tag:theconversation.com,2011:/africa/topics/pricing-10143/articlesPricing – The Conversation2024-03-15T12:10:30Ztag:theconversation.com,2011:article/2258572024-03-15T12:10:30Z2024-03-15T12:10:30ZWhy do airlines charge so much for checked bags? This obscure rule helps explain why<p>Five out of the six <a href="https://www.oag.com/blog/biggest-airlines-in-the-us">biggest U.S. airlines</a> have <a href="https://www.cnbc.com/2024/03/05/delta-is-the-latest-airline-to-raise-its-checked-bag-fee.html">raised their checked bag fees</a> since January 2024.</p>
<p>Take American Airlines. In 2023, it cost US$30 to check a standard bag in with the airline; <a href="https://www.usatoday.com/story/travel/airline-news/2024/02/20/american-airlines-bag-fees-mileage-earning/72669245007/">today, as of March 2024, it costs $40</a> at a U.S. airport – a whopping 33% increase.</p>
<p>As a <a href="https://www.bu.edu/questrom/">business school</a> <a href="https://www.bu.edu/questrom/profile/jay-zagorsky/">professor who studies travel</a>, I’m often asked why airlines alienate their customers with baggage fees instead of bundling all charges together. <a href="https://www.vox.com/2015/4/16/8431465/airlines-carry-on-bags">There are</a> <a href="https://www.usatoday.com/story/travel/columnist/2023/06/21/bag-fees-will-stay-a-while-cruising-altitude/70338849007/">many reasons</a>, but an important, often overlooked cause is buried in the U.S. tax code.</p>
<h2>A tax-law loophole</h2>
<p>Airlines pay the federal government <a href="https://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-49/subpart-D">7.5% of the ticket price</a> when <a href="https://www.pwc.com/us/en/services/tax/library/aircraft-club-nov-2023-air-transport-excise-tax-rates-for-2024.html">flying people domestically, alongside other fees</a>. The airlines dislike these charges, with their <a href="https://www.airlines.org/dataset/government-imposed-taxes-on-air-transportation/">trade association arguing</a> that they boost the cost to the consumer of a typical air ticket by around one-fifth.</p>
<p>However, the U.S. Code of Federal Regulations <a href="https://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-49/subpart-D/section-49.4261-8">specifically excludes baggage</a> from the 7.5% transportation tax as long as “the charge is separable from the payment for the transportation of a person and is shown in the exact amount.”</p>
<p>This means if an airline charges a combined $300 to fly you and a bag round-trip within the U.S., it owes $22.50 in tax. If the airline charges $220 to fly you plus separately charges $40 each way for the bag, then your total cost is the same — but the airline only owes the government $16.50 in taxes. Splitting out baggage charges saves the airline $6.</p>
<p>Now $6 might not seem like much, but it can add up. Last year, passengers took <a href="https://www.transtats.bts.gov/Data_Elements.aspx?Data=1">more than 800 million trips on major airlines</a>. Even if only a fraction of them check their bags, that means large savings for the industry.</p>
<p>How large? The government has <a href="https://www.bts.dot.gov/topics/airlines-and-airports/baggage-fees-airline-2023">tracked revenue from bag fees</a> for decades. In 2002, airlines charged passengers a total of $180 million to check bags, which worked out to around 33 cents per passenger. </p>
<p>Today, as any flyer can attest, bag fees are a lot higher. Airlines collected over 40 times more money in bag fees last year than they did in 2002.</p>
<p>When the full data is in for 2023, <a href="https://www.bts.dot.gov/baggage-fees">total bag fees</a> will likely top $7 billion, which is about $9 for the average domestic passenger. <a href="https://viewfromthewing.com/the-real-reason-airlines-charge-checked-bag-fees-and-its-not-what-you-think">By splitting out the cost of bags</a>, airlines avoided paying about half a billion dollars in taxes just last year.</p>
<p>In the two decades since 2002, flyers paid a total of about $70 billion in bag fees. This means separately charging for bags saved airlines about $5 billion in taxes.</p>
<p><iframe id="88MYD" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/88MYD/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>It seems clear to me that tax savings are one driver of the unbundling of baggage fees because of a quirk in the law.</p>
<p>The U.S. government doesn’t apply the 7.5% tax to <a href="https://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-49/subpart-D/section-49.4261-3">international flights that go more than 225 miles</a> beyond the nation’s borders. Instead, there are fixed <a href="https://www.airlines.org/dataset/government-imposed-taxes-on-air-transportation">international departure and arrival taxes</a>. This is why major airlines charge $35 to $40 <a href="https://www.aa.com/i18n/travel-info/baggage/checked-baggage-policy.jsp">for bags if you’re flying domestically</a>, but don’t charge a bag fee when you’re flying to Europe or Asia.</p>
