To compensate for the introduction of a lower-end version of its big-selling Tide detergent, P&G is raising prices on some fancier Tide varieties by as much as 25%.
Two possible explanations:
1. Pricing changes with commonly owned substitutes. Before introduction of the new brand, Tide did not care where from where it drew customers. After introduction of the new brand, marginal revenue on sales of old Tide goes down (because some of the additional sales come from new Tide). When MR falls below MC, P&G responds by selling less (and raising price).
2. Suppose there are two types of consumers: higher elasticity consumers who prefer the new cheaper Tide, and lower elasticity consumers who prefer the older more expensive Tide. The introduction of new Tide attracts more of the price elastic consumers, making demand for old Tide less elastic. P&G responds with a higher price on old Tide.
The explanations are not mutually exclusive. The second depends on two different consumer types. The first does not.
HT: Brian
This price discrimination technique resembles the substitution bias strategy. P&G responding to a decline in marginal revenue by adding a new substitute and introducing a higher price on the old Tide should allow them to improve their marginal revenue. But this is not always the case because there are several complex factors at play here. The substitution of the new Tide can be perfect or imperfect depending on whether this substitute completely or partially satisfies the consumer. However, if consumers see a marked difference in between the new Tide and old Tide brand, the majority of customers may conclude it as an imperfect substitute, even if others might consider them perfect substitutes. This will then cause them to stick to the lower price option which cuts into projected marginal revenue gain. Conversely, when a good's price decreases, the demand for its substitute will decrease. Notwithstanding, since the new Tide is a substitute for the old Tide, if its quality is not to the customer’s satisfaction, chances are, the consumers can meet similar needs by using a totally different and cheaper brand. In this scenario, no significant yield to marginal revenue.
ReplyDeleteLeo Palmer ESC Econ.
The evolution is quite interesting, first there was the powder, and then the liquid, then 5 times concentrate, and now PODs. When I was growing up my mother would never use any other brand other than Tide. She was certainly dedicated to washing cloths as she done it almost every other day and I can still smell and visualize those folded garments with their Tide scent and gleaming with bright colors. She would say, the magic behind the fresh cloth was tide. She definitely had a love affair with tide when it came to washing.
ReplyDeleteEven in such an elastic industry and product line, Proctor and Gamble has always managed to be one-step ahead of all the substitutes and store brand knock offs. Even at Walmart, given a choice most people select Tide over the knock-off and will pay a 40% premium for less even in compared volume.
So why is Tide such a success? Psychological pricing contributes greatly because customers equate Tide as the standard of standards or best of the rest in detergents. When you put Tide side by side another brand consumers takes into account that paying $18.00 for Tide opposed to $14.00 for the next brand is more than worth it within their reference point because of their brand loyalty.