Question

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: a. Requiring airline travelers to spend at least one Saturday night away from home to qualify for a low fare. b. Insisting on delivering cement to buyers and basing prices on buyers' locations. c. Selling food processors along with coupons that can be sent to the manufacturer for a \(\$ 10\) rebate. d. Offering temporary price cuts on bathroom tissue. e. Charging high-income patients more than lowincome patients for plastic surgery.

Short answer

Price discrimination schemes aim to capture more profit by charging different prices to different customers. The given business strategies all sort customers, identify their willingness to pay, and create barriers to prevent arbitrage. The goal of these strategies is to maximize profit by capturing more consumer surplus.

Step-by-step solution

Understand Price Discrimination

Price discrimination occurs when a seller charges different prices to different consumers for the same good or service, when the price differences can't be justified by cost differences. The goal is to capture consumer surplus and turn it into additional producer surplus or profit.

Explaining Situations: Airline Travelers

The airline insists that travelers spend at least one Saturday night away from home to qualify for a low fare. This is a price discrimination scheme as it sorts consumers based on their willingness and ability to stay over the weekend. Business travelers typically want to return home before the weekend and are less price-sensitive, whereas leisure travelers are more likely to stay over the weekend and are more price-sensitive. This scheme also prevents arbitrage as the ticket is non-transferable.

Explaining Situations: Cement Delivery

Sellers insist on delivering cement to buyers and base prices on buyers' locations. This is price discrimination as it sorts consumers based on their locations. Those in remote locations might be charged more due to the higher cost of delivery, and they're less likely to arbitrage due to the cost and practicality of re-selling and delivering cement.

Explaining Situations: Food Processors and Coupons

Selling food processors with coupons that can be sent for a rebate is price discrimination. The manufacturer sorts the customers based on their willingness to spend time to send the coupons for rebate. More price-sensitive consumers are more likely to send the coupons. The arbitrage is prevented as the coupon is valid only with a proof of purchase.

Explaining Situations: Price cuts on bathroom tissue

Offering temporary price cuts on bathroom tissue is a form of price discrimination. It sorts customers based on their ability and willingness to stock up during sales. More price-sensitive consumers are more likely to do this. The arbitrage is limited due to the practicality of reselling bathroom tissue.

Explaining Situations: Plastic surgery for high and low income patients

Charging high-income patients more than lowincome patients for plastic surgery is price discrimination. It sorts customers based on their income levels, assuming high-income individuals are less sensitive to price. The arbitrage is minimal as reselling medical procedures is not feasible.