"What Supermarkets Don't Want You To Know"

Dominic Northey reviews Chapter 2 of 'The Undercover Economist' by Tim Harford.

 

Now that the UK appears to be coming out of recession and consumers may be planning to increase their spending, it is worth considering the ways that retailers maximise their revenue. In a discussion on price discrimination policies, we see that the difference between Marks and Spencer and Asda has very little to do with the cost of the goods and a lot to do with who the shoppers are. Tim Harford explores the dilemma a firm has with charging the correct price to the correct consumer. Price discrimination occurs when a business charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs.

Tim Harford identifies that not everyone is willing to pay the same price for goods and so at any price the firm sets, they will be losing some customers. He explains that it is difficult for a firm to set an individual price for each consumer, due to the cost of collecting data on what each consumer is willing to pay, and the unwillingness of consumers to own up to their own ability or willingness to pay higher prices. This would be first degree price discrimination. Harford therefore goes on to highlight that a Costa Coffee bar on the South Bank in London offered fair trade coffee for anyone who was willing to pay 10p extra for a drink. He concludes that this extra 10p made no difference in terms of making the farmer better off but instead enabled Costa to identify the consumers willing to pay more for a cup of coffee. Thus Costa were able to charge a marginally higher price to those who were willing to pay more and a lower price to those who weren’t, instead of having to guess a price where trade off was minimal. In this way they were able to maximise their revenue from these customers.

Even though it appears impossible, some firms have been able to indulge in first degree price discrimination, although not to a full extent. Harford explains that supermarkets accumulate evidence of what you are willing to pay by giving you ‘discount cards’, which are needed to take advantage of sale prices. In return for getting lower prices on certain products, you allow the stores to keep records of what you buy and then in turn offer you coupons for discounts on products. However, due to the fact that these coupons can only be ‘money off’ and not ‘money on’ vouchers, the system does not work perfectly.

Is it fair that retailers can charge different prices to different consumers for essentially the same product? What do you think?