<h2>Do travelers get anything for that money?</h2>
<p>This system raises an interesting question: Do baggage fees force airlines to be more careful with bags, since customers who pay more expect better service? To find out, I checked with the Bureau of Transportation Statistics, which has been <a href="https://www.bts.gov/content/mishandled-baggage-reports-filed-passengers-largest-us-air-carriersa">tracking lost luggage for decades</a>. </p>
<p>For many years, it calculated the number of mishandled-baggage reports per thousand airline passengers. The government’s data showed mishandled bags peaked in 2007 with about seven reports of lost or damaged luggage for every thousand passengers. That means you could expect your luggage to go on a different trip than the one you are taking about once every 140 or so flights. By 2018, that estimate had fallen to once every 350 flights.</p>
<p>In 2019, the government <a href="https://www.bts.gov/topics/airlines-and-airports/number-30a-technical-directive-mishandled-baggage-amended-effective-jan">changed how it tracks</a> mishandled bags, calculating figures based on the total number of bags checked, rather than the total number of passengers. The new data show about six bags per thousand checked get lost or damaged, which is less than 1% of checked bags. Unfortunately, the data doesn’t show improvement since 2019.</p>
<p>Is there anything that you can do about higher bag fees? Complaining to politicians probably won’t help. In 2010, two senators <a href="https://www.nj.com/business/2010/04/us_senators_present_bill_to_ba.html">tried to ban bag fees</a>, and their bill went nowhere.</p>
<p>Given that congressional action failed, there’s a simple way to avoid higher bag fees: <a href="https://www.cnn.com/travel/article/packing-expert-travel-world-handbag/index.html">travel light</a> and <a href="https://www.nytimes.com/2023/07/08/opinion/carry-on-packing-airlines-lost-luggage.html">don’t check any luggage</a>. It may sound tough not to have all your belongings when traveling, but it might be the best option as bag fees take off.</p><img src="https://counter.theconversation.com/content/225857/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The answer lies in the tax code.Jay L. Zagorsky, Associate Professor of Markets, Public Policy and Law, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2256102024-03-14T12:42:30Z2024-03-14T12:42:30ZWendy’s ‘surge pricing’ mess looks like a case study in stakeholder conflict<p>Just two words created a publicity nightmare for fast-food giant Wendy’s: <a href="https://theconversation.com/whats-dynamic-pricing-an-operations-management-scholar-explains-188265">dynamic pricing</a>.</p>
<p>In late February 2024, news broke that the chain was considering charging different prices at different times of day — a tactic usually associated with airlines and ride-hailing companies. As headlines like “<a href="https://www.foxbusiness.com/media/wendys-roll-uber-style-surge-pricing-menu-prices-fluctuating-based-demand">Wendy’s to roll out Uber-style surge-pricing</a>” flooded the news, #BoycottWendys trended on social media. Wendy’s rival Burger King quickly took advantage of the news with a “<a href="https://www.bk.com/terms">No urge to surge</a>” promotion.</p>
<p>The backlash put Wendy’s on the defensive.</p>
<p>Within days, Wendy’s said that <a href="https://www.wendys.com/blog/wendys-digital-news-update">it never intended to raise prices</a> at times of peak demand, Instead, it only intended to lower prices when store traffic was slow. It also announced a monthlong $1 burger deal that observers were <a href="https://www.foodandwine.com/wendys-march-madness-burger-deals-8604311">quick to connect</a> to the pricing fiasco. </p>
<p>It looked like a classic PR disaster – and as a <a href="https://scholar.google.com/citations?user=N1Fxik0AAAAJ&hl=en">professor of marketing</a>, I couldn’t turn away. How did this all go wrong?</p>
<h2>Divergent stakeholder interests, with a side of fries</h2>
<p>I suspect this burger brouhaha came down to a classic case of investors’ interests colliding with those of consumers.</p>
<p>The whole mess seems to have started on Feb. 15, 2024, when Wendy’s <a href="https://www.irwendys.com/news/news-details/2024/THE-WENDYS-COMPANY-REPORTS-FOURTH-QUARTER-AND-FULL-YEAR-2023-RESULTS/default.aspx">released its fourth-quarter earnings</a> and held a <a href="https://www.irwendys.com/events-and-presentations/event-details/2024/Preliminary-Date-Q4-2023-The-Wendys-Company-Earnings-2024-uusGd41PbC/default.aspx">conference call with investors</a>. </p>
