Managerial Economics and Business Strategy

In what respects are the following common practices subtle (or not-so-subtle) forms of price discrimination? Frequent-flier and frequent-stay programs?

Frequent-flier and frequent-stay programs

Frequent-fliers are incentive programs are used by airlines to reward clients who have continuously been loyal travelers (Samuelson & Marks, 2006). The strategy aims to reduce travel costs to persuade travelers to become lifetime clients. Frequent-stay is a program that offers free stay in hotels for travelers who use hotel facilities quite often. The hotel industry introduced this program to ensure that as business people and travelers spend more time in hotels, they earn points that eventually allow them to enjoy free nights. Frequent-flier and frequent-stay programs are some of the most renowned strategies for developing loyalty among travelers (Samuelson & Marks, 2006). The criterion used for this type of reward program is quite often unknown. Therefore, it is certain that this is not a subtle form of price discrimination.

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Manufacturers’ discount coupon programs

The discount coupon program aims to reduce the prices of goods and services for customers who can meet the manufacturers’ set price irrespective of the prevailing demand (Samuelson & Marks, 2006). The latter is distinct from the direct reduction of prices. Manufacturers use discount coupons to target a specific consumer segment that has some element of elasticity at price (Baye & Beil, 2006). It is important to note that there are clients whose demand is more elastic than others. Therefore, using discount coupons is a subtle way of discriminating the prices of goods and services.

A retailer’s guarantee to match a lower competing price

This refers to a situation whereby retailers make an implicit guarantee to sell products to customers at a given price to outwit competitors’ prices. In most cases, it does not work well for retailers if the profit margin is reduced (Baye & Beil, 2006). Therefore, it may not be a subtle form of price discrimination

A New Hampshire resort offers year-round activities: in winter, skiing and other cold-weather activities; and in summer, golf, tennis, and hiking. The resort’s operating costs are essentially the same in winter and summer. Management charges higher nightly rates in the winter when its average occupancy rate is 75 percent than in the summer when its occupancy rate is 85 percent. Can this policy be consistent with profit-maximization?

Price maximization entails determining both the price and output levels to gain maximum gains (Baye & Beil, 2006). According to Samuelson and Marks (2006), several approaches can be used to maximize profits. First, the latter can be attained by increasing the prices of goods and services. It is important to evaluate and note the difference between marginal revenue and marginal cost. Baye and Beil (2006) point out that maximum profit is usually realized when the marginal revenue exceeds the marginal cost. In the given scenario, the New Hampshire Resort incurs almost an equal cost in preparing both summer and winter activities. Hence, it is anticipated that the turnout in both seasons must be relatively the same in generating revenue that meets the costs incurred besides the generation of surplus income.

However, the turnout for summer is higher than in winter. In this case, the costs incurred to cater to the 15% deficit must be catered for by those people who turned up for winter activities. Since the operating costs are equal and yet in winter there are fewer people, then the best option to maximize profit is to escalate the night rates. For the Resort to be profitable during the winter season, the management should ensure that the difference between operational costs and revenue obtained reaches its maximum. In other words, people who attend the winter activities will have to share the deficit accordingly to meet the cost and anticipated profit margin. This will be the best option for enhancing economic efficiency at the Resort. Therefore, it is agreeable that the policy is consistent with the ideals of profit maximization.

References

Baye, M. & Beil, R. (2006). Managerial economics and business strategy. Boston, MA: McGraw-Hill.

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Samuelson, W. F. & Marks, S. G. (2006). Managerial economics. New Jersey: John Wiley & Sons.

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