Question

Coca-Cola years ago was experimenting with a vending machine that would dispense their products according to the weather, specifically the ambient air temperature. Also considered was whether the product was demanded during off season when there is less traffic. In one study, assuming 200,000 “smart” vending machines were in place, the incremental (marginal) profit associated with the smart vending machine was estimated at $328.5 million per year. In fact, the CEO of Coca-Cola was quoted as stating “In a final summer championship, when people meet in a stadium to have fun, the utility of a Coca-Cola is very high. So it is fair that it should be more expensive. The machine will simply make this product automatic.” (a) Do you think this strategy could work to improve profitability? Explain your answer please. (b) What type of price discrimination was Coca-Cola attempting? Explain all of your answers.

Answer 1

according to the weather, specifically the ambient air temperature.

whether the product was demanded during off season when there is less traffic

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(a) Do you think this strategy could work to improve profitability?

Yes, this strategy will work to improve profitability.

In simple terms, profit is defined as the markup over marginal cost. The marginal cost of a bottle of Coke is very small, but its selling price is high.

With this strategy, the selling price can be kept even higher when demand is high. In other times when demand is low, price can be kept closer to MC.

This will enable the company to maximize profits throughout the year.

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(b) What type of price discrimination was Coca-Cola attempting?

This is peak-load price discrimination.

Here, the company charges a different price according to peak vs. off-peak demand. When demand is very high, the price charged will be higher. It is based on the willingness to pay principle.

This strategy is slightly different from third-degree price discrimination, where consumer groups are created on the basis of some criteria, usually demographic.