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    Elasticity and Price Discrimination

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    Elasticity and Price Discrimination: Evidence from Sam's Club and CVS

    An Example

    In a recent New York Times article, "Sam's Club personalizes Discounts for Buyers" (May 30 2010), the reporter Andrew Martin talks about an innovative discount idea from Sam's Club, the warehouse chain of Wal-Mart. He describes a new program called "eValues" where Sam's Club customers who are "Plus" members can go to a bright green kiosk near the entrance, swipe their membership card through the card-reader, and get an individualized booklet of coupons. This individualized booklet is tailored to each individual's expected demand for products and provides them with coupons for products that they would most like to purchase using the discounts. This is significantly different from the standard across the board discounts offered by most retailers. For example, warehouse clubs send out a booklet of coupons that any individual belonging to these warehouses could use. Similarly, grocery stores have long used "Preferred Shopper Cards" to offer discounts on products on their shelves. For example, if you browse by the selves of a grocery store aisle, you will see the price tag for a particular product offering the information that the normal price is $x while if you use the preferred shopper card for that store the price will be $(x-a). A similar (though more generic) idea that has often been used by producers and distributors is the coupon booklet insert that comes with your Sunday newspaper. In that booklet you get a wide variety of product coupons that you can then use in any grocery store to get a discount on the particular products that you buy. Grocery stores often complement these coupons by offering "double coupon" deals. Retail consultants call this type of individual pricing the "holy grail" of the retail business and predict that more and more businesses will use data mining and the power of predictive analytics to target individual customers. Indeed, amongst retailers, CVS and Kroger have already started offering individualized deals and coupons through kiosks while grocery giant Jewel offers individualized deals for a future shopping trip at the checkout counter.

    Explain briefly how this is an improvement over the generic use of coupons as a means to price discriminate.
    Are Sam's Club, CVS, and others moving towards direct rather than indirect price discrimination?

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    Solution Preview

    This is an issue related to price discrimination and elasticity of demand. As per 'thetimes100':

    "When you raise the price of most items, people will buy less of them. For example, when one airline raises its price, air passengers may switch to a rival airline. When you reduce the price of most items, people will buy more of them. For example, when supermarkets make special offers with reduced ...

    Solution Summary

    This solution discusses the concept of elasticity and price discrimination, using practices used by Sam's Club and CVS as examples.