Analysis of the Pricing Policy of the University of Exeter Sport Center - Literature review Example

Analysis of the Pricing Policy of the of Exeter Sport Center s affiliation Analysis of the Pricing Policy of the University of Exeter Sport Center While defining price discrimination, Stigler (1987) is seen to have the best of the definition. The author explains it as the statergy to be able to sell two or more similar goods at prices which happens to be in different ratios to marginal costs. The main idea here is the fact that the goods being sold have different prices of marginal costs ratios. For example, Stigler (1987) explains a situation where a hard cover book goes for £15 while in paperback the same book goes for £5. The effect here is price discriminination as the extra binding costs do not justify the £10 difference. Miles (1986), on the other hand, explains this as the key to avoid overpricing, It involves being able to deliver to different consumer groups while reflecting the true competitive value of what is being provided. It involves being responsive to consumers’ price sensitivity and alternative suppliers combination. As revenue maximizing entities, firms find themselves trying to apply this method to be able to gain more from those customers while at the same time remain with those who cannot afford as much. Obstfeld (2003) explains that its through price discrimination that similar or identitcal products are able to be to transcated at different prices by the same provider in different markets areas. This means that the customer here is the focus and their ability and willinness to pay the price is very key (Robert Phillips, 2005). This statergy has been applied to many different products and service providers in the world making it a common trend. Key among the main areas where this is applied includes but is limited to cellular phones users, credit card users, banks and hotels with service providers being the leaders in the application of this stratergy (Tirole, 1990). Hal R. Varian (1987) explains that for price discrimination to be made possible, three conditions have to satisfied. The first condition is that the firms that is excercising this must posees come market power. Second the firm must be able to sort the customers int different customer segments and lastly they must be able to prevent resale of the products from one customer segment to the other. Looking at the three requirements and in relation to the university of Exeter Spoet, there is the ability of the business to practice price discrimination. The table below provides ac consolidated pricing menu for the sports centre. Through this consolidation the speorts centre serves throught four different market segements which are symbolic of the different pricing of their services. The segments inludes the student; persons associated to the university such as the staff retired staff, alumini and lay memebers together with the cororate memebers; external memebers and the juniors. The corporate members and those ssocited to the university namely the staff and former students all belong to the same group as the are in the same pricing bracket. Membership Standard Gold Platinum University of Exeter Student £22 £240 £300 University of Exeter Staff, Retired Staff, Alumni and Ley Member Corporate Member £50 £294  (£25.50 per month direct debit) £348 (£30 per month direct debit) External Member £65 £340 (£29.50 per month direct debit) £399 (£34.50 per month direct debit) Junior (under 16 years) £40 N.A N.A Inlow and Marks (1988) noted that the service industries is one of the industries that is very easy to apply price discrimantion as the probability of resale is not possible. Therefore all that na organization requires to practice rice discrimination is only the market control and the ability to do customer segmentation. Since the sports centre is in the business of service provision, the idea of resell is not possible meaning that all is required is to have the market control and be able to segment the various customer segements. Shmanske, (1991) explains that for a business to be said to be in control of its market, it should be able to have rather unelastic demand for its product. This gives the business the ower to vary its market prices with much ease and without fear of losing customers. For the sports centre, it is able to control their market share especially for the student and the staff memebers. It is also able to be in control of their former staff and the alumni owing to the fact that those individuals have some attachement to the sorts centre making them loyal customers. Graph 1 In a market wher the firm has the power to set the market prices, their demand curve and te other related costs curves is as in Graph 1 above. In the monopoly therefore the firm is able to set its own price such as price P1 wher the it sells the quantity Q1 of products. Here the firm is able to make a profit of P1 less the MC (marginal cost). Where price discrimination is introduced, the firm is able to sell relatively similar roduct but at different prices as is the case with the graph below. Graph 2 Looking at the graph above, the firm has the power to set three different prices for the same product. In the sports centre, the administration is able to set P2 to be for the students while P1 is for second group of customers who consist of the alumni and the former staff while P3 is for external customers. This makes the different groups of customers to provide the business with different profit margins. The main advantage of the price discrimination is the fact that the business is able to benefit from making some customers better of than the other. As is in the case with the sports centre, the external member are left at a disadvantage in comparision with the students. This can be explained from the issues of social justice which can be explained with the fact that that the students cannot afford very high charges if they were asked to do so. The issues of social justice thus come into play whereby just like in some taxation systems, it is considered okay to tax the rich to feed the poor. Similar philosophy is used here, further more on the laws of relativity, the fact that the student would be paying £22 is almost equally exensive with a corporate member aying £50 for the same money since they are at a better financial position than the students. Over and above the basice pricing, the centre has also come up with another classiffication of the the four segments where they have divided the segemnts further into three memenbership plans namely; Standard, Gold and Platinum. While the same come with relatively increased srvices the principles of price discrimination in raltion to the marginal cost to pricing ratios are concered, then there is still the aspect of price discrimination. This is more so between the standard and the gold plans. The difference between the two is just that one getes to use the gym for unlimited times. In realtion to this we find just like Malmendier & Vigna (2006), rarely do those people who pay for the Gold memebership visit the gym. In the quite interesting research done by Malmendier & Vigna it was found out that member would rather pay for monthly lans to the gym but end up appearing for a limited number of times than pay on a daily basis as they use the facility. From this idea, the sports centre is able to sell their memberships and make a lot froom it. The different memberships with the various segements memberships gives the users the freedom to make sure that they have the ability to choose on various options provided. This thus provides the members with the power to have the second degree of price discrimination where the consumers chooses what to consumer and thus what to pay Schemalense (1981). On the other hand the discrimation on wherether one is a srudent, junior, staff member of corporate member represents the first degree of price dicrimationation where the customers have little control over how the business segemnts its customers and determines their pricess. For example an external member cannot choose to be a student in the sports centre to be able to enjoy the student charges. From the application of price discrimination, the business has been able to increase and maximize on the profits that results from the different groups as oppsed to if it decide to use an average price. An average price would have left out the juiniors and the students as the price would have been higher than what they now pay. Through this pricing therefore, the members are charged as per what they can afford. References Francisco Javier Rondán Cataluña. (2004). Price discrimination in retailing, International Journal of Retail & Distribution Management, 32 (4): 205 – 215 Hal, R. V. (1987). Price Discrimination University of Michigan Malmendier, S & Della, V. (2006). Paying Not to go to the Gym, American Economic Review, 96 (3): 694-719. Miles, A. (1986). Pricing. Perspectives on marketing seiles. Boston: Boston Consulting Group. Norton E. M., & Neely, S. I. (1988). Price discrimination and its impact on small business, Journal of Consumer Marketing, 5 (1): 31 – 38. Schwartz, M. (1990). Third-degree price discrimination and output: generalizing a welfare result. Schemalense, R. (1981). output and welfare imlications of monopolistic third degree price discrimination. The American Economic Review 242-247. Stephen, S. (1991). Price discrimination and monopolistic competition, Studies in Economics and Finance, 14 (1): 25 – 48. Stigler, G. (1987). Theory ofprice. New York: Macmillan. Tirole, J. (1988). The Theory of Industrial Organization. MIT Press: Cambridge. Read More