Barbie Doll pricing in the printer industry

This article reports the link between cheap printers and expensive ink.

Why don't luxury hotels provide "free" Internet?

The Middle Seat. Pay for Wi-Fi? Only at a Luxury Hotel
by: Scott McCartney
Feb 19, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Pricing

SUMMARY: High-end hotels are fighting hard to be the last place left on Earth where you have to pay for wireless Internet connections.

CLASSROOM APPLICATION: Students can analyze the reason why high-end hotels charge for Wi-Fi connections while lower-end hotels do not. The article draws the analogy between these hotel Wi-Fi charges and airline baggage fees. The related video states, "For the hotels, it lets them advertise a lower rate and then hit you with the upcharge when you get there." The most interesting point in the article for students to analyze: "Wi-Fi has become the most prevalent hotel upcharge, slapped onto bills where business travelers know their companies will pay and affluent leisure travelers are less price sensitive.... They charge at premium properties but not at budget inns because price-sensitive chains have made free Wi-Fi a perk to attract customers, and all want to stay competitive."

QUESTIONS: 
1. (Advanced) What is the relationship between the price elasticity of demand for a hotel and whether it charges for Wi-Fi?

2. (Advanced) Why are businesses willing to pay Wi-Fi upcharges while price-sensitive pleasure travelers are not?

3. (Advanced) What is "add-on pricing"? Is an add-on price posted like a hotel rate is posted? Is Wi-Fi upcharge an example of add-on pricing?

4. (Introductory) Is free Wi-Fi at high-end hotels an effective loyalty inducement?

Supply and demand in action or price discrimination?

The Middle Seat. Airline Fare Riddle: One Route, Two Prices
by: Scott McCartney
Jan 08, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
TOPICS: Price Discrimination, Supply and Demand
SUMMARY: Airlines charge different prices for the same round-trip ticket depending on where you start your trip, a study conducted for The Wall Street Journal shows.
CLASSROOM APPLICATION: Students can evaluate whether airlines setting different prices for the same round-trip ticket depending on the where flyers start their trips is an example of price discrimination. In some cases the price differences is an example of price discrimination: "Some cities have more buyers of last-minute tickets at higher prices, which drives up the average for tickets sold in one direction over another, a Delta spokesman said." In other cases, it is due to limited capacity and increased demand: "A United spokesman said holiday travel periods drive demand directionally, pushing fares higher."
QUESTIONS: 
1. (Advanced) Define third-degree (i.e., multi-market) price discrimination. Consider the case in which flights from New York to London and from London to New York are not full. Suppose the flight from New York to London is more expensive. Is this example of third-degree price discrimination?

2. (Advanced) Define second-degree price discrimination. Business travelers, who have a more price-inelastic demand, sometimes reserve flights at the last minute, while leisure travelers plan ahead. Is the case in which an airline raises the price of a flight as its date approaches an example of second-degree price discrimination?

3. (Introductory) Is the following case about travel between the mainland and Hawaii an example of price discrimination? A United spokesman said holiday travel periods drive demand directionally, pushing fares higher. "There may be fewer deeply discounted seats available on preholiday Hawaii-bound flights because of the increased demand by mainland travelers," he said.

Reviewed By: James Dearden, Lehigh University

Price discrimination on airplanes

This screenshot is a great example of price discrimination.

To buy the bundle or not to buy the bundle?

This article from the WSJ is a great example of the effects of (un)bundling. 

SUMMARY: A future where television viewers subscribe to each channel they want could make the average cable TV bill-which hovers about $90-seem like a bargain.
CLASSROOM APPLICATION: Instructors can use the article to compare bundling and a la carte pricing. They can present bundling as a means to extract consumer surplus and also possibly as a means to improve economic efficiency (by providing goods should be, but are not, provided under a la carte pricing).
QUESTIONS: 
1. (Advanced) Consider a simple case in which two people can subscribe to a cable network, ESPN for example. Person 1 values the network at $10 and person 2 values it at $20. The total cost of providing the network to either one or two people is $25. Is it efficient to provide the network? Suppose a cable company charges each person the same price for the network. What is the minimum price for which the network would be provided? If the network is provided a la carte at this price, would both people subscribe to the network? Suppose the network is bundled with others in a cable package. In doing so, the price of the bundled package would increase by the minimum price needed to provide the network. Is it possible that both people would subscribe to the bundled package? If so, would the shift to bundled networks from a la carte pricing improve economic efficiency?

