Many supermarkets provide regular shoppers with "loyalty cards." By swiping the card when checking out, a shopper receives reduced prices on a few goods, and the supermarket compiles information on all the shoppers' purchases. Some supermarkets have switched from giving the same price reductions to all shoppers to giving shoppers differing price reductions depending on their shopping history. A manager at one supermarket that uses this approach said, "It comes down to understanding elasticity at a household level." a. Is the use of loyalty cards that provide the same price discounts for every shopper who uses them a form of price discrimination? Briefly explain. b. Why would making price discounts depend on a shopper's buying history involve "understanding elasticity at a household level"? What information from a shopper's buying history would be relevant in predicting the shopper's response to a price discount?

Step by step solution

01

Understanding price discrimination

Price discrimination is a pricing strategy that charges customers different prices for the same product or service based on certain criteria. In the context of the supermarket loyalty cards that offer the same discounts to all customers, it isn't considered as price discrimination, as all customers have the opportunity to receive the same discounts regardless of their shopping habits or preferences.

02

Understanding elasticity at a household level

Elasticity at a household level is a measure of how households alter their demand or supply of a good when prices change. Understanding elasticity at this level involves predicting the shopper's response to a price discount. If a consumer has a more elastic demand for a product, they are more likely to increase their quantity demanded if the price decreases. This could impact supermarkets' pricing strategies.

03

Utilizing shoppers' buying history

Information from a shopper's buying history that would be relevant in predicting their response to a price discount could include frequency of purchases, types of goods bought, their reaction to previous price changes, and the quantity of goods bought at different price levels. This information can help in predicting demand elasticity for individuals, thereby helping the supermarket in determining which shoppers to target with specific price discounts.

04

Conclusion

In conclusion, using loyalty cards that provide the same price discounts is not a form of price discrimination since all shoppers get the same price reductions. However, customizing discounts based on shopping behaviors involves understanding elasticity at a household level meaning supermarkets are trying to utilize the buying history of shoppers to predict their response towards price changes, thereby indirectly practicing price discrimination.

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