Economics a Price Discrimination Strategy Is One Essay

Economics

A price discrimination strategy is one where different customers are charged different amounts. The price charged for my shop's submarine sandwiches will therefore be different for locals than for visitors. There are a number of ways to achieve this. In the context of a sandwich shop, the prices are going to be listed publicly on the menu, so it is impossible to openly discriminate with respect to prices. One technique that can be utilized to lower the average cost for each sub-for locals is to offer a loyalty card. The local would then receive either a discount or a free sub-after making enough purchases. This would deliver a lower price to locals in the long run. Alternately, a loyalty club can allow the locals to receive discounts if they are members of the club. A certain amount of annual sales would be required for club membership, or even a small fee could be implemented to join the club. Under this plan, only locals would have an incentive to join the club. Once in the club, the locals would receive a standard discount on their purchases. Again, this lowers the average price per sub-for locals in a way that visitors to town cannot take advantage of.

If the legislature implements a price ceiling that is below the current equilibrium price, two things will occur. Presumably, this price will be lower than the current price, if the current price is at equilibrium. The lower price will spur an increase in demand. This will reduce the marginal cost to the cable company as it takes advantage of improved economies of scale. However, there is the risk that the decrease in marginal cost will not be matched by a decrease in the price charged. Thus, the cable company will in all likelihood experience a loss as the result of this price ceiling. Faced with both a loss and an increase in their customer base, the cable company would either have to lower its cost of service per customer or it would be forced to go out of business.

If the cable company adopted the former strategy, of lowering the cost of its programming, it is expected that the demand for programming would decrease. Ideally, the cable company would decrease the quality of its programming to the point where demand for cable and the cost of providing service meet the price ceiling. This would be the new equilibrium point. Whether this is higher or lower than the unregulated equilibrium would depend on whether the price or quality elasticity of demand is stronger.

Perfect competition is characterized by all sellers being equal, markets having perfect information, an undifferentiated product and all firms have easy entry and exit (Investopedia, 2010). If demand for the product falls, then in the short run firms will see a decline in profitability. They are price takers, so they will be forced to lower their prices in an attempt to maintain past volumes. In the short-run, firms may remain in the market, depending on what other alternatives they might have (for example, selling other goods). In the long-run, if demand falls, some firms will exit the industry, as it will have become unprofitable for all competitors. When a few firms exit the industry, the sales volumes at the remaining firms will increase. The price will not likely increase, but compared with the default state the firms in the industry will be selling greater volume as the result of having fewer competitors. This will bring the market to a new equilibrium point.

If demand for the product rises, the firms in the industry will see an increase in profits in the short run. New players will not enter the market until they are certain that this increase in demand is permanent and better than the alternatives. Over the long-run, new players will see the higher profits…