Fundamentals of Microeconomics Experiments

Question: Discuss about the Fundamentals of Microeconomics Experiments. Answer: Introduction: The chosen form of price discrimination is the first degree price discrimination. This is an ideal form of price discrimination which aims to maximize the profit which the producer can derive from selling products or services. The design of this form of price discrimination is done in a manner where every consumer would be charged a particular customised price based on underlying utility. The price charged to each consumer aims to match the maximum price the given customer or individual is willing to pay for buying it (Mankiw, 2014). It is noteworthy that unlike other price discriminations, the focus of first price discrimination is on individual pricing decisions and not on group pricing. As a result, 100% of the consumer surplus is captured by the seller in the given case. Possible example of the relevant design could be personalized internet based pricing systems which charge different price to each consumer driver by the underlying willingness to pay (Nicholson and Snyder, 2011). As the design of this form of price discrimination is based on matching the utility of each of the consumers. Hence, the key information which is required to implement this design is the perfect information with regards to the underlying utility of the offered service or product to the particular customer. This may be enabled through customer analytics which has made rapid strides in enhancing the overall consumer behaviour and overall understanding (Pindyck and Rubinfeld, 2001). However, even after much progress, it is possible to segment behaviour on basis of groups but to determine the individual utility still remains largely elusive. As a result, the first form of price discrimination is not witnessed in the real world and only a model which resembles this might be applicable. But one key aspect is that it is highly efficient even though consumers tend to lose under this price discrimination as they end by paying a higher amount than otherwise (Krugman and Wells, 2013). As briefly highlighted above, the key information which is required to operationalize the personalised prices intended for individual constraints seems to be one of the main constraints. Further, the existence of this large amount of prices could result in an administrative nightmare as neither is prediction possible nor offering a wide gamut of prices of the consumers in order to judge their underlying utility. Besides, despite being efficient, it faces resistance from consumers as the underlying price description is unfair and thereby would lead to customer alienation which needs to be avoided (Nicholson and Snyder, 2011). There would be the requirement to continuously tract the customers in order to update the utility status which tends to be dynamic and driven by a host of factors. Due to lack of tracking, it is possible that there are arbitrage opportunities for the customers (Krugman and Wells, 2013). This is possible when a person who previously had lesser utility now may have increased utility but if he/she procures at still the same price, then this may result in arbitrage profit for the customer. Hence, it may be understood that there are significant barriers as a result of which a perfect first degree price discrimination does not occur and only practices inspired from these tend to exist in the real world (Mankiw, 2014). A practical example of first degree of price discrimination is observable in the Migros supermarket personalised discounts scheme. The various aspects are explained below (Pindyck and Rubinfeld, 2001). The company i.e. Migros understands that displaying differential prices for various customers could be potentially disastrous and invoke criticism. Hence, it designed an alternative way to implement price discrimination of first degree by offering the customers personalised rates. The customers with Cumulus loyalty cardstend to receive personalised discounts via an app based on the complex algorithms that tend to rely on the historical purchases of the given consumer. The discounts offered are specific to customer as well as the product. In this manner, the various customers tend to pay different prices for the same goods as the underlying discounts available would be different (Tribune, 2016). It is apparent that information required for the above design to work would be the historical purchases of customers. Hence, this system may have limited utility for a new customer. Also, it is necessary that the concerned customer should have the loyalty card which can be used as a means to retrieve the past sales records of the customers. In the absence of this card, the relevant data cannot be retrieved and hence personalised coupon cannot be generated. Besides, a complex algorithm is also required to analyse the data which would keep on updating on a real time basis (Tribune, 2016). It is likely that this price discrimination is going to face resistance from the consumers and hence the company would have to terminate the personalised discounts. This is also apparent from the experience of a fellow supermarket Coop. Thus, sustainability remains a concern (Tribune, 2016). Further, the current personalised pricing cannot be implemented for those customers who have not enrolled for the loyalty program and thus do not possess the card. Besides, the current system has limited utility for new customers with no purchase history (Tribune, 2016). The algorithm would continuously require to be updated so that more parameters could be taken into consideration and hence improve the overall efficiency of price discrimination which would continue to remain a concern (Krugman and Wells, 2013). It is quite possible that the company may face litigation on account of this scheme as there are people who observe the scheme as self-serving rather than being customer centric (Mankiw, 2014). References Krugman, P and Wells, G 2013, Microeconomics, 3rd edn., London: Worth Publishers Mankiw, G 2014, Microeconomics, 6th edn., London: Worth Publishers Nicholson, W and Snyder, C 2011, Fundamentals of Microeconomics, 11th edn., NewYork: Cengage Learning Pindyck, R and Rubinfeld, D 2001, Microeconomics, 5th edn., New York: Prentice-Hall Publications Tribune (2016, October 26), Migros experiments with personalised discounts, Le News, Retrieved March 29, 2017 from https://lenews.ch/2016/10/26/migros-experiments-with-personalised-discounts/