<p>That day, Wendy’s announced a multimillion-dollar investment to roll out digital menu boards across all its U.S. stores. This investment would support “dynamic pricing and menu offerings,” according to a slide from the conference call. While presenting the slides, Wendy’s chief executive officer <a href="https://www.fool.com/earnings/call-transcripts/2024/02/15/wendys-wen-q4-2023-earnings-call-transcript/">said</a>, “Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day-part offerings along with AI-enabled dynamic pricing menu changes and suggestive selling.”</p>
<p>While some people argue that Wendy’s may have never meant to hike prices at all, I’m skeptical. Of course there’s nothing wrong with raising prices – companies would go out of business if they didn’t. The issue is how to frame the price hike. For example, Starbucks increased prices <a href="https://www.cbsnews.com/news/starbucks-prices-inflation/">three times</a> in just four months between October 2021 and February 2022. It blamed the hikes on inflation and didn’t face much of a backlash.</p>
<p>But no matter how you frame it, raising prices is a company action that benefits investors but not consumers. And while the dining public has been outraged by the whole affair, Wendy’s investors seem relatively unconcerned. Wendy’s stock price has remained <a href="https://finance.yahoo.com/quote/WEN/history">relatively stable</a> since Feb. 26, when the media picked up the story and boycott calls commenced.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/NlmKBsjj-30?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">It’s a bad sign when your company’s pricing controversy makes it onto “Good Morning America.”</span></figcaption>
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<p>This asymmetry makes sense and is well documented in <a href="https://doi.org/10.1016/j.ijresmar.2018.06.001">academic research</a>. On average, investors are motivated by a company’s profits. Moves to raise revenue, such as hiking prices, make them happy. That’s why companies often announce those increases well before they put them into effect – not for the customers’ sake, but <a href="https://doi.org/10.1016/j.ijresmar.2018.06.001">for the investors’</a>.</p>
<p>Of course, higher prices feel different if you’re the one paying them. And consumers tend to believe sellers aren’t being fair when they set prices: They think sale prices are set much <a href="https://doi.org/10.1086/346244">higher than fair prices</a>, underestimate <a href="https://doi.org/10.1177/0092070304269953">the impact of inflation</a>, overattribute the cause of price increase to profit-seeking, and fail to consider company costs. Their backlash is both <a href="https://doi.org/10.1086/346244">economically rational and predictable</a>.</p>
<p>What also makes sense is Burger King trying to act like a typical rival – aiming to benefit from the backlash Wendy’s received.</p>
<h2>A needless food fight</h2>
<p>In my opinion, Wendy’s early announcement of its dynamic pricing was a serious mistake. Remember that its CEO said that Wendy’s would introduce dynamic pricing “as early as 2025.” That means it announced the news at least nine months before customers needed to hear about it. I assume Wendy’s did this because it wanted to impress its shareholders and boost its stock price.</p>
<p>In fact, the cynic in me wonders whether this incident was “staged” – that is, Wendy’s was testing the waters to see whether they could preannounce the price hike to impress shareholders, and then not actually implement the changes. </p>
<p>Indeed, research has shown that <a href="https://doi.org/10.1016/j.ijresmar.2018.06.001">companies often preannounce price increases</a> a few days to several months in advance, and may withdraw some of these preannouncements if they realize that the price hike may cause more damage than increase in revenue.</p>
<p>But either way, announcing a decision nine months in advance seems premature. And I haven’t seen any evidence that Wendy’s planned for customers to hear the news along with investors.</p>
<p>My advice is for executives to be astute in communicating price increases so consumers take the company’s perspective and don’t <a href="https://doi.org/10.1177/0092070304269953">view the hike as unfair</a>. That may mean avoiding terms that elicit hostile reactions, or <a href="https://doi.org/10.1016/j.ijresmar.2018.06.001">providing explanations</a> for their decisions, such as an increase in the cost of ingredients or employee salaries. Consumers who understand the reasons for a price hike may be more accommodating.</p>
<p>Interestingly, even after the Wendy’s wobble, other restaurants are reportedly <a href="https://www.wsj.com/business/hospitality/surge-pricing-is-coming-to-more-menus-near-you-66a245f3">considering increasing menu prices</a> during hours of high demand. I hope they learn from Wendy’s error and frame their price increases strategically.</p>
