Consider the following two cases: Case 1: Subway charges a higher price for the
ID: 1191009 • Letter: C
Question
Consider the following two cases:
Case 1: Subway charges a higher price for the 6-inch Veggie Delight Sandwich sub in New York City than it does in a small town in Iowa.
Case 2: Consumers collected coupons from free newspapers and magazines and take to the store to save money on products.
Is each case an example of third degree price discrimination? Explain.
Consider the following two cases:
Case 1: Subway charges a higher price for the 6-inch Veggie Delight Sandwich sub in New York City than it does in a small town in Iowa.
Case 2: Consumers collected coupons from free newspapers and magazines and take to the store to save money on products.
Is each case an example of third degree price discrimination? Explain.
Explanation / Answer
Case 1 :-
Third degree price discrimination is when sellers charge different prices to customers who can be identified by a characterstic such as location, age etc. and these groups have different demand elasticities. It is evident that incomes in Iowa would be much lesser than in New York. If seller is charging higher prices in New York (location) due to ability of consumers to pay more than ones in Iowa, he is definitely using third degree price discrimination. Seller is clearly able to identify groups of customers and charge them differently which is the essence of third degree price discrimination.
Case 2 :-
In this case, seller is unable to identify customer groups and hence places coupons in newspapers and magazines. The rich have not time to collect coupons whereas poor people or ones who are conscious of price collect coupons and take it to the store to save money. This is a case of second degree price discrimination and not third because seller is unable to identify customer groups based on some characterstics.