Kyla Marie B.

Quirona
BSA -1

Managerial Economics
Case No. 9 - Pricing
CASE QUESTIONS:

1. What are the conditions for a successful implementation of price discrimination? In

your opinion, can price discrimination help increase Jason’s profits? Why or why
not?
The following were the conditions for successful implementation of price
discrimination:
a. First, the seller must have a power when it comes to pricing. As a person who provides
the consumer’s needs and wants, they must have the capacity to manipulate and create
pricing for every goods and services they sell.
b. Second, consumers must have different preferences. This condition I think is very
noticeable to consumer but to state it clearer, there should be at least 2 groups with
known differences in demand.
c. Third, the seller mist have the capability to site differences among groups of
consumers.
d. Fourth, the possibility of product resale should be eliminated. For hotel reservations
and airplane tickets, this condition can be made by personalizing their own product and
making it non-transferable. When it comes to services like dental or haircut services as
well as to the sale of intangible goods, resale is a not that concern because such services
cannot be resold in nature.

For the second question, I think Jason can make use of price
discrimination to increase their profit because this price discrimination is a
strategy that other businesses utilize. With price discrimination, it can provoke the
consumers to purchase goods in larger quantities because the seller (Jason) can
charge his buyer the absolute maximum price that he’s willing to pay. With that,
he can get the most revenue possible for every customer.

2. Which of the companies mentioned in this case – Orbitz, Expedia, Hotels.com, Home
Depot, Budget – actually uses price discrimination? Provide argumentation to support
your opinion.
If we will analyze the case in a deep manner, I can say that Orbitz and Budget
uses price discrimination while Home Depot and Expedia do not. I said that because
Home Depot and Expedia adapts in such a way that they present their product
 offerings to a customer in accordance to the beliefs when it comes to the
characteristics of the customers. It is actually the same with the practice of
reallocation of goods or items in a store or even customizing the selection of product
choices which is merely the heart of a good customer service. Since the said two
companies has good reputation and price if any item remains the same across
customers, we can say that there is indeed no price discrimination.

3. Should Jason experiment with first-degree price discrimination? Why or why not?
Which type of price discrimination would you recommend Jason consider?
In my opinion, Jason should not experiment with first degree price discrimination
because we all know that first degree discrimination requires a seller which has the
knowledge or absolute knowledge of every customer’s individual willingness to pay
which I think is very impossible to do. It will be just a waste of time. Also, the
numbers of customers are increasing in number. If they will invest on them just to
know their willingness to pay, then it will be costly for them. Jason, in addition has
large set of customers in his e-commerce business, it requires more effort which
makes the first degree of price discrimination impossible in his case. If I would
recommend one type of discrimination to Jason, I think it would be the third degree of
price discrimination because the nature of this type is setting price according to
consumer attributes. With these, I think it will be much easier for Jason because he
can do it using tracking technologies or using customer registration data.

4. Do the Internet and e-commerce make the implementation of price discrimination

easier or harder for sellers? Provide your argumentation.
For me, e-commerce has both advantage and disadvantage when it comes to the
implementation of price discrimination. We all know that through e-commerce, the
costs of tracking every individual customer, the number of their visits, purchases,
buying patterns and location were reduced. The use of e-commerce is also more cost-
effective. It also contributes to greater profitability. For disadvantages, it reduces the
market power of the seller because Internet has reduced the customer’s cost of
searching for the best price. Internet also made the dissemination and sharing of price
easier making it harder for the seller to price discriminate. Lastly, E-commerce has
made the consumers eligibility to pay in lower prices possible resulting to reselling of
product items to customers who would normally pay a higher price.

5. When implementing price discrimination for Budget car rentals, for which customer
groups would you charge higher prices and for which lower? What could be the
rationale for the price differences reported in the case?
When implementing price discrimination for Budget car rentals, I will consider
the Law of Demand and Supply. I would charge higher price to groups with less
elastic demand with high willingness to pay. On the other hand, I would charge lower
 price to customer groups with high elasticity of demand or to the groups with lower
willingness to pay. For the second question, I think the rationale for price differences
is the products and services as well as the different customer groups (purchasing
power). Of course, products and services were different in nature especially when the
products themselves are customized just to answer the needs and wants of the
different customers. Moreover, the rationale of price differences can be the customer
groups just like when they have greater purchasing power, price must be higher but if
they have lower purchasing power then price must be lower. But then, price
differences should not be an issue. I mean we should promote “FAIR PRICING”.

6. In your opinion, are price discrimination practices ethical? Is price discrimination

good or bad for the society? Should it be illegal to engage in such practices? If Jason
decides to go that route, should he alert his customers to the fact that he uses these
practices?
In my opinion, price discrimination can be ethical under some consideration and
can be unethical under some consideration also. Of course, price discrimination can
be good and bad to our society. If we will look further on its nature, we can see that
price discrimination is a strategy that business men utilized in the business industry so
I can say that it is ethical and also provides good benefits to people especially to
consumers and sellers. Price discrimination is a way to help reduce the inequalities
when it comes to personal incomes. It also means expansion in output, more income
for the community and gives way to the use of larger resources. Price discrimination
is not necessarily bad to consumers because lower prices are give to those with less
purchasing power while higher prices are given to customer groups with high
willingness to pay. It will be illegal only if the implementation of price discrimination
is regarding the age, color, race or culture. If Jason decides to go that route, I think he
should not alert his customers about that practice because it’s confidential and you
should not disclose that information to your customers for the reason that it might
lead to commotion.

7. If Jason uses price discrimination, what criteria do you recommend he uses to

estimate his customers’ willingness to pay?
If Jason uses price discrimination, the criteria that I recommend to him which he
can use to estimate his customer’s willingness to pay is to use their own technology
and customer data information/registration to track customer data which might
include:
a. Number of times a certain customer visit the shop/store
b. Geographical location of the customer
c. Prior purchases
d. Income
e. Buying patterns

8. The case mentions frequent flyer programs. What is the rationale for the firms to
offer such programs? Would you recommend Jason to implement a similar scheme?
Firms offer frequent flyer programs because it leads to higher level of brand
loyalty, customer retention and clearer purchase intentions. It is a strategy that is
used to improve the satisfaction of the customers including their buying choices as
well as developing deeper customer relations. It encourage the consumers to
purchase the products more often and avail such services frequently thus increasing
the buying behavior. In short, frequent flyer programs is a good technique to create
behavioral loyalty towards companies. For the second question, I think the
implementation of such program will be promising and better for Jason. I mean for
some modification, I think Jason’s business will be much product, efficient and will
increase their profitability.