The Undercover Economist - Part II - What Supermarkets Don't Want You to Know

Businesses with scarcity power cannot force us to pay unlimited prices for their products, but they can chose from a variety of strategies to make us pay more.

Example (London Eye Coffee Shack Price discrimination):

- Dilemma (Higher margin per cup, but fewer cups; or lower margins on more cups)
- Price discrimination- Charge high price to the lavish (on free trade coffee) and a low price to the thrifty (normal coffee), they can maximize profits (yet have similar costs)
- By charging different prices for products that have largely the same costs, coffee shack is able to smoke out customers who are less sensitive about the price.


Three strategies for finding customers who are cavalier about prices

1. First Degree Price Discrimination "Unique Target Strategy"
- to evaluate each customer as an individual and charge according to how much he or she is willing to pay
- e.g. used car salesman or real estate agent (for products with high value relative to the seller's time)
- e.g. supermarket discount cards

2. Third Degree Price Discrimination "Group target strategy
- to offer different prices to members of distint groups
- e.g. reduced far for children and elderly

3. Self Incrimination Strategy
- to get customers give themselves away by selling products that are at least slightly different


Price-gouging the natural way
- Organic food
- Supermarket have come to the rescue with a plentiful supply of organic products that happen to be marked up far above their additional costs to the supermarket

Bargain shopping and bargain stores
- Similar products are, very often, price similarly. An expensive shopping trip is the result of carelessly choosing products with a high mark-up, rather than wandering into a store with "bad value", because price-targeting accounts for much more of the difference between prices than any difference in value between one shop and another.

Sale Pricing
- If some customers shop around for a good deal and some customers do not, it's best for stores to have either high prices to prise cash from the loyal

Reality Check #1 (Scarcity Power)
- Often, scarcity is something we we give companies through our own laziness (e.g., popcorn)
- Wine @ restaurant, charge higher price for things tend to be savoured during longer meals (i.e. dessert & appetizers as well)
- It is the lack of price sensitivity that allows a business with scarcity power to practise price-targeting

Reality Check #2 (Leaks in price targeting strategy)
- Price insensitive customers may buy cheap products unless the products are deliberately sabotaged
-e.g., own value brands at supermarket may of similar quality with disgusting design to put off customers
- Grooup targeting (customers who are being offered a discount may buy the product and then resell it at a profits to the customers who are being charged a higher price)
- e.g., DVDs