Comments on: A small pricing problem

By: Tel

Tel — Sat, 13 Mar 2010 01:33:44 +0000

I suspect that if you ask a random city person, “What is the most popular style of coffee?” you would reliably get an answer of either “Latte”, “Flat White” or “Cappuccino”. If you did a follow up and tell them to rule out those three and ask what is the next most popular style of coffee you would get a reliable, “Long black”.

But such connoisseurs would lean towards either “purer” forms of coffee unadulterated by other flavours, or uncommon beverages that might mark them as an expert.

Leading to the conclusion that this particular outlet’s primary customers are not such connoisseurs.

By: Butterfield, bloomfield & Bishop

Butterfield, bloomfield & Bishop — Thu, 11 Mar 2010 23:42:38 +0000

Making coffee retail involves relatively high fixed costs so the prices mean customers are being ‘creamed’.

Having said that it is usually the largest profit ( but not revenue) earner in most cafes.

By: Richard Green

Richard Green — Thu, 11 Mar 2010 16:03:13 +0000

James – As Patrick alludes to, I think the diminishing marginal utility would relate to caffeine intake rather than volume of liquid drank. All the beverages (bar ristretto) are the same caffeine dose.

Craig – The easiest way to price discriminate when you lack this information between consumers is offering slightly versions at different prices which are effectively the same cost. It’s the same with double smoked ham and smoked ham at the deli, or home and professional versions of software. They are doing this here, but not in the way I would have expected.

Arch – I think that form of price discrimination does take place, but not at an outlet like this. You really don’t get people stumbling in randomly, they pretty much have to make a conscious decision to go to this particular outlet. However, there could be a market for the pseudo connonsieur, who likes to have the paper cup with the boutique logo on it to show off, but can’t actually tell the difference. They probably would have a greater inelasticity than the true coffee wankers.

By: Arch

Arch — Wed, 10 Mar 2010 00:29:20 +0000

Building on Patrick’s comment, how about reputation and repeated interaction effects, Richard? A boutique cafe wants the connoisseurs coming back, but they are picky and and have the capacity to move around, so this drive the price of the `purer’ coffees down.

In contrast, if joe average stumbles in before work, Mr barista just takes him for as much as possible. Moreover, I guess this seems fair to Mr average, cause he got a big cup.

My recall of mechanism design fails me a bit here, but my hunch is that the two types of buyers in this market differ in more ways than the typical price discrimination models you implicitly refer to are capable of modelling. Interesting observation though!

By: Patrick

Patrick — Tue, 09 Mar 2010 23:37:01 +0000

Also, I very strongly doubt James’ Farrell’s explanation, quasi-rational as it may be. More than any other factor, coffee is actually a drug and very few people are sufficiently indifferent to their consumption as to be influenced by pricing strategies.

By: Craig

Craig — Tue, 09 Mar 2010 22:37:39 +0000

You’re forgetting about the information problem. Only the connoisseur knows who he or she is. The price setter wants to charge the connoisseur the highest price, but must at the same time make the non-connoisseur’s coffees unattractive to the connoisseur. So there is a tradeoff: to maintain the higher price for connoisseurs, the price setter must also increase the price (or do something else like degrade the quality) of the average beverages, to optimise the overall returns. This could end up meaning that the average coffees are priced higher. This would be the case if the proportion of connoisseurs is high. This is assuming that costs have nothing to do with the prices, but this is more often than not the case. It also assumes there isn’t some sort of introductory pricing effect going on also.

By: conrad

conrad — Tue, 09 Mar 2010 20:50:29 +0000

I have some evidence (actually an anecdote) of expected fairness from the coffee place near where I work. Basically, I was sitting around having a coffee, when I assume what was probably a business student asked how much it cost the guy running the shop in ingredients to make one of the weird coffees (vanilla syrup coffee or something like that). The answer was that he didn’t know, and that didn’t seem to bother him at all. I imagine this is also why his coffee is rounded to 50c increments — it’s simpler for people to pay $3.00 vs. $2.90, and no-one really cares about the difference, obviously including the price setter.

By: Patrick

Patrick — Tue, 09 Mar 2010 12:12:51 +0000

I think it is a more basic thing – charging what you think the market can bear, irrespective of what rational basis your belief is based in. Maybe if you called it something like ‘satisficing’ you might feel better about it!

By: James Farrell

James Farrell — Tue, 09 Mar 2010 10:50:13 +0000

Richard, if people hang around socialising or reading, they might drink two cups. The probability is increased if the portions are smaller. The discount for the smaller portions must be just enough to make it worthwhile to choose two small cups rather than one standard one.

Ideally cafes would use second degree price discrimination — i.e. charge less for the second cup — but it would be too hard to police.

By: Jacques Chester

Jacques Chester — Tue, 09 Mar 2010 10:07:54 +0000

And it still costs less than the cafe downstairs from my employer’s West Perth office.