In: Economics
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 2nd degree (volume) price discrimination scheme. How would you structure a proper 2nd degree (volume) PD scheme?
A.
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.