Big Pharma uses Price Discrimination

Marathon Pharmaceuticals to Charge $89,000 for Muscular Dystrophy Drug After 70-Fold Increase
by: Joseph Walker
Feb 11, 2017
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Health Economics, Pricing

SUMMARY: Marathon Pharmaceuticals will charge $89,000 annually in the U.S. for a decades-old steroidal drug that was approved for U.S. sale for the first time on Thursday, a price that is as much as 70 times higher than the drug's price overseas. Related article: Marathon Pharmaceuticals will delay the U.S. launch of its muscular dystrophy drug amid mounting criticism of its $89,000-a-year price, including from two members of Congress who launched an investigation Monday.

CLASSROOM APPLICATION: Students can investigate the reasons for the marked difference between the U.S. and U.K. prices, examine the ethics of the price difference, and consider whether Americans subsidize the use of the drug in the U.K.

QUESTIONS: 
1. (Advanced) Research question. Why is the price of deflazacort 50 to 70 times greater in the U.S. than the U.K.?

2. (Advanced) Is it ethical for a pharmaceutical company to set a U.S. price for a drug that is 50 to 70 times greater than it sets for the drug in the U.K.? What criterion could be used judging the ethics of the pricing policy? (In the online interview of the reporter, comment on the reporter's last sentence.

3. (Introductory) Do Americans subsidize use of the drug in the U.K.?

Reviewed By: James Dearden, Lehigh University

Pricing and price discrimination in the automobile market

Car Dealers Take Steps to Help 'Underwater' Buyers Trade Up
by: Adrienne Roberts and Christina Rogers
Dec 02, 2016
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: Customers who owe more than their cars are worth are getting financing incentives including rebates, long loan terms-even cash.

CLASSROOM APPLICATION: Students can evaluate the causes of underwater auto loans, the incentives that auto manufacturers and dealers offer to consumers who are underwater on current loans, and the effect of lower gasoline prices on the types of automobiles that consumers are purchasing,

QUESTIONS: 
1. (Introductory) What are the causes of the increase in the number of car owners who are underwater on their auto loans?

2. (Advanced) What is the effect of a decrease in gasoline prices on the willingness of consumers to trade in the vehicles they purchased when gas prices were higher?

3. (Advanced) Why would car manufacturers and dealers set lower prices for customers who are underwater on their auto loans than for customers who are not?

Reviewed By: James Dearden, Lehigh University

Reblog: minimum advertised prices as form of price discrimination

https://managerialecon.blogspot.com/2016/11/minimum-advertised-prices-as-form-of.html

Hold-up = price discrimination in the market for apartments

Some Big U.S. Cities See Apartment Rents Fall for First Time in Years
by: Laura Kusisto
Oct 05, 2016
Click here to view the full article on WSJ.com

TOPICS: Supply and Demand

SUMMARY: Apartment rents declined in some of the country's priciest cities during the third quarter, a dramatic reversal that could signal the end of a six-year boom for the U.S. rental market.

CLASSROOM APPLICATION: Students can evaluate the effect of an increase in the supply of apartments and a decrease in job growth, which causes a decrease in demand, on apartment rents. The article also notes a "hold-up problem": Landlords typically drive a harder bargain on renewals because they know residents would rather avoid the hassle of moving.

QUESTIONS: 
1. (Introductory) What is the effect of an increase in the supply of apartments on rents?

2. (Advanced) What is the effect of a slowdown in job growth on rents?

3. (Advanced) Why do landlords typically drive a harder bargain on apartment lease renewals?

Reviewed By: James Dearden, Lehigh University

Price discrimination in the mobile game industry

How Mobile Games Rake In Billions
by: Sarah E. Needleman
Jul 29, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Price Discrimination

SUMMARY: Behind a pair of recent multibillion-dollar deals in the mobile videogame industry is an expertly crafted weapon: virtual goods sold inside apps for as little as 99 cents a pop. In-app purchases let players spend real money to bypass ads, acquire skills or grow powerful quickly.

CLASSROOM APPLICATION: Students can evaluate the evolution of mechanisms within mobile videogames to increase the likelihood that players purchase in-game tools to improve the playing experience. One interesting class of mechanisms involves behavior-based price discrimination: "Data on players' behavior also are used to strategically tweak prices for virtual goods in real time."

