- Price discrimination tactics let firms ‘smoke out’ different customer groups
- Bargain hunters: beware
The Undercover Economist opens with a chapter on coffee shops. I am always reminded of it when elaborate festive drinks start appearing on coffee shop menus: Tim Harford argues that by charging wildly different prices for drinks that cost a similar amount to make, coffee shops can “smoke out” customers who are insensitive to price. After all, if the person in front of you in the queue is ordering a large Black Forest mocha with whipped cream and extra syrup, they are probably not on the lookout for a bargain.
This kind of information is hugely valuable for retailers. If sellers can work out which groups are price sensitive, they can offer them a lower price. This isn’t as outlandish as it sounds: we see it frequently with student and senior discounts. If retailers can identify other groups as reliably less price sensitive, they can do the opposite, exploiting their higher willingness to pay by charging steeper prices. This is relatively well tolerated, too: expensive peak time tickets for time-pressed travellers are a textbook example.