Imagine yourself as the profit-seeking owner of a chain of retail stores. Would you charge the same (or nearly the same) price across all the stores? Or would you vary prices according to average income level of consumers who use that store, or according to whether the local economy was robust or shaky, or according to whether the store had geographically nearby competitors?
He points to a working paper by DellaVigna and Gentzkow suggesting that chain retailers are leaving money on the sidewalk by not engaging in price discrimination.
My thoughts:
1. Changing computer systems to allow this would be difficult. Note that the computer systems would have to avoid making the mistake of letting a customer buy a product at the low-price store and return it at the high-price store for a higher price.
2. Consumers might adapt. Some might be willing to drive long distances to save. It would create an opportunity for an arbitrageur to offer to buy stuff at the low-price store and ship it to customers who live near the high-price store.
3. Competitors might advertise that the high-price store is gouging its customers.
In general, saying that strategy X would work without thinking about how the market might adapt seems rather brave.
With retail stores, I agree with you. Margins are pretty low in general and a store next door will undercut you if you try to charge an excess price.
But with services, I think it is a different matter. A yard crew in a rich part of town will charge more.
Think of your waiter post. Waiter tips are generally determined by ticket size, so better waiters are in more expensive restaurants, which generally are located in richer areas. Yes waiters in nicer restaurants are better, so more or less market works. With yard crews and other like services, maybe half and half. Some better, and many just charge more because they know homeowner in rich area can afford it.
Stores already deal with this. With sales tax, in MA you can return an item for a refund with no receipt, but the sales tax is not refunded (no sales tax in NH). Also if you try to return something without a receipt, you are paid the lowest sale price the item has been sold for, as you could do the same thing buying on sale and returning the item later. So stores already have all the systems in place.
I would think sales and frequency of sales could accomplish this without the negative effects you state. It would be interesting to see a comparison of sales across Walmarts for any given week, I bet you would see something like this.
Gold star.
The whole point of the franchise is inventory control, On the margin, each store adjusts their orders such that shelf turnover time is optimum at the margin. Thus, inventories remain ‘economic’ up the controlled delivery channel. We call this, a pattern of sustainability and specialization.
Price discrimination already happening to maximum extent. Check the difference in prices of products aimed at men or women. Women know this and pay more any way. Or check the cereal aisle, with the cheaper generic right next to the name brand. Walmart develops shopping centers connected to their store which contain retailers of name brand shoes that they don’t carry so they don’t lose customers to Kohl’s and make a profit off rent. And too many more to list here.
I’m voting for #2, and there is a great story about Huey Long driving miles in the state limousine to get half price onions. People will put a lot of effort into not feeling that they are being hornswoggled.
“We’ll match any competitor’s price” is a form of price discrimination, and an attempted to counter #2.
I’m pretty sure many chain restaurants already engage in this kind of price discrimination. For example, the price of a cup of Starbucks coffee definitely varies by location.
I can confirm that this is much more common with food chains. It would be interesting to check if it makes a difference whether those stores are with the same/different franchisees or centrally managed.
The main difference that I sometimes see with super markets is the same chain with a somewhat larger or smaller assortment of goods, depending on location/size of the store.
Also different goods on sale sometimes. (Most likely when they ordered too much of something and need to get rid of it.)
It’s well known that supermarkets all price milk the same, regardless of locations. That’s basically what they are measuring, because they are measuring the prices of staples that for which they have the most data. Most supermarkets probably make their profits on items that are unique/infrequently bought, like prepared salads or expensive chocolate bars or high-end olive oil. There is price discrimination, just not in staples. In any case, it would be impossible to price the same when rent is not the same. Target would bankrupt itself if it priced the same in St. Louis, MO as in Columbia Heights, DC.
Milk pricing is highly-regulated. The justification is that it is such a perishable product. Check out this USDA pub.
See here: https://www.ers.usda.gov/publications/pub-details/?pubid=42310
The manager of a chain auto shop I used once remarked to me that he was having trouble selling a certain kind of part because corporate wanted him to charge the same price as his sibling store in the wealthier part of town (10-15 minutes drive). Their customers would buy it at that price; his wouldn’t.
I think I see price discrimination by neighborhood in the DMV. There are the nicer, slightly more expensive by item, Giants and Safeways in nice areas with more expensive competitors (Wegmans, Whole Foods), and then there are ones you tend to see slightly better deals at in lower rent neighborhoods, usually in older buildings which haven’t assessed it worthwhile to jump on the fancy renovation bandwagon.
As time goes on, it becomes easier and easier to make more complex pricing decisions.
The dilemma is that that such price discrimination decreases the information embedded in the pricing. You are taking information away from your customers, and they may choose another retailer that they understand better instead.
I’m fairly certain some online stores do this already, especially with some of the data they can gather about the consumer. I don’t know if amazon does it, but generally travel websites and airlines charge more based on all kinds of factors. As you see more data integration or if the Amazon Go model expands it will probably become more common.
In general, saying that strategy X would work without thinking about how the market might adapt seems rather brave.
I go with Number 3 but most consumers figure it really quickly even before competitors advertising. My wife is not a price freak like me but she understands that a grocery bill of $150 at Winco on a trip and figure it would cost $170 at Staters and $190 at Vons/Albertson/Ralphs.
Go to the web site of Auto Zone or any of its competitors. You have to enter a ZIP code if you want to see the prices of auto parts. If there are multiple stores in the same town, they will probably all have the same price on a particular item, but it could easily be different the next county over.
Same with Lowe’s and Home Depot, for the items they stock in their big box outlets rather than exclusively on-line.
It struck me that there is a very defective assumption underlying the conclusions/interpretations of DellaVigna/Gentzkow, as well as those of several of their “supporting” referenced research, such as that of Mankiew, and extending through to Taylor’s cited question.
The defective assumption is just this: That somehow higher-income consumers are inherently and universally less price-discriminatory (by nature) – on any individual item – than are lower-income consumers. By corollary, that high-income consumers are inherently more willing to minimize their own Consumer Surplus on any individual purchase, by paying a higher price, than are low-income consumers.
Ability to pay a higher price is NOT willingness to pay a higher price.
Important distinction.
I feel like this is already common practice, though I suspect the price differences have more to do with the differences in the cost of doing business, not in customer’s income.
If you go to Target in downtown San Francisco everything will be 10-20% higher than if you go to the Target in Fremont, even though the median income in Fremont is actually higher. It’s just that labor and real estate are both lower in Fremont.