After reading the assigned section for the week, I was able to learn and could understand better about the direct and indirect price discrimination. The idea of price discrimination is a strategy that the companies adopt to sell the same products or service to customers using different prices, but based on what the seller/company think that they can get the customer to agree and actually buy the product, it is basically based on the strategy of charging the customer the maximum price that we think they will pay for the product or service, and I can see that happening in my company, since we have the price based on the complexity of the job we will have to do, together with what we think it would be fair, and then we negotiate with the client to get to a price where both of us are comfortable with.

Price discrimination helps the company to achieve the expected profit, when we charge the maximum price of the product/service to each client, we can go beyond and maximize our profits, based on the marginal of costs and marginal of price (which impacts directly on the marginal of revenue), to calculate how much it will be of profit achieved with that certain product/service. As Froeb, McCann and Ward states: “Price discrimination is the practice of charging different prices to different buyers or groups of buyers based on differences in demand.” (Froeb, L., McCann, B., & Ward, M.; 2017), it is the way to increase profits quickly by elevating the marginals of the company.

Direct price has an influence on the customers when we charge them different prices for the same product/service but based on some identifiable traits, giving certain discounts when we think it could be applied, such as senior citizens, veterans, etc. A direct price discrimination can be applied to the following specifications: time of the purchase, quantity purchased, coupons, age discounts, student fees, resident state discounts, loyalty cards, among some others.

In the other hand, we have indirect price discrimination which is based when the company allows the customer to choose the discounts they want to be applied to their purchase/service, the company is already charging a lower price compared to the competition or similar products, but the customer choses and buy more based on the lower price of unit being sold, for example: when people apply coupons to their grocery shopping, by applying many coupons and having a higher discount, they are choosing to have that done and at the same time they are buying more units of the same product.

As Froeb, McCann and Ward also states: “This indirect price discrimination differs from the direct price discrimination of Chapter 13 because high-value customers could clip coupons if they wanted. If too many high-value customers (those with a low elasticity of demand) clip coupons, then the attempt at price discrimination becomes unprofitable.” (Froeb, L., McCann, B., & Ward, M.; 2017). The indirect price is about identifying features, differing traits, relating and correlating values that are going to be decisive to the purchase, having an impact on the revenue and profits of the company.

Question:

Why might Mattel set a much lower margin on its Barbie dolls than on the accessories for the dolls?

Mattel might ser a lower margin of profits on its Barbie dolls rather than on the accessories because Barbies already comes on the category of “high value”, because the doll become such a collectable item, some of the customers purchase more outfits than the doll itself, explaining the idea and logic on the change of focus, setting a lower contribution to the margin when it comes to the accessories rather than the Barbies. This idea of differentiate the price between doll and accessories, gives the factory Mattel an idea and opportunity to sell more dolls with a lower price, targeting a higher margin of profits.

References:

Froeb, L. M., McCann, B. T., & Ward, M. R. (2017). Managerial Economics (5th Edition). Cengage Limited.