Question

In: Economics

You own 2 restaurants serving the exact same type of food.   The menus of meals and...

You own 2 restaurants serving the exact same type of food.   The menus of meals and drinks served are exactly the same.

Suppose that the costs of each restaurant are exactly the same.

Suppose further that the number of potential customers for each restaurant is exactly the same.

One restaurant is located in a wealthier section of town; one restaurant is located in a poorer section of town.

  1. Should each restaurant have the same prices on their menus or different prices at each location? If different prices, which restaurant should have the higher prices and which restaurant should have the lower prices? Why?

2. How does your pricing policy above benefit you? Explain why.

Solutions

Expert Solution

1) The phenomenon of price discrimination occurs when different prices are charged from the consumers for the same product. Although the restaurant would be offering the identical food items however can charge different prices from the different locations. The restaurant's pricing scheme will link the willingness to pay (WTP) of consumers with the ability to pay (ATP) of consumers. It will not be the same because one restaurant is located in a wealthier section of town; while the other's location in a poorer section. The restaurant will use the third-degree pricing programs while fixing it's pricing strategy wherein it will charge high prices from the wealthier section of town and lower prices from the poorer section of town.

2) The pricing discrimination will help the restaurant to capture consumer purchases from consumer groups that would otherwise would not be interested in their menus; thus provides the opportunity to expand the market and it's profits


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