When Starbucks raised its prices during the beginning of 2010, it lowered the price of a tall regular to $1.70. But, if you wanted a splash of foam, a shot of espresso, or a touch of flavor, the addition could be expensive. For a triple grande soy vanilla latte, you would have paid a whopping $6.25.
Their goal, I suspect was to attract coffee lovers who would spend a little and those who would spend a lot. For a basic cup of coffee, the price would be low. However, those who were willing and able to pay more would also be satisfied. In that way, Starbucks could retain a dual clientele.
NPR’s Planet Money explains how Groupon takes advantage of the same idea. People willing to expend the time and energy looking for coupons pay less. But businesses still can take advantage of the group who, ignoring the coupons, are willing to pay more. Again, the business owner can benefit. She does not have to offer lower prices to everyone.
The Economic Lesson
Starbucks and Groupon are engaging in what economists call price discrimination. The perfect example is airlines. An airline knows, for example, that a business traveler might be willing and able to pay more than a vacationing student. Their task is figuring out how to charge the businessperson more. The answer? Give discounts to people who stay over a Saturday night. The price discrimination is not explicit and yet, business fliers are charged a higher price.
In economics textbooks, price discrimination is typically discussed in chapters on monopoly. A monopoly and a smaller firm with a unique good or service have pricing power that have enables them to target different customers with their prices and coupons. Movie theaters discriminate by charging senior citizens less.
Do you think that colleges engage in price discrimination through financial aid?