Rationale for Shelf Space Price Discrimination
To understand the rationale for shelf space price, the concept of price discrimination should be elaborate. This is because the concept is applied to determine the price charged for the different shelves depending on their location: eyes level, close to the floor, or at the top. The price is high on the eyes level shelves and decreases respectively.
According to Machlup (1955), price discrimination is the practice of a firm or group of firms selling a homogenous commodity at the same time to different purchasers at different prices. Carroll and Coates (1999) identified market conditions necessary for firms wishing to employ price discrimination. First, the firm must possess market power, which is the ability to price above marginal cost, thus, ability to differentiate its products in the market from others. Second, the firm must have control of its products’ sale. If a product has a secondary market, opportunities could arise where buyers purchase the product from the firm at low price and resell to others at a lower price less than the one the firm would charge other customers. This is a little problem for sellers preventing resale, as argued by Varian (1992). Finally, the consumer with different price elasticity of demand should experience heterogeneous utilities from the goods. If the consumer values the goods equally, there would be no rationale for differentiating prices among different consumers.
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In supermarkets, shelves arrangement for products is in a particular way to capture the attention of different consumers. Products’ prices in different shelves are differentiated to discriminate between different consumers. Shelves, which are easily accessible to the consumers such as those at eyes level, tend to charge products placed on them higher than the products placed on the top most and the bottom shelves. Charging of different prices for products on different shelves in the supermarket can be explained from the perspectve of the different types of price discrimination.
Based on the information required for implementation, Pigou (1920) identified three different types of price discrimination, namely, first-degree price discrimination in which the seller charges a reservation price for each individual consumer, thereby, obtaining possible maximum revenue from each. It is also known as perfect price discrimination and in this case, sellers have to possess information on each consumer’s willingness to pay. Second-degree price discrimination occurs, depending on the number of units of goods bought; the prices differ although, not across the consumers. Consumers face the same price schedule, which involves different prices for different goods purchased. Third-degree price discrimination is whereby different customers are classified according to specific traits encompassing classes that pay a constant amount for the products each buys. These traits separate customers with different demand elasticises (Philips 1983). The customers are discriminated by age or discounts to students. For instance, a supermarket near a maternity home would discriminate the prices of newborn products. Obviously, mothers would have to buy these products regardless of the high price, especially because most expecting mothers are rushed to the hospital upon labour, which is unpredictable. Hence, they forget to carry the essentials, which the newborn must use upon birth.
From the first-degree price discrimination perspective, the supermarkets possess information about the customers’ mode of purchase. Customers seem to purchase more from shelves located at the eyes level. Therefore, products from eyes level shelves move faster than products in other shelves. Because of the fast movement of products from eyes level shelves, the supermarkets tend to discriminate the price by increasing their value to maximize profits. The products placed on top most and bottom shelves have normal prices. Therefore, the prices of the products on eyes level shelves are discriminated because of their high-demand and easy accessibility.
Consummers are offered discounts, depending on the volume of goods they purchase according to second-degree price discrimination approach. Supermarkets charge the consumers with large purchases less to induce them to buy more of the products. The supermarket would still make profit from these sales because marginal cost exceeds the price charged. For instance, if a supermarket sells 10 units of a product at $20 each or $19 for 11 units of the same, the marginal revenue from the 11th unit is $9. The second-degree price discrimination does not represent the high prices supermarkets charge for products on eyes level shelves. Contrarily, according to the second-degree price discrimination, supermarkets charge less to large quantity purchasers. Therefore, in our scenario, supermarkets charge according to how much each consumer purchases; bulk buyers are charged less than the consumer who purchases lesser units. Here consumers are not grouped as required under third-degree price discrimination, but their surplus is captured by designing price offering, which classifies customers according to their decisions (Philips 1983).
The supermarkets exogenously separate consumers into classes with different prices for each class as illustrated by the third-degree price discrimination. Depending on the location of the supermarket and the various consumers it targets, it can arrange its shelves placing the fast moving products on the eyes level shelves, which are charged higher than the less moving products on other shelves. For example, if the supermarkets were near learning institutions, its target would be students, and therefore, they would place stationeries on the eyes level shelves and tag with high prices because of their high demand.
Therefore, supermarkets place slow-moving products on the topmost and bottom shelves, where they are less accessible, as compared to the shelves on the eyes level where every customer has a clear and immediate look when he or she enters the supermarket. This is the price discrimination concept, which ensures products on different shelves are priced differently depending on their demand.