QUESTIONS: 
1. (Introductory) Is the use of a countdown clock within a game a tool used by game developers to price discriminate?

2. (Advanced) What is "behavior-based price discrimination"? What are examples of behavior-based price discrimination noted in the article?

3. (Advanced) Evaluate the statement, "Developers have gotten savvier about giving players more free things to do to keep them hooked until they start spending." Does getting hooked on a game imply that the player's demand for continued and faster play is more price inelastic? Does the higher price inelasticity imply that the player is more willing to pay to play a game without imposed delays?

Reviewed By: James Dearden, Lehigh University

Pricing floor space in malls

Mall Owners Push Out Department Stores
by: Suzanne Kapner
Jul 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: Once the linchpin of American shopping malls, department stores are being displaced by newer types of retailers that do a better job of driving shoppers to the centers and lifting overall mall sales.

CLASSROOM APPLICATION: Students can evaluate the reason for mall owners to set rents based on the amount of mall traffic stores generate. They can also examine the reasons for the decline in department store sales and the decrease in value of department stores to mall owners. One note in the article is that department stores are not closing fast enough.

QUESTIONS: 
1. (Advanced) Why did mall owners set lower rents for department stores than for other retailers? What was the benefit to mall owners of having department stores?

2. (Introductory) What factors explain the decrease in department store sales?

3. (Advanced) Why are department stores not closing fast enough?

Reviewed By: James Dearden, Lehigh University

Pricing strategies in the hotel industry

Hotels Turn to 'Member' Discounts to Battle Travel Websites
by: Drew FitzGerald
Jul 08, 2016
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: Hotel chains, including Wyndham, Hilton and Marriott, are offering discounts as high as 25% to loyalty-program members who book reservations through a hotel's website.

CLASSROOM APPLICATION: Students can evaluate the response by hotel chains to the commissions charged by online booking sites. In particular, the chains offer financial incentives to customers to join their loyalty programs and book stays on their own sites.

QUESTIONS: 
1. (Introductory) Why are hotel chains offering discounts to loyalty members?

2. (Advanced) What is the effect of online booking sites in the attempted product differentiation by hotel chains? Why is perceived product differentiation important to hotel chains?

3. (Advanced) What is the response by online booking agencies to hotel discounts for loyalty members?

Reviewed By: James Dearden, Lehigh University

Who is missing a chance to move resources from low-value uses to high-value uses?

This article reports that items sold by women fetch lower prices than the same items sold by men: https://www.theguardian.com/science/2016/feb/19/ebay-study-shows-online-shoppers-are-subconsciously-sexist.

Questions, assuming that the premise of the article is true.

1. How could savvy trader take advantage of the price differentials to earn profit?
2. What would happen to the price differential when these savvy traders act?

Price discrimination against women

http://managerialecon.blogspot.com/2015/12/why-do-women-pay-more.html

On-Demand Pricing

Now Prices Can Change From Minute to Minute
by: Jack Nicas
Dec 14, 2015
Click here to view the full article on WSJ.com

TOPICS: Price Discrimination, Pricing

SUMMARY: Backed by vast amounts of data and powerful software, more businesses are varying prices by the day, the hour, even the minute. Online sellers have used such tactics for years, but frequent price changes are increasingly common in the physical world. "On average, consumers pay more as a result of [pricing based on demand and also supply conditions at a particular point in time], economists say. Dynamic pricing also affects who gets the goods in highest demand, favoring those willing to pay the most, while creating deeper discounts for shoppers who can buy when prices are low."

CLASSROOM APPLICATION: Students can evaluate the effect of "dynamic pricing" (i.e., basing prices at a particular point in time on the demand and supply characteristics at that point in time) on seller profits, consumer welfare, and economic efficiency. One important point for instructors to emphasize is that sellers changing prices according to demand and supply conditions can be the result of a technological change in measuring demand on the equilibrium process of a competitive markets. Due to the technological change, equilibrium prices adjust quickly. Alternatively, changing prices over time as a result of changing demand conditions can be the result of price discrimination with consumers selecting from a price-time of purchase menu.