2. (Advanced) Consider two people. Person 1 values ESPN at $12 per month and Bravo at $5 per month. Person 2 values ESPN at $5 per month and Bravo at $12 per month. Suppose the total cost offering each network is zero. What is the profit-maximizing (i.e., revenue-maximizing) price of the bundled networks? What are the profit-maximizing prices of the a la carte networks? Does the cable company prefer to bundle the networks?

3. (Introductory) "All these things are so much more expensive when you separate them out," said David Bank, an analyst at RBC Capital Markets. "You are going to have to pay more for less choice." Does this statement imply that everyone would be made worse off by the shift from bundled network pricing to a la carte pricing? Is it the case that everyone would be made worse off?

Reviewed By: James Dearden, Lehigh University

Price discrimination on the Web

This article in the WSJ reports that e-commerce companies charge different sums for the same goods, or push some people toward higher-priced offers and do not tell the consumers.

Labels: Price discimination

TOPICS: Price Discrimination

SUMMARY: A new study of top e-commerce sites found the practice of personalizing prices for the same goods, or pushing some people toward higher-priced offers, is more widespread than previously understood. Related article: The prime time to find airfares has changed. Scott McCartney looks at when to make a purchase and how early the lowest prices pop up.

CLASSROOM APPLICATION: Students can evaluate a third-degree (i.e., multimarket) price discrimination example in which online retailers according to whether students are logging in using Apple's iOS mobile operating system. They can also evaluate a second-degree price discrimination example in which airlines price according to the day of the week in which consumers book flights.

QUESTIONS: 
1. (Introductory) Define third-degree price discrimination. Cite an example from articles of this type of price discrimination.

2. (Advanced) Define second-degree price discrimination. Cite an example from the articles of this type of price discrimination.

3. (Advanced) Why do sellers price discriminate? Include a discussion of price elasticity of demand in the answer.

Reviewed By: James Dearden, Lehigh University

RELATED ARTICLES: 
The Best Day to Buy Airline Tickets
by Scott McCartney

Unbundling Phones and Service

This article from the WSJ reports that cellular providers are reducing the subsidies for phones while reducing monthly charges.

SUMMARY: Apple faces a risky new environment this week as it unveils new iPhones, with carriers weaning consumers off subsidies for new devices.

CLASSROOM APPLICATION: Students can evaluate whether consumers evaluate new smartphone purchases based on only the total price over the lifetime of a phone of the wireless service plus the phone, or whether they respond also to the structure of the payments : the upfront cost and monthly payments. The analysis involves the marginal price of a smartphone, the discounting future payments and the possibility of behavioral explanations involved in the consumer evaluation of the pricing plans.

QUESTIONS: 
1. (Introductory) Compare the marginal price of a new smartphone under unsubsidized and contract-based plans. How does the marginal price of a smartphone affect the purchase decision?

2. (Advanced) A consumer can pay for a new smartphone upfront or can pay for it in installments. How does the consumer's discount rate affect this decision about paying for the phone?

3. (Advanced) Do subsidies of new phone purchases combined with greater monthly payments for service plans disguise the true price of the phone to consumers? Are consumers affected by this disguise?

4. (Advanced) How would the movement to unsubsidized wireless service plans affect the prices of the best smartphones?

Reviewed By: James Dearden, Lehigh University

Is Net Neutrality Efficient?

This article from the WSJ is an opinion that Internet service would improve if customers paid according to how much and when they use the service. It is a good introduction to subsidies, price discrimination, and congestion pricing.

Pricing Restaurant Reservations

This article from the WSJ is a good example price discrimination, peak-load pricing, and the effects of information asymmetries and who bears risk.