<p>Otherwise, they shouldn’t be surprised when competitors eat their lunch.</p><img src="https://counter.theconversation.com/content/225610/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vivek Astvansh does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Sometimes, good news for investors is bad for consumers.Vivek Astvansh, Associate Professor of Quantitative Marketing and Analytics, McGill UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2249102024-03-06T21:00:53Z2024-03-06T21:00:53ZWendy’s won’t be introducing surge pricing, but it’s nothing new to many industries<p>The recent <a href="https://www.washingtonpost.com/opinions/2024/02/29/wendys-dynamic-pricing-elizabeth-warren/">controversy over Wendy’s pricing strategies</a> is a perfect example of how <a href="https://rdcu.be/dAfd2">online word-of-mouth</a> can distort <a href="https://doi.org/10.1509/jm.15.0419">marketing communications</a> and create confusion for consumers.</p>
<p>Wendy’s new president and CEO Kirk Tanner <a href="https://www.forbes.com/sites/shelleykohan/2024/03/02/wendys-dynamic-pricing-announcement-puts-new-ceo-kirk-tanner-in-spotlight/">announced plans to test dynamic pricing and AI-enabled features by 2025</a> on Feb. 15 during an earnings call. He said: “Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day-part offerings.”</p>
<p>Many interpreted this to mean Wendy’s would be introducing <a href="https://doi.org/10.1287/msom.2017.0618">surge pricing</a> — a term often associated with the dynamic pricing models used by companies like Uber, where prices increase during periods of high demand.</p>
<p>The issue likely stemmed from confusion over terminology. Although surge pricing and dynamic pricing are often used interchangeably, <a href="https://www.cnet.com/tech/wendys-says-no-to-surge-pricing-but-yes-to-ai-here-are-the-key-takeaways/">they have slightly different definitions</a>. Dynamic pricing refers to any pricing model that allows prices to fluctuate, while surge pricing refers to prices that are adjusted upward.</p>
<p><a href="https://www.npr.org/2024/02/28/1234412431/wendys-dynamic-surge-pricing">Several news outlets ran stories suggesting Wendy’s would raise prices</a> during busy periods, <a href="https://www.aljazeera.com/news/2024/2/27/us-burger-chain-wendys-plans-to-test-surge-pricing-next-year">prompting widespread backlash and criticism online</a>. </p>
<p>Wendy’s executives have since <a href="https://globalnews.ca/news/10320406/wendys-surge-pricing-ai-menu-changes/">clarified that its dynamic pricing model would not increase prices for customers</a>, saying in a news release the CEOs comments were “<a href="https://www.wendys.com/blog/wendys-digital-news-update">misconstrued</a>.” Wendy’s said that while price adjustments could happen in both directions, the upper limit would remain the current price.</p>
<p>Although Wendy’s won’t be exploring dynamic pricing until 2025 at the earliest, this type of pricing strategy is nothing new for many industries.</p>
<h2>Dynamic pricing is nothing new</h2>
<p>One aspect of the Wendy’s dynamic pricing controversy that warrants further examination is the nature of the product being sold. Traditionally, dynamic pricing has been associated with <a href="http://dx.doi.org/10.2139/ssrn.3611696">high-value goods and services</a>, such as airline and concert tickets and ridesharing services, where consumers are accustomed to fluctuating prices. </p>
<p>In contrast, fast food is generally perceived as a low-cost, everyday convenience with an expectation of stable pricing. Introducing dynamic pricing into the fast food industry represents a significant departure from these established norms.</p>
<p>Of the industries that already use dynamic pricing, ride-sharing apps are perhaps one of the most well-known. Uber, for example, uses <a href="https://doi.org/10.1287/mnsc.2021.4058">surge pricing during peak times</a>, meaning prices increase during periods of high demand when there aren’t enough drivers available for every customers.</p>
<p>The travel and hospitality industries have long used dynamic pricing models as well. <a href="https://insights.som.yale.edu/insights/is-dynamic-airline-pricing-costing-us">Airlines adjust ticket prices</a> based on a variety of factors, including time until departure, the day of the week and demand for specific routes. The hospitality industry similarly adjusts room rates based on demand, seasonality and local events. </p>
<figure class="align-center ">
