2. Who Pays for Your Coffee?
Examples to study the strength of scarcity of resources in
markets and the subsequent bargaining power held by the
certain resource owners
Bargaining power is correlated to the scarcity, and if the
scarcity shifts so does the bargaining power, as it doesn't come
solely by ownership
Ricardo’s model which expounds on the concepts of scarcity,
bargaining power and the shifts in bargaining power. It also
explains the concept of relative value pricing and marginal land
3. Who Pays for Your Coffee?
Starbucks, Farragut West
Located at a very prime location, at the station exit near to
International Sqaure, Washington DC
It expereinces a huge volume of commuters, being the
only coffee cafe in the station
They enjoy the scarcity and charge exorbitant prices for
their coffee, which is paid happily by the consumers
The scarcity isnt the only factor behind high prices, the
huge rent paid to the landlord for the prime location
4. Who Pays for Your Coffee?
Ricardian Theory of Rent
Rent of land arises due to the differences in the fertility
or situation of the different plots of land
Looks at the supply of land from the standpoint of the
society as a whole
There is perfect competition in the market for land
No consideration of the various alternative uses to
which land can be put
David Ricardo, a Classical Economist, developed a theory
of rent in 1817
His definition: That portion of the produce of the earth
which is paid to the landlord for the use of the original and
indestructible powers of the soil.
Assumptions of the Theory:
1.
2.
3.
4.
5. Who Pays for Your Coffee?
Ricardo's Theory, Meadows & Owners
With the examples of medows and landowners, we
observe that the bargaining power comes through scarcity
The relative bargaining power shifts between the buyers
and the land owners, based on factors like natural
availability of resources and the regulations
The shifts in bargaining power is also a factor of 'Marginal'
land, and it is because of this marginal land that owners
can enjoy the power of relative pricing
6. Who Pays for Your Coffee?
Ricardian Graphs and Model
Here, AD, DG and GJ are three separate plots of land of
the same size, but of difference in fertility. The total
produce of AD is ABCD, that of DG is DEFG and that of GJ
is GHIJ. The first and second plots of land generate a
surplus shows by the shaded area, which represents the rent
of the first two plots of land. Since the third plot GJ has no
surplus it is marginal land or no-rent land. Grade 4 (below-
marginal) land will not be cultivated, because rent is
negative.
7. What Supermarkets don't
want you to know?
How can companies exploit scarcity?
Tim Harford talks about two attractions spots in London - The
London Eye and the Millennium Dome - and how differently the
scarcity power was exploited.
To further elaborate on what or how companies can exploit this
scarcity he talks about the example Costa Coffee in London.
To attract more customers, CC could either increase prices or
reduce prices drastically and try to increase sales. But this isn't
very feasible for very obvious reasons.
The most ideal situation - differential pricing - is it possible? Yes.
That is what we will look at further.
8. What Supermarkets don't
want you to know?
First Degree Price Discrimination or
Unique Target Strategy
1.
Here, each customer is individually evaluated and charged at
whatever price they are willing to pay. Ex:- Used by car
salesmen, real estate agents.
It is time consuming, but nowadays, companies are trying to
automate the process by using "discount cards" in physical
supermarkets and "cookies" in online platforms.
Comapnies use this data to customise prices tailormade for
each individual customer.
9. What Supermarkets don't
want you to know?
AMAZON
Amazon, like other online websites, uses "Cookies" to identify
and track customer data
They used these records to offer "Money On" Vouchers: two
readers buying exactly the same book would be offered a
different price based on tendencies shown in previous
purchases
Customers realised that if they deleted cookies from their
devices, they were offered lower prices and this caused an
outcry, forcing Amazon to promise not to use this strategy
10. What Supermarkets don't
want you to know?
2. Group Target Strategy
This is a less objected to strategy, where companies offer different
prices to members of different groups. Ex:- Lower pricing for the
aged in comparison to adults
This model makes more sense and is easier to implement because
it is seen that certain groups that usually pay more, are ones that
can afford it
This strategy is more socially acceptable when compared to
Individual targeting. It also brings to light the concept of Price
sensitivity and how different groups react to change in price
11. What Supermarkets don't
want you to know?
DISNEY WORLD, FLORIDA
Disney World offers discounts of over 50% for the locals. This is
not because the locals cannot afford the tickets, but because they
are more price sensitive than tourists.
If price of the tickets were increased, locals were more likely to
skip a day of visiting the park which they might have otherwise
visited. If prices were lowered, locals might make multiple visits
which tourists will not be able to.
While it is assumed that the rich are price insensitive, this strategy
indicates that it is not always like that. Scarcity and repeat visits
are important criteria to look at as well.
12. What Supermarkets don't
want you to know?
3. Self-Incrimination Strategy
This is a common strategy where companies convince customers
to confess that they aren't sensitive to price. They achieve this by
offering products in different quantities, with different features, or
even in different locations.
The reason why this strategy is successful is because it is not
inherently obvious to the eye of a common consumer. They do
not know if the additional price is a price targeting strategy or just
due to added costs.
For example, coffee shops charge a similar premium whether you
have a large cappuccino in the café or take it away.
13. What Supermarkets don't
want you to know?
POPCORN & WINE
Popcorn in movie theatres and wine in a restaurant are often very
expensive, yet are still in demand.
This is not only due to the scarcity power that theatres and
restaurants hold, but also because of the price sensitivity of the
customers.
For example, those who are insensitive to the price will end up
not buying any popcorn, but if someone is on a date, will buy the
product irrespective of the price.
Similarly, those eating a long meal ona special occasion will buy
expensive wine and even the relatively expensive appetizers and
desserts.
14. What Supermarkets don't
want you to know?
Reality Checks for Companies
Companies need to be wary of "leaks".
Leak #1: Making customers price insensitive
The possibility of the rich customers preferring cheaper products
is very high. Therefore, it is the company's duty to intentionally
sabotage the cheaper product to make the costlier product more
viable.
Leak #2: Leakage between groups
Customers who are being offered a discount might buy the
product and sell it at a profit to those who are being offered a
higher price.
15. What Supermarkets don't
want you to know?
Price Targeting: Good or Bad?
Price Targeting can be beneficial for companies in certain
situations. ex:- Pharma Companies' differential pricing for diferent
demographics
It can also be a lose-lose situation sometimes: In airline and railway
industries, the group price-targeting strategy is inefficient because
it takes seats away from customers who are willing to pay more,
and gives them to customers who are willing to pay less
In many conditions, Price Targeting strategies can be both
efficient and inefficient.
