Assume that you are a marketing manager for a supermarket. The accounts departme
ID: 1228456 • Letter: A
Question
Assume that you are a marketing manager for a supermarket. The accounts department provides you with different price elasticites for a variety of goods. Some products (e.g. confectionaries & cosmetics) are relatively price-elastic; other products (e.g. bread, milk & greengroceries) are relatively price-inelastic.Write a brief report (two or three paragraphs) explaining how your marketing strategies will respond to this information. Your discussion should apply the following concepts to the problem, together with any other elements of microeconomic theory or concepts that you consider relevant.
(20 marks)
• The relationship between revenue and price elasticity;
• The relationship between PCM [Percentage contribution margin] and price elasticity; and importantly,
• How different pricing strategies are used to capture consumer surplus.
Explanation / Answer
Assume that you are a marketing manager for a supermarket. The accounts department provides you with different price elasticites for a variety of goods. Some products (e.g. confectionaries & cosmetics) are relatively price-elastic; other products (e.g. bread, milk & greengroceries) are relatively price-inelastic.
Write a brief report (two or three paragraphs) explaining how your marketing strategies will respond to this information. Your discussion should apply the following concepts to the problem, together with any other elements of microeconomic theory or concepts that you consider relevant.
(20 marks)
• The relationship between revenue and price elasticity;
• The relationship between PCM [Percentage contribution margin] and price elasticity; and importantly,
• How different pricing strategies are used to capture consumer surplus.
We know that revenue is heavily related to the price-elasticity of specific goods, and that different supermarket products have different price elasticities. Cigarettes, for example, are very price-inelastic - cigarette addicts will continue to purchase them regardless of whether the cigarettes cost $5.00 or $15.00. This is important, as it allows us to stock a set amount of cigarettes without worrying about increases in taxes or a change in demand. Plus, there are rarely coupons for cigarettes - again, because of the inelastic demand and the low (negative!) price elasticity of demand.
Price strategies used to capture consumer surplus include using coupons to encourage over-consumption of certain goods. For example, if a particular brand of cereal is set to expire within the next week, we can capture consumer surplus by issuing specific coupons for that brand of cereal, allowing us to *sell* this soon-to-expire good instead of, for example, distributing it for free. We can also distribute recipie books that encourage people to purchase all of the goods in the recipies, and distribute samples of full-priced foods - again, to incite consumers to purchase our products and to minimize consumer surprlus.
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