An economic problem for dummies: price discrimination

I recently read the undercover economist and one of the main stand out chapters to me was the chapter of price discrimination and consumer surplus and it got me thinking about other examples of how this price discrimination is and could be being used in the modern day of apps. Consumer surplus is the amount of customers who would be prepared to pay more than the asking price for a food or service. This group of consumers is something that firms have wanted total into for years; in an ideal world, for the seller, everyone would buy their good at the maximum price that they'd be prepared to buy at, thereby maximising revenue. As a result they have tried tonnes of methods for making use of this great potential source of additional revenue. Whilst the logical step seems simply charge the point on a demand curve where PED is equal to 1, as this is the single price point where the firm makes the most money, in actual fact price discrimination is used to entice people to spend as much money as they are in fact prepared to. Whilst I want to get into the world of modern day price discrimination it must first be established the other means by which this has been done. The most effective method to date has been the simple market stall haggling; a good negotiator should be able to persuade a customer to pay as much as possible. This is very good for allowing humble market sellers to make as much money as possible but what if our humble market trailer wants to expand into the world of retail, by setting up a number of shops. Well the first way he could get a similar effect would be to offer different prices on his good in each of bishops dependent on their location, how convenient, how pleasant and how competitive is the location would all play a factor. Coffee served at a motorway service station I have noted is a good 20p dearer than it is on the high street. DAMN YOU COSTA! In fact dear old costa aren't just shrewd with their locale based pricing but also with our product range. Has anyone noticed that a mocha at costa costs £2.35 whilst being essentially a fifty-fifty blend of a laté, £2.15, and a hot chocolate, £2.30, making it in theory worth £2.23. So why charge more? Price discrimination of course, they are cleverly tricking their customer to pay an extra 12p more for a coffee that costs them no extra to make. In addition they've recently been pushing 30p extras, cream, syrup and other unhealthy treats, that I can guarantee cost them a fraction of that price. By purchasing these pricier, large and extra smothered coffees you are telling costa you don't mind paying more, it's rather shrewd is it not. "But Dave you said modern day! What is more modern than a high street coffee brand?" The Internet and online micro transactions, of course! A new phenomena of the modern world are i devices and their apps. I recently decided to investigate some apps that I'd been hearing a lot about, temple runner, jet pack joyride and draw something, and was surprised that they were all free to play. So, naturally, downloaded them without question to discover they not only all had coins that could all be purchased with real world money. I am now going to ignore temple runner and jet pack joyride as their economic model has been eclipsed by the shear awesomeness of draw something's one. The way draw something works is it allows consumers to download a free and inhibited version of the app. Prepared to pay more? Well then buy the full version with a whole dictionary of words and more starting colours, for 69p. You've started playing with our pals and your on a long streak but are stuck on a word, fear not there are bombs which drastically enhance your chances of guessing it. However, you need to buy them too! The app not demonstrating your artistic prowess? Buy more colours then! In fact, buy a pack of coins so you can get both! This model is genius! If you value your drawing streak more than £1.99 then you'll show that by buying more of the helps. The app manages to successfully get the consumer spending real money on things that cost the company nothing extra and the amount a customer spends on their product is dependent on how much they're prepared to pay. In addition there are the small adverts in the app, which over the costs of the free app itself, so anything after that is pretty well just profit for the company. It isn't all rosy, though. App development is still very much the wild west of software and video game development, even with Apple's strict monitoring policies news of court cases revolving around apps. Anti gay apps and many apps inappropriate for certain ages are still on the store; this isn't what this about though. The incident I want to refer to is the smurfs app which allowed for in app purchases of $99.99 a piece. This has given apple a bit of legal trouble, having had children, using their parents credit card, spend away small fortunes on intangible gifts. The argument against this is that children should not be given access to their parents credit card and a valid one. I only hope that issues like these are actually dealt with by firms as micro transactions would appear to be a fantastic way of keeping both consumers and sellers happy and I hope it continues to gain speed.