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May 07, 2007

Dividing markets

Why can't people get flights to New York that costs the same regardless of when they fly? And why can't two people -- one age 60 and the other age 20 -- each get a hotel room for the same price? Why do the same products often cost different amounts to different buyers? N.C. State University economist Mike Walden says it's because sellers often know that some groups are willing to pay more for the same products and services than others are.

“You see this everywhere, and it is perplexing for people. They think that everything ought to cost the same regardless of your particular characteristics, but this is a very common technique used by sellers," says Dr. Walden, a North Carolina Cooperative Extension specialist.

“What sellers try to do is they try to separate buyers into different groups -- if they know that those different groups have different demands or desires for the products. In other words, if you have one group -- we’ll call it group A, who really likes a product and another group B, who is kind of lukewarm -- well the business if they can separate those groups, A and B, can probably charge group a more for the same product than they can charge group B," he explains.

“And so you see this everywhere. You see it for example … in the airline ticket area. Typically what happens there is airlines try to divide ... travelers into business travelers and leisure travelers. They know that business travelers who have to be at a certain place at a certain time likely will be willing to pay more than … leisure travelers," he adds. "Or you may see it at a store where people who are buying items in bulk will get a lower per-unit price because they are much more sensitive to the price.

“The trick for sellers, though, is they have to use characteristics of buyers that are legal to use," he concludes, "and which don’t offend those buyers when they do divide them into different groups.”

Posted by deeshore at May 7, 2007 08:12 AM