3/07/2006

I'm Thirsty for Price Discrimination!

For most businesses, being able to effectively price discriminate is a dream. A company that can create a mechanism that allows price discrimination can significantly increase seller surplus and revenues. Coca-Cola is considering the use of vending machines that react to temperature changes. When the temperature rises, so does the price of Coca-Cola. When you are hot and thirsty are you willing to pay more for a cool Coca-Cola? Coca-Cola stands to benefit greatly if this strategy can be successfully implemented. According to my understanding this idea was met by a consumer backlash. Wouldn't a consumer who purchases Coke on a day when the temperature is below freezing increase their consumer surplus? Economically this is a very good idea if it can be executed without adverse impacts on demand.

7 comments:

will said...

I think this is a good marketing strategy and I am suprised no one thought of it sooner. On the other hand as a consumer it makes me mad. If I buy a coke this week (with freezing temps) and then go to buy one next month and the price is more, I will probably not buy one that is more according to temp. Most people know a price to expect for a soda and take just enough money to the vending machine to get what they want. I believe this price discrimination will cause coke to lose profits.

parker said...

In a marketing class I had we read the Harvard Business Review case study on this very marketing strategy. I remember the discussion well because the class seemed to be split on the strategy. I remember feeling that the strategy was truly ingenious in its ability to alter price to greater match the movement in demand. However, I feel that the strategy is only truly effective if it is analyzed using "ceteris paribus." Too bad in reality we know that such is not the case and there are many caffeine addicts, myself included, who are emotionally tied to such purchases. These emotions play into the purchase of a coke, and if on a hot day I am unable to purchase a Coke because I only have one dollar and the cost is one dollar and ten cents, I will forever hold a grudge against Coke and will begin looking for Pepsi machines which I consider reliable.

Anonymous said...

This technique betrays expectations-- it makes the coke machine unreliable, just like one that doesn't give change or doesn't light up the "out of stock" button until after you choose "New Coke".
Also, the machines I've seen like this don't have "specials" for under 40 degrees or under 50 degrees, just high and higher. Why wouldn't I just select a different machine or store?

Ashton said...

Well this really isn't a new idea. We talked about in class how gas stations increase the price of gas in the middle of the night. Why wouldn't other companies do similar things. I can understand that customers might get upset, but will it stop them from paying a little extra for a coke on a hot day? I think this idea could work.

Dr. Tufte said...

This post was posted about at one of the bigger economics blogs, Cold Spring Shops on March 14. The point was is that sometimes the things you choose not to do are as critical as those you choose to do.

I'd also like to point out that there are already "smart" vending machines. There is one across the way at the Sorensen Building with a motion sensor that sets off bells and whistles when someone walks by.

Most of the complaints about this (and they may be legitimate) are based on framing effects. A coke should cost (say) a buck, and we are less inclined to buy it when its price is not a buck. I think these are pretty weak arguments, as long as the change in pricing is subtle. Vending machines already have different prices, and how often would you think about whether the price of this particular machine had changed?

Matthew said...

Dr. Tufte said that complaints arise from this because of framing effects. This is completely true. We expect to pay a certain price for a coke. I don't expect to pay just a buck for a coke. The price will change regarding the place (sports arena vs. grocery store), so why not for the temperature?! I think people are being too sensitive on this issue. If they install those vending machines and you don't want to buy, then don't. Then you can prove to Coke it's not profitable and they will change.

Dr. Tufte said...

So, what exactly should Coke do to "unframe" their product's price?