Question

Cowboy Hat Markets Cody’s Cowboy Hat Emporium has two stores Fort Worth, TX. One in the Stockyards area that caters to tourists and another a mile further north that caters to ranch hands. Why doesn’t Cody sell to both customer types out of one store?

Answer 1

Two stores keep tourists from arbitraging away the price differences in Cody’s discrimination scheme. Since tourists do not have too many opportunities to buy cowboy hats, their demand rather inelastic. Ranch hand soften replace their hats and are more aware of the different retailers and so are more elastic demanders. Codytakes advantage of this fact by charging higher prices at the Stockyards. It does not sell to ranch hands out of this store because tourists would try to arbitrage away the price differential.

Note:

Arbitrage means is the purchase and sale of an asset in order to profit from a difference in the asset's price between markets.