Take Aways From Undercover Economist
1. Scarcity – Scarcity is often one of the key sources of competitive advantages for many firms. It can come in several ways – be it the location (Starbucks) or be it the unique ability to produce drugs that no one else can. It is this important phenomena that enables some companies to charge higher.
2. Signalling – Is first price discrimination really possible? Not very much in an interconnected world. Firms often need to deploy strategies that elicit signals from buyers to automatically tell them who are the ones who would pay more than the others. How can they practice price targeting? Discount coupons or cookies (Amazon), lazy buying behaviour. Exploiting the lack of price sensitivity is key!
3. Product differentiation is much more than what we think – Firms often make sure that the premium buyers perceive the “cheaper” version as inferior. Often they deliberately play with the other version to ensure that the premium buyers do not migrate to those products. Ex – IBM and Intel slowing down its printer or processor. A sense of exclusivity is important!
4. Leakages and its unintended consequences – Price targeting can be good. An example is a pharmaceutical firm that can effectively charge different price in India and US without putting off the Americans. However, leakages often discourage firms from doing this.
Interesting bit – In the above case private greed (charging differently) serves public interests (availability of the product to everyone). The moralists and the economists would be at opposite ends of the argument in this sense. Tim’s argument makes sense from the efficiency stand point – but it would piss off the social activists. Ironically, Pareto optimal is not always socially acceptable!
5. Allocative efficiency – Price targeting can have negative consequences. However, they can be averted in well-functioning markets where-in each consumer buys goods for the value they place on it (In economic jargon – a zero or slightly positive consumer
2. Signalling – Is first price discrimination really possible? Not very much in an interconnected world. Firms often need to deploy strategies that elicit signals from buyers to automatically tell them who are the ones who would pay more than the others. How can they practice price targeting? Discount coupons or cookies (Amazon), lazy buying behaviour. Exploiting the lack of price sensitivity is key!
3. Product differentiation is much more than what we think – Firms often make sure that the premium buyers perceive the “cheaper” version as inferior. Often they deliberately play with the other version to ensure that the premium buyers do not migrate to those products. Ex – IBM and Intel slowing down its printer or processor. A sense of exclusivity is important!
4. Leakages and its unintended consequences – Price targeting can be good. An example is a pharmaceutical firm that can effectively charge different price in India and US without putting off the Americans. However, leakages often discourage firms from doing this.
Interesting bit – In the above case private greed (charging differently) serves public interests (availability of the product to everyone). The moralists and the economists would be at opposite ends of the argument in this sense. Tim’s argument makes sense from the efficiency stand point – but it would piss off the social activists. Ironically, Pareto optimal is not always socially acceptable!
5. Allocative efficiency – Price targeting can have negative consequences. However, they can be averted in well-functioning markets where-in each consumer buys goods for the value they place on it (In economic jargon – a zero or slightly positive consumer