Suppose Cub Foods is offering BOGO (buy one get one free) deal on avocados. If you...

Suppose Cub Foods is offering BOGO (buy one get one free) deal on avocados. If you buy two avocados, you pay $4. If you buy one, you pay $2 each.

a. Explain how this scheme is not a proper 2^nd degree (volume) price discrimination scheme. How would you structure a proper 2^nd degree (volume) PD scheme?

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Expert Solution

A second degree price discrimination, takes place when different price is charged on the basis of quantity of goods purchased or consumed. For example, for 2 Kg of Apple, $5 is charged and for 1 Kg of Apple, $3.5 is charged. It shows the second degree price discrimination, because person buying 2 Kg Apple, get discounts in price.

In the given scenario, the second degree price discrimination does not work, if Price for 2 avocados is $4 and for 1 avocados, it is $2. Here, average price of avocados remains same for both the consumers if they buy 1 avocado or two avocados and it is $2 per avocado. Hence, there is no discrimination.

To make proper second degree price discrimination, if price of 2 avocados purchased at one time is $4, then price of only 1 avocado purchased, should be $3. It will make price discrimination, because if somebody buys in bigger quantity, will get price discounts.

Rahul Sunny answered 6 months ago

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