QUESTIONS: 
1. (Advanced) Consider the statement: "Previously, a taxi at rush hour went to 'the person who happened to be on the right street corner,' said Ian McHenry, the president of Beyond Pricing, which helps homeowners price their rented guest rooms like big hotels. Now, rides go to people willing to pay more, and fewer people 'hit the jackpot and get that underpriced reservation or baseball ticket or open cab.'" Does this statement imply that prior to "dynamic pricing," markets experienced excess demand during peak demand periods? Does "dynamic pricing" improve economic efficiency?

2. (Advanced) Evaluate the statement: "'This is not a passing fad,' said Peter Fader, co-director of the University of Pennsylvania's customer-analytics initiative. Amazon is making dynamic pricing the norm, he said, 'and then it's going to become imperative for the brick-and-mortar players to figure out how to do this.'" Why is it imperative for brick-and-mortar stores to adopt the same pricing policies as those of online retailers? In terms of game-theoretic analysis, why is it a best response for brick-and-mortar players to do so?

3. (Advanced) Does the price discrimination based on demand and supply characteristics a particular points in time result in higher average consumer prices?

4. (Introductory) The article notes a case about highway pricing based on time-of-day or congestion. Does basing the price of highway use on the amount of congestion improve economic efficiency?

Reviewed By: James Dearden, Lehigh University

One way to maintain 3rd degree price discimination - lie to them!

http://consumerist.com/2007/03/02/best-buy-confirms-the-existence-of-its-secret-website/

GM trys to curb discounting

This article from the WSJ is a great introduction to pricing, framing, the trade-off between margin and volume, price discrimination, and differentiation.

Arbitrage

The Web's Most Maniacal Bargain Hunters

by: Greg Bensinger
Apr 13, 2015
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: Retailers fret about "showrooming," where shoppers scan bar codes in stores and seek better deals online. But now there is a twist.

CLASSROOM APPLICATION: The article offers a great example of arbitrage in action, deemed "reverse showrooming." Armed with price-checking apps, individuals purchase low-priced items in stores. They then resell the items on Amazon, at a profit. "Industry insiders call the practice retail arbitrage. It's more art than science, because prices are often lower online. Tricks of the trade include scoping bargain racks, shopping on senior discount day, buying unusual sizes and anticipating high demand. Software developers offer price-checking applications that help calculate potential profit, after shipping costs and online commissions."

QUESTIONS: 
1. (Introductory) Define arbitrage. Is the practice of purchasing low-priced items in stores and then reselling them at higher prices online an example of arbitrage?

2. (Introductory) Are people who purchase low-priced items in stores and then resell them at higher prices on Amazon taking advantage of Amazon shoppers?

3. (Advanced) Does Amazon benefit from the practice of retail arbitrage?

4. (Advanced) Based on the anecdotal evidence in the article, how does the online competition for a product affect the prices set by retail arbitragers?

Reviewed By: James Dearden, Lehigh University

Is this price discrimination?

This article from BBC reports that fines for speeding vary with the daily income of the speeder.

Price discrimination at work

Does Tinder's scheme meet the conditions necessary for price discrimination to occur?

Why don't luxury hotels provide "free" Internet

The Middle Seat. Pay for Wi-Fi? Only at a Luxury Hotel
by: Scott McCartney
Feb 19, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Pricing

SUMMARY: High-end hotels are fighting hard to be the last place left on Earth where you have to pay for wireless Internet connections.

CLASSROOM APPLICATION: Students can analyze the reason why high-end hotels charge for Wi-Fi connections while lower-end hotels do not. The article draws the analogy between these hotel Wi-Fi charges and airline baggage fees. The related video states, "For the hotels, it lets them advertise a lower rate and then hit you with the upcharge when you get there." The most interesting point in the article for students to analyze: "Wi-Fi has become the most prevalent hotel upcharge, slapped onto bills where business travelers know their companies will pay and affluent leisure travelers are less price sensitive.... They charge at premium properties but not at budget inns because price-sensitive chains have made free Wi-Fi a perk to attract customers, and all want to stay competitive."

QUESTIONS: 
1. (Advanced) What is the relationship between the price elasticity of demand for a hotel and whether it charges for Wi-Fi?

2. (Advanced) Why are businesses willing to pay Wi-Fi upcharges while price-sensitive pleasure travelers are not?

3. (Advanced) What is "add-on pricing"? Is an add-on price posted like a hotel rate is posted? Is Wi-Fi upcharge an example of add-on pricing?

4. (Introductory) Is free Wi-Fi at high-end hotels an effective loyalty inducement?