University of Nottingham Ningbo China
[School]
Academic Year 2017/18 - Autumn Semester
Microeconomics for Business A
Dr. Paolo Bianchi, Paolo Di Giannatale
[Women Surcharge]
[Jen Chun LO]
Student ID: [6522493]
[Words count:1138]
One of the hidden issue in modern market (in consumer’s perspective) that often neglected by costumers is the “pink tax”. The topic gets this name by the products that directly marketed to female including women and girls and mainly focus on the price differentiation with gender-neutral and men merchandises. A recent study by New York City Department of Consumer Affairs, investigates over 800 products, points out that nearly 40% of women-targeted products are 7% more expensive than male version (Blasio et al.,2005). This refers to the fact that women are in an unfair position in the market due to the inefficiency of consumer surplus. In this paragraph, the pricing strategy of retailer to female costumers will be demonstrated and how this problem will affect the social welfare to public will also be included.
In general, firms may manage a single and fixed price to sell the products to consumers. In fact, firms are the price takers in the perfect competition market (most of the products) which means that price is determined by the supply and demand of the market. However, if a company have a degree of monopoly power and the products itself is separable, it may as well practice “price discrimination” to gain more revenue and “pink tax” is one of the form of it. Price discrimination can be distinguished into 3 levels which in the first level companies are charging the price equals to the highest willingness to pay of consumers. This situation achieved the Pareto efficient since the total surplus is maximized despite the difficulties of implementing this strategy to the market for the elusive WTP of buyers. The second stage of price discrimination is to charge costumers according to the amount they bought and this is common in daily life e.g. the different of wholesale and retail in price. The final stage of price discrimination which applied in the “pink tax” issue is that costumers are divided into several categories and each group will have distinctive pricing approach.
Third degree price discrimination is the main reason of why women are paying more than men within the same products. This pricing strategy allows firms to earn extra revenue from the discriminated price that costumers pay. As it shown in the graph below, if companies are selling at price of P1 with these 20 outputs, the total revenue will be the green area. In another situation which third degree price discrimination is applied, firm may enhance the price to P2 for specific group of buyers. These buyers can be identified by particular characteristics e.g. location, time of use, in this case, gender. By the application of this theory, the total revenue now becomes these 15 outputs at price P2 plus those 5 in the same price P1. As it demonstrated in the chart, the additional red area is the extra revenue that organization earn. Another advantage of applying third degree price discrimination is that firm can repel the competitors by using the monopoly power in a market. This monopoly power gains form the barriers to enter the market and the brand’s image, in other words, the dependency from the costumers. This leads to the inelastic demand which means buyers will not switch to substitutes comfortably, therefore, company are permitted to charge a higher price than the competitors. As mentioned by Blasio et al.(2015), individual buyer has inability to choose the textiles or ingredients of the products but to make purchasing choice marketed to them. Under the “pink tax” circumstances, retailers target female customers who has limited purchasing decision for more profit using the existing monopoly power. The additional revenue may also be utilized to advertise and so widen the leading advantage with competitors. In addition to the monopoly market, if a firm is under oligopoly for example in export market, it can provide financial aid to the products using the profit which earn in monopoly market and thus decrease the price. These low price merchandises are able to break the equilibrium in oligopoly which action of one firm will have dramatically influence to others and force the competitors to depart the market.[pic 1]
In the area of social welfare, price discrimination is likely to enhance total surplus by using the extra profits to enter new market or increase the outputs of the products in original market. In the perspective of companies, price discrimination is a tool that used to enhance the revenue which raise the total surplus of supplier. In consumer’s side, the first degree price discrimination which known as perfect price discrimination is comparatively difficult to attain. This win-win situation hinders from the inconvenience of collecting data which here means the highest WTP from the potential or current buyers of the products. Consequently, the limitation force company to apply third degree price discrimination which will decrease consumer surplus for those are paying more. However, those groups of buyers who are not targeted will have greater surplus that obtain by the low price of the products. In fact, according to Hornbeck (2005), price discrimination has positive impact in the spread of AIDs drugs while maintaining the capital of development and research for organization. This means that, in a certain degree, price discrimination allows those who cannot afford the merchandises to enter the market. In other words, the redistribution of income from those are paying more to the unaffordable customers leads to affirmative outcome in the long run. In addition to the welfare gains from new market, the alternative method to increase public interest in original market is to enhance the number of outputs. As Yoshida (2000) suggested, the increase in outputs is one of the necessary elements toward social welfare improvement. This happens when firm profit by the discriminated price and expand the supply thus lowering the price. In consequence, the decrease of price leads to greater total consumer’s surplus overall. Under this theory, the additional total surplus in “pink tax” case is undoubtedly increase in retailer’s standpoint. The tendency of charging extra from female costumers has no possibility to halt in short run as long as the discriminated price is “accepted” by the consumers. According to the theory of second best, when price discriminating total surplus is greater than total surplus without the unequal price, it benefits social welfare. Which means that, the unequal treatment toward women customers is beneficial to society as a whole in long run.