Confusing price discrimination
Wholly Bagels in Wellington has this great student special which I often take advantage of: in the last hour before closing they charge 30% less to students. Much as I love the special, I can’t figure out why they run it that way. I can think of three reasons they might price discriminate in this fashion:
- Students have more elastic demand for gourmet bagels than other consumers and so charging them less raises profits. This is classic price discrimination, but I don’t understand why you wouldn’t want to discriminate in this fashion for the entire trading period.
- Demand for bagels in the mid-afternoon might be more elastic than during the lunch hour and so prices might be lower in the mid-late afternoon than in the morning. But then you’d expect the afternoon discount to apply to all consumers, not just students.
- Bagels go stale during the course of the day so the value of a bagel in the afternoon isn’t as high as the value of a bagel in the morning. Perhaps they’re riding down the demand curve throughout the day and capturing the last bit of the demand curve in the afternoon by lowering their prices. Morning consumers value the bagels more (they’re really more of a breakfast/lunch food, I think) so they’re willing to pay a premium for the fresher bagels and aren’t tempted to switch to afternoon consumption. Again, if this were the rationale, I’d expect the discount to apply to all consumers.
Any way I think about it, the discount should either be to all consumers or to students for the entire day. Why would it be only to students in the afternoon? Help!
The main motivation is to not have bagels left over at the end of the day and yield nothing. Students typically have a highly scheduled existence that doesn’t allow them to readily set aside the end of the day as a time to buy discounted bagels, so they won’t substitute a discounted bagel for a normally priced one. The relative youth of the students means that they will be less reluctant to pile on extra calories in general. So the negatives of a second bagel a day are far greater for older non-students, who WILL often be substituting a discounted bagel for a normally priced one.
Regards, Don
3 is the winner for me, the cost is sunk, you can’t sell them again 2moro, but as you say, why only students?
What time do they close?
Only students because they can be identified, student ID? If you can identify them then 3rd price discrimination can work. Assuming student do have the right elasticity.
First and foremost, Wholly Bagels are fresh and all produced in the morning, so as Agnitio says, the bagel is a sunk cost and the marginal cost of selling a bagel after it is produced is just the spreads that go on it. Because of this they want to sell bagels to the less elastic morning and lunch traffic for more money, but might be able to flick a few more as snacks in the afternoon.
Perhaps demand is discrete. Practically no-one will respond to a 1c discount, and as human beings we naturally think in terms of 10, 20, 30, 40, 50 per cent off, not 8% off or 27% off.
Given this, a 30% discount is needed to get sufficient demand (20 won’t do) and at this price they generate more demand than they can handle. Because of this, they limit the offer to a particular group.
This may also have the benefit of allowing them top advertise in the student magazines as being student friendly – it always sticks out a bit more to see a student discount rather than just a discount.
I’m not sure what relevance the sunk cost has: that shouldn’t influence their profit maximisation. It seems that every explanation we can come up with involves making a significant number of unlikely assumptions, so perhaps they didn’t consult an economist before coming up with the discount scheme 😛
“I’m not sure what relevance the sunk cost has”
I think I disagree, it makes sense to clear out the bagels at the end of the day given you can’t sell them tomorrow.
The bit where we are struggeling to come up with an explanation for is the fact that it is limited to students.
@agnitio
It makes sense to try to make the most profit possible from your goods. That MIGHT mean clearing them all out, but the price you sell them for doesn’t depend in any way upon the sunk cost. It might be that discounting them at the end of the day diminishes sales earlier in the day by enough to make it preferable to just chuck out left over stock. Either way, the size of the sunk cost affects the profit you make, but not your profit maximising price. I think… 😛
There are a few reasons for the exclusivity to students that I can see:
1. As Robbie notes, advertising a “special” to students is more likely to fall on appreciative ears than advertising a discount to all users.
2. Students are less discerning than the average member of the public (publican?), so the sale of inferior products to students is less likely to damage the overall markets appreciation of bagels. To an ordinary member of the public, a bad bagel may put them off bagels altogether, even if it is discounted.
3. Having such a heavy discount to students can lead to a higher than normal level of demand due to the fear of missing out, FOMO. It breeds competition, where previously there may not have been any. So the student gains, not just by getting a discount, but by “getting the last available bagel of the day”.
4. Students of today are the workers of tomorrow, by getting them hooked on bagels young, the bakery is assuring themselves more consumers tomorrow. When students become workers their hours are likely to change so they will be consuming the premium bagels.
@rauparaha
I agree with you on the sunk cost thing Rauparha, I think I was being a bit sloppy on my use of words 🙂
The way I have been thinking about it is that early in the day there is allways an opportunity cost to selling a bagel now, as you can sell it later. When you get to the end of the day opportunity cost effectively goes to zero since you can’t sell tomorrow.
You are definitely right that in some cases discounting later might reduce your demand in peak periods so it may not be worth while (implying the opportunity cost of selling at the end of the day is negative I think?), however I think the quality dimnesion is why that doesn’t happen for bagels.
Who would have thought that bagel pricing could be so complex?:)
“Who would have thought that bagel pricing could be so complex?”
Perhaps you need to reacquaint yourself with the seminal essay “I, Bagel.”
@agnitio
Very interesting topic and discussion guys.
My feeling would be that the bagel company sets “capacity” above the average demand for the day to start with – as they realise the bagels are an experience good, and they want to promote demand in the future.
Given this, the majority of the time they have bagel left over. If they gave discounts to everyone at the end of the day this would lower demand earlier in the day. By just giving the discount to students they are able to ensure that the lower demand only occurs for one, identifiable, sub-set of their client base.
I also agree with all the other explanations put forward, they all make sense. However, if I had to say how it rolls for me that is the explanation I would give 😛