Question

In Example 11.1 (page 422), we saw how producers of processed foods and related consumer goods use coupons as a means of price discrimination. Although coupons are widely used in the United States, that is not the case in other countries. In Germany, coupons are illegal.

1. Does prohibiting the use of coupons in Germany make German consumers better off or worse off?

2. Does prohibiting the use of coupons make German producers better off or worse off?

Short answer

1. German consumers can be better or worse off after prohibiting coupons.

2. German producers will be worse off on prohibiting coupons.

Step-by-step solution

Step 1. Explanation for part (a)

The consumer may be better or worse off depending on the price and demand as the total surplus may increase or decrease with the price discrimination. Let us suppose that a company sells a box of cereal at $5 and 2,000,000 boxes are sold per week. If a coupon of $1 is offered per box it results in an increase in the number of boxes of cereal sold, to 2,500,000 per week. It means the consumer demand and surplus have increased. Consumers will be worse off when the coupons are prohibited.

Let us suppose that the price of cereal increases to $5.5. With the price increase, there will be a reduction in demand if the after-coupon price is higher than the initial situation. Some consumers will also continue to purchase cereals without coupon. Some consumers will redeem the coupon, and the price will be $4.5; thus, the consumer surplus increases for one group and decreases for another. Hence, the total consumer surplus may increase or decrease. Thus, the German consumer may be better off or worse off on prohibiting coupons.

Step 2. Explanation for part (b)

The German producer will be worse off but not better off after prohibiting the coupons. The producer uses the coupons only if they profit; thus, those producers will be worse off; and the producers who do not use coupons will have no effect.