Tuesday, November 8, 2016

Minimum Advertised Prices as a form of price discrimination

Saw an interesting explanation for Minimum Advertised Prices at the FTC's annual Microeconomics Conference (my old employer).  Many manufacturers adopt these "MAP" policies which prevent retailers from advertising a price below the manufacturers recommended price.  If a retailer wants to sell at a lower price, it has to "hide" the lower price from online search engines.  The lower prices are revealed only after a shopper "clicks through" several levels.

A numerical illustration illustrates how it works.  Imagine that there are 50 low-value shoppers willing to pay $5 and 50 high-value shoppers willing to pay $10.  A traditional posted-price offers a retailer the choice between selling to only half the consumers at a price of $10 or all of the consumers at a price of $5.  Both strategies would earn the retailer $500=50*($10)=100*($5).

A minimum advertised price allows the manufacturer to price discriminate if the low-value shoppers search for a lower price and the high-value shoppers won't, e.g., because the high-value shoppers have a higher opportunity cost of time.

Imagine that half of the consumers go to the websites of each retailer, one of whom posts (advertises) a price of $10, while the other allows shoppers who click through several layers to buy at a price of $5.  Each retailer receives a even mix of high and low-value shoppers.

For the consumers who go to the high-priced retailer, only the high-value shoppers purchase, which results in revenue of 25*($10)=$250.

For the consumers who go to the low-priced retailer, all of the shoppers purchase. In addition, the low-value consumers who did not purchase from the high-priced retailer will search and find the lower price and purchase.  Revenue at the low-price retailer is 50*($5)+25*($5)=$375

Total revenue from the minimum advertised price strategy is $625=$250+$375 which is bigger than the $500 from a single posted price. 


3 comments:


  1. I think for price discrimination for manufacturers, it allows them to utilize consumer trends in order to maximize profit. However, in the age of online shopping, I think it’s important for manufacturers to understand the vast knowledge available at the fingertips of the consumers.
    I know that some retailers offer price matching which can be beneficial if that consumer already needs to procure items within their store and personally, when I shop, both in the store and online, I take into consideration all of the places I could procure the item.
    Typically, I will go where the item is the cheapest, but sometimes convenience trumps cost and if I am in a place where I am buying multiple items, then I will pay the higher price for the convenience of not having to make several trips. Additionally, making only one trip is even more appealing when the retailer price matches.
    However, some retailers have removed price matching to include online pricing or online retailers like Amazon but, overall, as a consumer, if you can save a few dollars, it’s a win for your purchase.
    Lastly, if retailers were able to study market trends a little more in depth with price discrimination to include frequently bough together items, such as a Keurig and k-cups, they may be able to grant additional discounts to make the “package” appealing for consumers. From there, the volume of what they would sell would outweigh the discount that they granted.

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  2. You mention, “Many manufacturers adopt Minimum Advertised Prices "MAP" policies which prevent retailers from advertising a price below the manufacturers recommended price. If a retailer wants to sell at a lower price, it has to "hide" the lower price from online search engines. The lower prices are revealed only after a shopper "clicks through" several levels. I understand mathematically why this makes since for a business owner. Hiding the minimum advertised price is being price discriminate not to just high-value shoppers but to the shoppers with limited time. This could include the single parent working multiple jobs and someone who is not computer suave. Having the time and know how only benefits the limited consumer.
    It makes me think of how Amazon tip toes a fine line in doing this. Jillian D’Onfro (2015) states in her article,” In fact, Amazon will tweak its prices many times per hour (equaling millions of individual price changes per day), taking advantage of the psychology of price perception.” This can be noticed by just having items in your shopping cart then going back in a couple hours and pricing has changed. They will also change priced on what they determine as your buying habits.
    Leena Rao also states in here article,” raised questions about whether Amazon’s is trying to unfairly profit by funneling customers to more expensive products.” They talk about how Amazon doesn’t always send you to the best deal. The algorithm they use they say includes the top rated and shipping to show the best option for the consumer.

    D'Onfro, J. (2015, January 13). The Clever Way Amazon Gets Away With Not Always Offering The Lowest Prices. Retrieved November 18, 2016, from http://www.businessinsider.com/how-amazon-adjusts-its-prices-2015-1

    Rao, L. (2016, September 21). Amazon Faces Questions Over How It Lists Prices. Retrieved November 18, 2016, from http://fortune.com/2016/09/21/amazon-pricing-algorithms/

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  3. Price discrimination happens within a market when the sales of similar goods or services are sold at different prices by the same provider. The goal of the providers is to make much profit as possible as they can , Even though the cost of producing the products is the same, the providers have the ability to increase the price based on its location, consumer financial status, and the product demanded.
    This pricing strategy charges customers different prices for identical goods or services according to certain criteria. In pure price discrimination, the seller/provider will charge each customer the maximum amount they are willing to pay .In more common forms of price discrimination, the seller places customers in groups based on their attributes and charges each of them differently. In most cases the providers discriminate by judging on the customers and what they are willing to pay for a specific price usually based on their dressing.
    I will go for the cheapest price any day in order to save considering the kind of responsibilities I have, but as a busy mum convenience is always the best so I find myself buying high price items when I go for shopping because it's located just close to my house and I patronize them because of their convenience.i believe don't have time to analyze prices on the thousands of items they purchase, nor do they have time to drive to six different stores to do the weekly grocery shopping and most companies are aware , so they move prices all over the map with immunity, gouging customers constantly. Since wholesale prices are invisible, it is impossible to detect price gouging at the moment of sale.



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