Chapter 48 Chapter 4 The Economics of Discounting

Why are hotels with minibars so expensive? Why is it so much more expensive to wire between banks than to send money by check? Why Are Appliance Retailers Knocking Dents On Stoves And Refrigerators? Why is a black Apple laptop $150 more expensive than a white laptop with the same specs? Why is it so much cheaper to buy concert packages? Why are air tickets more expensive now, but tickets to Broadway shows are cheaper? The capacity of an ordinary cup is eight ounces, but why is the smallest cup of coffee in Starbucks called a tall cup with a capacity of twelve ounces? Why do many restaurants offer free refills for drinks?

Why is it that ordinary people can't even use the functions of the simplest video recorder, but it still has so many functions? Why do cheap flights charge for meals (luxury flights are usually free) while luxury hotels charge for Internet access (cheap hotels are often free)? Why are there always long queues for the most popular rides in many amusement parks, but the amusement parks don't charge extra for them? Why do car rental companies not charge customers for short-term cancellations, while hotels and airlines charge expensive cancellation fees? The law of one price works best in perfectly competitive markets, roughly speaking, markets like table salt and gold, where numerous suppliers sell highly standardized products.But there are also many products that are not sold in a perfectly competitive market.For example, although movies of the same genre seem to be similar, the release of movies in various places is not a standardized product.Different movie theaters have different locations and different show times, and in some ways, every movie is unique.Besides, who's a regular moviegoer and would think that "Casablanca" is a perfect alternative to "Scream"?

Since the law of one price does not apply to the movie exhibition market, economists are not surprised that movie ticket prices vary.For example, a day show of the same movie is usually cheaper than a night show, because there are always fewer people free to watch movies in the afternoon than in the evening. Theater owners also often offer discounts to special groups (students, seniors, etc.) because they believe their needs are more price-sensitive.Unlike gold and table salt, movie tickets cannot be resold at will.It is impossible for young people to buy a student ticket and then sell it to adults for a profit because only those with a student ID can use the discounted ticket.Arbitrage opportunities are inherently limited when sellers are offering an experience rather than a tangible product.This is like a student watching a movie, and it is impossible to resell his experience to other adults.

But in real markets for products, especially expensive ones, the possibility of arbitrage limits the ability of a monopolist to demand high prices from particular buyers.For example, for Emperor Moreau who only wears high heels.Blahnik is a complete monopoly for women who make shoes like Manolo Blabnik.Even so, the possibility of resale between buyers prevents the company from charging prices according to the wishes of each customer.Similarly, the theater owner is unlikely to sell the same popcorn for five dollars to adults and two dollars to students, because there will definitely be students who buy popcorn at the discounted price and then sell it to adults to make a profit. .

Although the possibility of resale profit limits the possibility of sellers charging different prices for the same product, they have come up with various ingenious strategies to overcome this limitation.Many of the tricks have one thing in common: Sellers allow customers to buy at a discounted price, but only if the customer jumps over some kind of threshold first.The most common example is a short sale.Buyers who are willing to make such an effort will take the trouble to rush over to buy when they know that the discount has started, so as to enjoy the discounted price.Customers who are unwilling to bother will pay a higher price.

After seeing the examples of sellers setting thresholds for different pricing, you will definitely find that no matter what the product, sellers use such methods more or less.A few years ago, I was in Minneapolis for a conference.Before I set off, I made a reservation at a hotel, and the room rate was about the equivalent of two hundred dollars.When checking in, I noticed a poster behind the clerk saying remember to ask about our specials.I was curious, and after asking, the other party told me that I could get a house price of $150. Here, the hurdle I jump to get a discount is to ask a simple question.Since this threshold is so easy to clear, I can't help thinking, how could anyone not ask?As a result, the front desk clerk told me, most people didn't notice.

From the seller's point of view, setting a discount threshold works because potential buyers who are extremely price-sensitive (and might not even buy without a discount) will find the threshold easy to jump, while other less price-sensitive Customers will find it difficult, or even simply feel that it is not worth the effort.The poster inviting customers to ask about specials ended up saving me fifty dollars on the room bill.However, it still counts as a valid threshold for certain guests who have not booked in advance.Some customers may find it indecent to ask for specials and are not price sensitive.And some guests, such as business people who can reimburse the room rate, don't care at all.

The first two examples in this chapter illustrate how to set discount thresholds.