<img alt="Close-up of a pair of hands holding a plane ticket" src="https://images.theconversation.com/files/579703/original/file-20240304-24-6j93mk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/579703/original/file-20240304-24-6j93mk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/579703/original/file-20240304-24-6j93mk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/579703/original/file-20240304-24-6j93mk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/579703/original/file-20240304-24-6j93mk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/579703/original/file-20240304-24-6j93mk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/579703/original/file-20240304-24-6j93mk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Airlines adjust ticket prices based on a variety of factors, including time until departure, the day of the week and demand for specific routes.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p><a href="https://globalnews.ca/news/9053769/alan-cross-defence-ticketmaster-dynamic-pricing/">Ticket prices for concerts</a>, sporting events and other live performances often vary based on factors like demand, seat location and timing as well. In this context, dynamic pricing allows event organizers to match prices to perceived market value.</p>
<h2>Benefits of dynamic pricing</h2>
<p>When implemented effectively, dynamic pricing can offer a number of benefits to both businesses and consumers. One advantage it offers is an enhanced customer experience. Dynamic pricing <a href="http://dx.doi.org/10.5296/jmr.v4i4.2009">can provide value to consumers</a> by offering lower prices during off-peak times or for less popular products and services. </p>
<p>This can make certain goods and services more accessible to budget-conscious customers and encourage them to make purchases they might otherwise forgo. Additionally, dynamic pricing can help businesses respond to market changes and customer preferences more quickly, leading to a more personalized and satisfying shopping experience.</p>
<p>Dynamic pricing can also help with inventory management. <a href="https://doi.org/10.1016/j.apm.2016.12.024">For industries dealing with perishable goods or limited inventory</a>, dynamic pricing can help manage supply and demand more efficiently. </p>
<p>By adjusting prices based on demand, <a href="https://doi.org/10.1111/j.1937-5956.2009.01099.x">businesses can encourage sales when inventory is high or demand is low</a>, reducing the risk of unsold inventory. This can be particularly beneficial for events or services with fixed capacities, like concerts or flights, where unsold seats represent lost revenue.</p>
<p>Lastly, dynamic pricing can help businesses maximize revenue and profitability. It allows businesses to <a href="https://www.mckinsey.com/industries/retail/our-insights/how-retailers-can-drive-profitable-growth-through-dynamic-pricing">adjust prices in real-time based on demand, competition and other market factors</a>.</p>
<h2>Challenges of dynamic pricing</h2>
<p>While dynamic pricing offers a number of benefits, it also comes with its own set of challenges. One of the biggest risks associated with dynamic pricing is the <a href="https://doi.org/10.1002/mar.10084">potential negative impact on customer perception and trust</a>. If customers feel that prices are unfair or unpredictable, they may lose trust in the brand. </p>
<p>This was evident in the Wendy’s situation, where the misunderstanding around surge pricing led to a backlash. Transparency and clear communication are crucial to maintaining customer trust when implementing dynamic pricing strategies.</p>
<figure class="align-center ">
<img alt="Uber app displayed on smartphone held in a hand in front of taxi with an Uber sign on top of a car" src="https://images.theconversation.com/files/579702/original/file-20240304-51515-pe8oss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/579702/original/file-20240304-51515-pe8oss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/579702/original/file-20240304-51515-pe8oss.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/579702/original/file-20240304-51515-pe8oss.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/579702/original/file-20240304-51515-pe8oss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/579702/original/file-20240304-51515-pe8oss.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/579702/original/file-20240304-51515-pe8oss.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">While Uber is one of the most well-known examples of using surge pricing during peak times, the travel and hospitality industries have long used dynamic pricing models.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>Another concern is the way <a href="https://doi.org/10.2307/23043490">dynamic pricing can be perceived as a form of price discrimination</a>, where different customers are charged different prices for the same product or service based on factors like demand, time of purchase or even personal data. Businesses need to ensure their dynamic pricing models are fair and do not inadvertently discriminate against any customers.</p>
