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Discrimination Department Of Economics

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Discuss About The Price Discrimination. Department Of Economics.

When Some Customers Tried Ordering These Jerseys On-Line From Overseas Or Tried To Buy Them Overseas And Sell Them In New Zealand?

 

Answer:

Introduction

The New Zealand sports ware market can be categorized as a competitive market between the retailers though the presence of only one licensed manufacturer and distributor ensures that the market operates as a monopoly. The Rugby World Cup held in New Zealand provided an opportunity for sports manufacturers to sale their products. In our case however, only one manufacturer had the exclusive rights to make and distribute the national team Jersey, Adidas. The firm decided to price the jersey at the premium rate of $220 for each which at the least is exorbitant keeping in mind that the same replica sold for half the price in other markets namely the United States.

The Adidas country manager argued that the disparity could be attributed to currency fluctuation alongside other factors such as shipping. However, data does not support the argument as the additional costs add up to only a maximum of 35% of the retail price in the United States and other costs cannot be explained by the current or previous currency exchange rates. Adidas being a commercial firm aims to maximize its profits whenever possible. The difference in price can therefore be explained by price discrimination which is a pricing strategy that sales identical goods or services at varying prices to different markets or market segments. The strategy aims to maximize profit by charging the absolute maximum amount that a consumer is willing to pay.

 


The seller Can maximize his profit and sales to the different markets by selling at a price close-to their maximum willingness to pay. The seller increases or reduces his/her price based on location, financial status and product demand in a particular area (Mark, 2006). In our study case, the financial status of the targeted consumers Can be considered to be High as New Zealand is a high-income economy and a member of the OECD. Therefore, the consumers have a High spending power and can afford to buy the jersey at a premium price. Secondly, the demand for the jersey in the country was high as it was during the Rugby World Cup and national pride and support for the national team (All Blacks) were at an all-time high. Therefore, the prevailing conditions were suitable for the use of price discrimination.    

Nevertheless, for the practice to be able to function in a particular market some key structural realities have to exist. One, the firm must have a market power close a monopoly to been able to manipulate the marketing (Mark, 2006). As stated earlier, Adidas has exclusive rights for the manufacture and distribution of the national rugby official team jersey, in effect a monopoly. Secondly, the supplier must-have the ability to prevent resale of the product from the cheaper priced market to the more expensive one. Adidas, through manipulation and persuasion was able to get international retailers to remove New Zealand from their distribution list thereby closing that avenue to consumers.    

Sales Revenue

The diagram above shows the sales difference between a product with price discrimination and another without price discrimination. The lower one exhibits the characteristics of price discrimination.

Adidas moved to stop and shut down moves by disgruntled consumers Who sought to order cheaper jerseys online because this would be a violation of one of the principle requirement for price discrimination to function properly. As stated above, the firm must have the ability to prevent arbitration which in essence is Resale of the product from the cheaper market to the expensive one. If allowed, buying of the overseas jerseys by consumers would distort the market and render the whole price discrimination strategy unviable. The cheaper overseas version would undercut Their business besides being a public relations nightmare that portrays The firm as money grabbing institution without the fans interest at heart.

A seller’s sole aim is usually to maximize profit which translates to charging the highest possible price that the seller is willing and able to pay. Adidas, therefore, in the pursuit of maximizing profit chose to price discriminate and offer the consumers a price higher than the equilibrium. I the Ultimatum Game, there are two players in the game, the responder and the proposer. In our case, the firm Adidas is our proposer Whereas the New Zealand World Rugby fans are the responders. The proposer always makes the first move which can either be rejected or accepted by the responder with both parties seeking to maximize their outcomes (Maschler & Zamir 2013).

The first player may choose to either make a fair proposal or tilt the balance to his Favor. In a Competitive market, any proposals (pricing) that are not fair is rejected by the responder (consumer). Shifts in prices have a considerable elasticity within the market greater than one which means that other variables (demand) respond to such changes (Maschler & Zamir 2013).  Increase in prices lead to decreases in sales volume as consumers seek cheaper alternatives elsewhere in the market resulting in decreased revenue streams. However, in our case study, the New Zealand sports jersey market is by and large a monopoly. Therefore, the market is inelastic and Quantity demanded does not change drastically to the different pricing policies adopted by the monopoly. The kit manufacturer Adidas can therefore offer a price above the market equilibrium as it is insulated against market forces that may diminish the demand of its products. The New Zealand fan is in effect left with no alternative but to accept the unfair offer thereby creating a Nash equilibrium. The lack of competing Firms thereby provides the consumer with no other viable alternatives.

Price elasticity effect on price discrimination 

The graphs above show price discrimination in practice whereby the elasticity of the market has a great influence on the firms’ profit.

 

References

Mark, A. (2006) Price Discrimination. Department of Economics. University College London. 2, 1-38. Retrieved from: https://else.econ.ucl.ac.uk/papers/uploaded/222.pdf

Maschler, Management., Solan, E., & Zamir, S. (2013). Game Theory. Cambridge: Cambridge University Press. Doi: 10.1017/CBO9780511794216

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