Netflix wants to discriminate in price

The article from the WSJ reports that Netflix is planning to increase price for new users and only new users. Is the difference in price consistent with 3rd-degree price discrimination?

The article is also a good introduction to vertical relations, antitrust, and net neutrality.

SUMMARY: Netflix said it plans to increase its U.S. prices for new members by a dollar or two. The company also came out in opposition to Comcast's proposed acquisition of Time Warner Cable. With regard to relationship between Netflix and cable providers, the company has a lot of choices about how it sends content to customers, but at some point, its content must realistically pass through the systems of cable providers. Netflix chief executive told analysts that Netflix had "no choice" when it recently agreed to start paying Comcast to interconnect Netflix servers directly to Comcast's cable systems as a way of ensuring good quality video streaming. Netflix has argued operators should strike such interconnection deals without levying fees. Netflix also came out in opposition to Comcast Corp.'s proposed $45 billion acquisition of Time Warner Cable warning that the combined company would have "anticompetitive leverage" because its systems would pass 60% of homes that take broadband Internet-access.

CLASSROOM APPLICATION: Students can analyze whether Netflix should increase its prices. Some analysts have argued that Netflix can charge more for its service because the company has the opportunity to close a gap in how much its customers spend for content compared with traditional competitors. Instructors can also present the issue of whether Comcast can use its market power in cable service provision to increase prices on content providers like Netflix. One interesting issue is about the effect of a Comcast-Timer Warner Cable merger on the market power of the merged company when dealing with content providers.

QUESTIONS: 
1. (Advanced) Why is Netflix increasing the price it charges new customers? Why only new customers?

2. (Advanced) Why would Netflix be harmed by a Comcast-Time Warner Cable merger? Keep in mind that Comcast and Time Warner do not compete for customers in any geographic areas.

3. (Introductory) Why do most Netflix subscribers connect to the service using cable connections and not cellular wireless connections?

Pricing seats in airplanes

This article from the WSJ reports how airlines price different classes of seats. It is a great example of indirect price discrimination through versioning.

If the link does not work, do a Google search on the title of the article.

TOPICS: Pricing a Product Line

SUMMARY: For fliers, the ideal seat is usually in first or business class. For airlines, the sweet spot is, increasingly, farther back in the plane, in premium economy.

CLASSROOM APPLICATION: Instructors can present the selection issue associated with offering premium economy. "Airlines want economy fliers to buy pricier seats, rather than business travelers opting for cheaper ones." One way to reduce the selection problem of business travelers selecting down is to improve the quality of business class. "Only after Lufthansa in 2012 began upgrading its business class to horizontal beds from slanted ones was it confident of not cannibalizing its own premium traffic."

QUESTIONS: 
1. (Introductory) Why are airlines introducing premium economy class?

2. (Advanced) In the consideration of whether to introduce premium economy class, what issue concerns airlines about the demand for business class concern airlines?

3. (Introductory) What redesign of Luftansa planes reduced the problem of business travelers choosing premium economy class?

4. (Advanced) The article notes "down-sell risk" and "up-sell potential" for introducing premium economy class. Interpret these two terms.

Pricing at Amazon

This article from the WSJ is a good introduction to pricing, the trade-off between volume and margins, and price discrimination on the Internet.

Do stores benefit from having sales on Thanksgiving?

This article from the WSJ describes the recent trend for stores to get a jump on Black Friday by starting sales on Thanksgiving. It is a good introduction to price discrimination, tie in sales, and cannibalization. It is also an example of a prisoner's dilemma that may reduce welfare.. 

SUMMARY: A trip with two shoppers in Albany shows that big chains like Wal-Mart are risking their customers' good will and cannibalizing later sales by pushing their "Black Friday" deals so aggressively into Thursday. "The moves are carefully calculated to help chains get ahead of online competitors that have successfully stolen a march on sales in the past couple of years, as well as outflank brick and mortar rivals in what has become essentially a zero-sum game for sales growth amid the sluggish economy."

