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:

1. Requiring airline travelers to spend at least one Saturday night away from home to qualify for a low fare.

2. Insisting on delivering cement to buyers and basing prices on buyers’ locations.

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

4. Offering temporary price cuts on bathroom tissue.

5. Charging high-income patients more than low-income patients for plastic surgery

Short answer

1. The arbitrage is not possible when a particular customer is considered.

2. The sorting is possible based on location.

3. The arbitrage is possible as the food processors can be sold below the retail price.

4. Arbitrage is possible, but the cost of arbitrage is high.

5. The arbitrage is not possible as it is difficult to transfer the plastic surgery.

Step-by-step solution

Step 1. Explanation for part (a)

The tourist has no urgency and makes travel plans generally on weekends, whereas it is difficult for business travellers to stay on the weekends. Thus, a particular customer name will be mentioned; hence, there is no space for arbitrage.

Step 2. Explanation for part (b)

The consumers are sorted based on geography by basing the price buyers’ location. The cement price includes the transportation charges paid by the consumer, whether the delivery location buyers’ place or the sellers’ place. The pricing strategy is called basing-point pricing; all the sellers use the same point to calculate the transportation cost. Hence, every seller changes the same price.

Step 3. Explanation for part (c)

The rebate is possible only when the consumer sends the form of rebate to the manufacturer. The consumer with less price-sensitive does not fill the form for the rebate, and the consumer with more price-sensitive does fill the form for rebate. The group of consumers who fill the form has an opportunity to sell the food processors below the retail price after receiving the rebate.

Step 4. Explanation for part (d)

The temporary price cut on the bathroom tissues is intertemporal price discrimination. The consumer with less price sensitivity will not change their demand, but the more price sensitivity will increase their demand. Here arbitrage is possible, but the profit from the arbitrage process will be very small as it requires a high cost of storing, transportation, and resale.

Step 5. Explanation for part (e)

Segregating the patients between high-income and low-income is very difficult for the doctor, as the doctor can only guess. The doctor can initially impose a high price, and gradually the patients will negotiate depending on their income level. Thus, plastic surgery cannot shift from low-income to high-income patients; hence, arbitrage is impossible.