<p>Implementing a dynamic pricing strategy can be complex and requires sophisticated technology and data analysis capabilities. Businesses need to invest in the right tools and systems to effectively manage and analyze large volumes of data in real-time. </p>
<p>Additionally, businesses need to ensure their <a href="https://doi.org/10.1109/WI-IAT.2011.193">pricing algorithms</a> are accurate and <a href="https://doi.org/10.1287/mksc.4.4.336">responsive to market conditions</a>. Failure to do so can result in pricing errors, <a href="https://doi.org/10.1145/2872427.2883089">lost revenue and damage to the brand’s reputation</a>.</p>
<h2>Lessons for businesses</h2>
<p>As technology continues to advance, dynamic pricing models are expected to become more common across sectors like retail, energy and transportation. While these pricing models offer the potential for increased profitability, businesses need to approach them with an honest and genuine consumer-first approach.</p>
<p>The recent pricing controversy at Wendy’s underscores the importance of precise language and transparent communication for companies looking to adopt dynamic pricing. It serves as a reminder that businesses need to avoid misunderstandings and negative reactions from customers.</p>
<p>As dynamic pricing gains popularity, companies must carefully choose their words and clearly articulate their pricing strategies to prevent misunderstandings and maintain customer trust. Failure to do so could result in losing control over how consumers and the public interpret their pricing strategies, which could significantly impact their reputation and overall success.</p><img src="https://counter.theconversation.com/content/224910/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Omar H. Fares does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Although Wendy’s won’t be exploring dynamic pricing until 2025 at the earliest, this type of pricing strategy is nothing new for many industries.Omar H. Fares, Lecturer in the Ted Rogers School of Retail Management, Toronto Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2143052023-10-04T13:43:08Z2023-10-04T13:43:08ZCocoa prices are surging: west African countries should seize the moment to negotiate a better deal for farmers<iframe id="noa-web-audio-player" style="border: none" src="https://embed-player.newsoveraudio.com/v4?key=x84olp&id=https://theconversation.com/cocoa-prices-are-surging-west-african-countries-should-seize-the-moment-to-negotiate-a-better-deal-for-farmers-214305&bgColor=F5F5F5&color=D8352A&playColor=D8352A" width="100%" height="110px"></iframe>
<p>The global price of cocoa is spiking, a direct response to <a href="https://fortune.com/2023/07/29/chocolate-inflation-wholesale-cocoa-west-africa-ghana-production/">dwindling cocoa output</a> in west Africa. In September, cocoa futures reached a <a href="https://www.confectioneryproduction.com/news/44853/ghana-and-ivory-coast-cocoa-prices-surge-to-46-year-high-as-concerns-remain-over-supply-deficits/">44-year price peak</a> due to mounting concerns over reduced supplies from the region. </p>
<p>The price surge could prove to be a critical moment for cocoa farming and policy in west Africa.</p>
<p>The cocoa-producing belt of west Africa is responsible for <a href="https://www.oecd.org/swac/publications/39596493.pdf">generating over 80%</a> of the total global output. Between them, Ghana and Côte d'Ivoire <a href="https://www.frontiersin.org/articles/10.3389/fsufs.2021.732831/full#:%7E:text=Most%20of%20the%20world's%20cocoa,2019%3B%20Fairtrade%2C%202020">contribute</a> more than 60% to the global output. Ghana is the <a href="https://www.confectioneryproduction.com/news/42498/icco-reports-show-increase-in-ghana-and-ivory-coast-cocoa-crops-but-key-export-challenges-persist/">second-biggest producer</a> in the world and cocoa is a vital component of the country’s economy. </p>
<p>The global price spike has led west African governments to increase the guaranteed producer prices to farmers. Ghana recently <a href="https://www.reuters.com/markets/commodities/ghana-hikes-20232024-cocoa-farmgate-price-supplies-tighten-2023-09-09/">raised</a> the state-guaranteed cocoa price paid to farmers by two thirds. The announcement means that Ghana’s cocoa farmers will be paid 20,943 cedis (US$1,837) per tonne for the upcoming 2023-2024 season, up from 12,800 cedis. </p>