CLASSROOM APPLICATION: The article offers an interesting twist on the models typically taught in principles and intermediate microeconomics. The article has elements of dynamic sales, timing in oligopolistic competition, and consumer preferences for purchase timing. The point in the article about cannibalization recognizes that BlackFriday demand is an economic substitute of Thanksgiving Day sales. Hence, if consumers purchase a product on Thanksgiving Day, they do not purchase it on Black Friday. With regard to retailers choosing whether to open on Thanksgiving Day, an interesting issue is whether competition drives them to do so. If consumers prefer not to leave their homes on Thanksgiving Day and retailers are not selling on the day to second-degree price discriminate (by offering a price-time menu), then the oligopolistic competition is driving retailers sell on a day that reduces consumer welfare.

QUESTIONS: 
1. (Introductory) Do consumers prefer to begin their Thanksgiving weekend shopping on Thanksgiving evening? Alternatively, would they prefer to begin the long-weekend shopping on Black Friday morning?

2. (Advanced) What factors pushed some retailers to move their Black Friday sales to Thanksgiving evening? Discuss competition from Internet retailers, competition among brick-and-mortar retailers, and the fact that Christmas is less than four weeks from Thanksgiving.

3. (Advanced) What is second-degree price discrimination? Are Thanksgiving evening and Black Friday early-morning sales a form of second-degree price discrimination in which to get the best prices consumers must fight the crowds and shop at unpleasant times?

The wedding fix

This article describes the wedding industry and points out that it thrives on asymmetric information and price discrimination. Here is a posting on the author's blog with more analysis.

Apple's dual iPhone strategy in doubt?

The WSJ ran a story which suggested that Apples decision to introduce the iPhone 5c. It is a good introduction to the problems firms face when offering multiple versions of a product. 

FYI: Apple thinks that the story is inaccurate and based on conjecture rather than fact.

Here is a summary and questions.

SUMMARY: Apple hoped to broaden its appeal with a cheaper version of the iPhone. But that effort appears to be faltering after a few weeks.

CLASSROOM APPLICATION: Students can evaluate Apple's strategy of second-degree price discrimination, in which the company is offering a price-quality menu. Two interesting issues are whether Apple mispriced the two phones or set too small of a quality difference between the phones.

QUESTIONS:
1. (Introductory) Why are the sales of the iPhone 5S doing well while the sales of the iPhone 5C are not? Discuss the quality and price differences of the two phones?

2. (Advanced) Evaluate the statement: "The reduced orders could indicate weak demand, or could signal that Apple wanted to ensure adequate supply of the 5C so that potential buyers, who were more likely to be switching from competing phones, didn't have to walk out of a store empty-handed." Is empty-handedness is the driving force of the greater inventories of the 5C? If so, would Apple have done better by producing more 5S models and fewer 5C models?

3. (Advanced) What is second-degree price discrimination? By offering both the 5C and 5S models, is Apple practicing second-degree price discrimination?

4. (Advanced) When introducing the 5C, should Apple have changed the price of the 5S?

Colleges Try Cutting Tuition

This article might be a good way to talk about price discrimination, game theory, strategy, and behavioral economics. It discusses the recent decisions by some colleges to reduce simultaneously nominal tuition rates and financial aid offers. Doing so may leave the net tuition equal for many families. The hope is that the simpler process will attract more and better students. The article points out that families may not respond rationally to lower net prices.

Maine to Allow Prescription-Drug Imports

Here is an article I might use to introduce price discrimination. It is an account of a new law in Maine that allows for the re-importation of drugs produced in the US. It mentions the effect on prices and quality control.

Personalized pitches

This article from Business Week describes how firms attempt to use technology to achieve 1st degree price discrimination.

How deep are your pockets?

This article from the Economist is a nice description of how firms are gathering information in attempts to practice 1st and 3rd degree price discrimination.

High court dives into resale trade

This article from the WSJ describes an example of a firm attempting to prevent artibrage in order to maintain 3rd degree price discrimination.