Wednesday, June 07, 2017

Amazon offers a discount on Prime for lower-income shoppers-but is it just a form of price discrimination?

See Amazon is going after Walmart with a 45 percent discount on Prime for lower-income shoppers by Jason Del Rey of recode. Excerpt:
"Amazon already owns the high-income shopper segment in the U.S. Now it’s making a bid to court those who have less income at their disposal.

On Tuesday, Amazon announced that it is offering a 45 percent discount on Prime memberships — $5.99 a month instead of $10.99 month — to U.S. residents receiving government assistance.

Shoppers with an Electronic Benefits Transfer card — used for benefits like the Women, Infants, and Children Nutrition Program — are eligible for the lower price but they also have to re-qualify every year for up to four years.

The move comes a little over a year after Amazon first introduced the $10.99 monthly payment option for Prime, which was previously only available for an annual fee of $99.

The monthly option comes with the same perks like free two-day shipping on tens of millions of items and access to a large selection of online movies and TV shows for no extra charge."

Charging different prices to different groups of customers based on their ability and willingness to pay (a discount) is price discrimination.

Why price discrimination raises profits

1. If a firm can get a higher price from some customers than others they increase their profits.
2. If a firm can lower the price for others who might not have bought the product to begin with, they also increase their profits.

Necessary Conditions for Price Discrimination

1. The firm must face a downward sloping demand. Monopolies do but firms in perfect competition do not (their demand, also their MR line, is flat).

2. The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand (senior citizens have a more elastic demand and will shop around more since they have more time so restaurants might give them a discount). The more elastic the demand, the greater the change in quantity demanded for a given change in price.

3. The firm must be able to prevent resale of the product or service. If a student can buy a movie ticket for $6 while everyone else pays $8, the firm will lose money if the students turn around and sell their tickets for $7. So the theater can prevent resale by checking student IDs to make sure people holding the lower price ticket really are students.

#2 might be the key here for Amazon. The lower income customers will be spending a bigger share of their budgets on Amazon products and services. One of the determinants of elasticity is how much of your budget you spend on the item. As this goes up, your demand becomes more elastic (that is, quantity will change more for a given change in price). You are affected alot more by a change in the price of cars than a change in the price of donuts. So if the price of cars doubles, the quantity demanded will fall much more than if the price of donuts doubles.

And when firms can price discriminate, as explained above, they will charge lower prices (offer discounts) to those groups with higher elasticities. The number of substitute goods and the amount of time consumes have to adjust to price changes also affect elasticity.

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