<p>Cameroon, the world’s fourth-largest cocoa producer, raised the price cocoa farmers get to 1,500 CFA francs (US$2.50) per kilogram, a 25% jump from the previous rate of 1,200 CFA francs. This increase is even more significant than Ghana’s when factoring in Cameroon’s single-digit inflation. Additionally, the Cote d'Ivoire government has announced a <a href="https://thecocoapost.com/ivory-coast-sets-2023-24-cocoa-farmgate-price-at-1000-fcfa/">rise</a> in the producer price.</p>
<p>As an economics researcher who has extensively <a href="https://www.ucl.ac.uk/history/people/academic-staff/dr-michael-ehis-odijie">studied and written</a> about cocoa production in west Africa, I contend that the recent shortages can be harnessed to strengthen the position of cocoa producers. This will enable them to address the structural challenges ingrained in the cocoa production value chain. Rising production costs have not been recognised in the value of cocoa beans. Farmers therefore haven’t been able to earn enough income and this has led to unsustainable farming practices. </p>
<p>In my view, west African countries should use the cocoa shortage as negotiating leverage against multinational corporations to address these structural issues. Both Ghana and Côte d'Ivoire must recognise this pivotal moment. They must take the lead, and frame the current production challenges as deep-seated structural problems requiring solutions, rather than as short-term issues.</p>
<h2>What’s driving the change?</h2>
<p>Ghana’s cocoa regulator recently <a href="https://www.wionews.com/business-economy/ghana-may-not-meet-demand-for-cocoa-after-weak-harvest-626238">indicated</a> that its farmers might not be able to meet some cocoa contract obligations for another season. Ghana’s <a href="https://www.nasdaq.com/articles/ghanas-2022-2023-cocoa-output-expected-to-be-lower-by-11-than-target-sources">projected cocoa yield</a> for the 2022/23 planting season was the lowest in 13 years, falling 24% short of the initial estimates of 850,000 metric tonnes. </p>
<p>This trend has been repeated across the region, with production falling in Côte d'Ivoire and Cameroon.</p>
<p>Reduced output means demand can’t be met and global prices rise. </p>
<p>The reduction in cocoa output is attributed to short-term and long-term factors. </p>
<p>Commentators typically emphasise the short-term factors:</p>
<ul>
<li><p>poor weather conditions</p></li>
<li><p>black pod disease, which causes cocoa pods to rot</p></li>
<li><p>the decline in the number of cocoa farmers, some of them selling their land to <a href="https://thecocoapost.com/illegal-mining-an-existential-threat-to-cocoa-production-in-ghana/">illegal miners</a> </p></li>
<li><p>a <a href="https://www.un.org/africarenewal/magazine/february-2023/one-year-later-impact-russian-conflict-ukraine-africa#:%7E:text=The%20Bank%20estimates%20that%20fertilizer,exacerbate%20food%20security%20throughout%202023.">shortage of fertilisers and pesticides</a>, especially since the conflict in Ukraine has curtailed Russia’s export of potash and other fertilisers. </p></li>
</ul>
<p>A number of long-term structural issues have beset cocoa farming in west Africa for decades. They shouldn’t be overshadowed by concerns with short-term problems.</p>
<p>The first is the <a href="https://www.mdpi.com/2073-445X/9/12/524">declining availability</a> of forest land and its connection to increasing production costs.</p>
<p>Over the last two decades, depletion of forest land has led farmers to turn to grasslands for replanting cocoa plants. This requires extensive land preparation, regular weeding around the cocoa trees, pruning, and the application of fertilisers and pesticides. What’s more, the plants are highly susceptible to disease. All these things result in increased labour costs.</p>
<p>None of these additional burdens have been incorporated into the pricing for sustainable cocoa production. In light of the new cost structure, cocoa beans have been undervalued for decades. Farmers have become poorer and are exploring alternative sources of livelihood. </p>
<p>The cost of sustainably cultivating cocoa in grasslands must be reflected in the price that farmers receive. Relying solely on market forces will not achieve this. For instance, every year, typically in September, the Ghana Cocoa Board <a href="https://thecocoapost.com/ghana-pegs-farmgate-cocoa-price-at-ghs1308-for-2023-24-crop/">announces</a> the official producer price for cocoa beans for the upcoming cocoa season on behalf of the government. This official price is based on the anticipated export market price, with an understanding in Ghana that farmers should receive approximately 70% of it. However, the resulting market price, and consequently the producer price derived from it, often falls short of covering the costs of sustainable cocoa cultivation.</p>
<h2>A path forward</h2>
<p>What would it cost for cocoa farmers to cultivate cocoa beans sustainably, and ensure a living income, without contributing to deforestation or resorting to child labour? </p>
