.

Step-by-step solution

Understand Price Discrimination Types

First, we need to understand the three types of price discrimination. First-degree price discrimination involves charging each consumer their maximum willingness to pay. Second-degree price discrimination offers different prices based on the quantity purchased or consumed. Third-degree price discrimination involves charging different prices to different groups based on characteristics such as age, location, or occupation. In this case, Disneyland offers discounts based on geographic location, identifying residents of Southern California as a group.

Identify the Type of Price Discrimination

Disneyland is practicing third-degree price discrimination. They are offering discounted admission prices to a specific group identified by their zip code, which is a characteristic related to location. This implies they recognize different demand elasticities among different geographic regions.

Analyze Elasticity of Demand

Price discrimination suggest that Disneyland believes the elasticity of demand for residents of Southern California differs from others. Typically, residents living closer to the park may have more substitutes (e.g., other entertainment options) available to them and may visit more frequently, implying a more elastic demand. Therefore, the discount is offered to increase their attendance.

Conclusion on Elasticity Implication

The implication of offering a discount to Southern California residents suggests that Disneyland perceives their demand as more price elastic compared to tourists or residents from other areas. Responding to price changes with larger changes in quantity demanded makes it beneficial for Disneyland to lower the price and capture more of this market segment.

Key concepts

Elasticity of Demand

Elasticity of demand is a key concept in economics that describes how sensitive the quantity demanded of a good is to a change in its price. If a small change in price leads to a large change in quantity demanded, the demand is considered elastic. Conversely, if a large change in price leads to a small change in quantity demanded, the demand is inelastic.

Understanding elasticity helps businesses like Disneyland make strategic pricing decisions. For instance, if Southern Californians show a higher sensitivity to prices—a characteristic of elastic demand—they would respond to price changes more significantly. This elasticity may arise because local residents have a mix of entertainment alternatives closer by, making them more likely to choose another option if Disneyland's prices are too high.

Disneyland responds to this elasticity by offering discounts specifically to Southern Californians. The lower prices likely help increase attendance by converting potential visitors into ticket-buyers who might otherwise choose different activities. Therefore, elasticity of demand plays a pivotal role in setting different price points to maximize revenue.

Third-degree Price Discrimination

Third-degree price discrimination occurs when a business offers different prices to separate customer groups based on identifiable characteristics like location, age, or occupation. This allows companies to adjust pricing according to the perceived willingness or ability of different segments to pay.

In the case of Disneyland, they implement third-degree price discrimination by offering discounts to residents of Southern California. This strategy is based on the assumption that this group has distinct purchasing characteristics compared to tourists or those living further away. For instance, local residents may not be willing to pay as much as visitors traveling long distances, possibly due to more accessible alternatives or more frequent visits.

By identifying and catering to these specific groups, companies aim to maximize their customer base and optimize revenue. Disneyland's tailored pricing ensures they capture more local visitors by adjusting prices to better match their demand patterns and willingness to pay.

Geographic Pricing Strategy

Geographic pricing strategy involves setting price differences based on location. Companies use this method to cater to diverse economic environments, cost structures, or competitive landscapes. For Disneyland, the geographic pricing strategy manifests as offering discounts to residents of Southern California.

This strategy recognizes that costs, market conditions, and competition vary between different geographic areas. For instance, customers who live close to Disney parks may have more affordable entertainment alternatives and thus require pricing incentives to choose Disneyland over other options.

• Residents may visit more often due to proximity, impacting their price sensitivity.
• Geographic pricing helps adjust for varying levels of competition and consumer preferences.

Offering location-based price adjustments allows Disneyland to strengthen customer loyalty and enhance attendance from particular regions. Ultimately, such a strategy aims to maximize market penetration and revenue by aligning prices with the local economic context.