<p>If the market price falls below this cost (which isn’t static), then the farmers face exploitation, giving rise to many of the problems that plague the industry.</p>
<p>A few years ago, Ghana and Côte d'Ivoire <a href="https://theconversation.com/why-efforts-by-cote-divoire-and-ghana-to-help-cocoa-farmers-havent-worked-162845">pioneered the introduction</a> of the “living income differential” – a premium that cocoa buyers would pay on top of the market price to ensure that farmers earned a sustainable income from their produce. Despite its noble intent, the initiative <a href="https://www.reuters.com/world/africa/africas-fields-plan-pay-fair-wages-chocolate-withers-2023-04-04/">faltered</a>. It was not well thought through. And it came at a time when these countries had diminished bargaining clout in a saturated market. Now is a favourable moment.</p>
<p>The crisis in the sector puts cocoa producers in a stronger negotiating position. </p>
<p>Ghana and Côte d'Ivoire could collaborate with other regional countries, such as Nigeria and Cameroon, to negotiate a better position for their cocoa farmers, ensuring sustainable cultivation. There are many strategies these countries can explore, including supply management (such as buffer stocks, export controls, or quotas), price premiums and value addition.</p><img src="https://counter.theconversation.com/content/214305/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael E Odijie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ghana and other west African cocoa growing countries must harness their combined bargaining strength to address the challenges plaguing cocoa farming.Michael E Odijie, Research associate, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2044272023-07-03T11:50:55Z2023-07-03T11:50:55ZWhy are some Beanie Babies worth more than others? Prices for collectibles are about supply and demand<figure><img src="https://images.theconversation.com/files/529648/original/file-20230601-27-v2vms0.png?ixlib=rb-1.1.0&rect=7%2C4%2C1590%2C1192&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">From limited editions to spelling errors, only the rarest Beanie Babies are worth money.</span> <span class="attribution"><a class="source" href="https://flickr.com/photos/housingworksauctions/432628528">iStock</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/281719/original/file-20190628-76743-26slbc.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/281719/original/file-20190628-76743-26slbc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=293&fit=crop&dpr=1 600w, https://images.theconversation.com/files/281719/original/file-20190628-76743-26slbc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=293&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/281719/original/file-20190628-76743-26slbc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=293&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/281719/original/file-20190628-76743-26slbc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=368&fit=crop&dpr=1 754w, https://images.theconversation.com/files/281719/original/file-20190628-76743-26slbc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=368&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/281719/original/file-20190628-76743-26slbc.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=368&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><em><a href="https://theconversation.com/us/topics/curious-kids-us-74795">Curious Kids</a> is a series for children of all ages. If you have a question you’d like an expert to answer, send it to <a href="mailto:curiouskidsus@theconversation.com">curiouskidsus@theconversation.com</a>.</em></p>
<hr>
<blockquote>
<p><strong>Why are some Beanie Babies worth more than others? – Theo R., age 8, Rockford, Illinois</strong></p>
</blockquote>
<hr>
<p>Most Beanie Babies are not worth much money. A new one at the store might be priced as low as US$5, depending on its size. If you buy a new Floppity the rabbit or Hissy the snake today and try to resell it tomorrow, you will likely lose money. That’s because Beanie Babies are made in large enough quantities that anyone who wants one can get one.</p>
<p>Still, every so often, a Beanie Baby resells for a lot of money. It’s not always easy to know when this happens, because many transactions are private, and not every for-sale listing leads to an actual purchase. Still, some Babies seem to have traded online for <a href="https://www.actionnetwork.com/news/most-expensive-beanie-babies-sales-2021">hundreds or even thousands of dollars</a> in recent years. You might wonder why.</p>
<p><a href="https://scholar.google.com/citations?hl=en&user=aMoG0UkAAAAJ">I study the prices</a> of things people like to collect, such as paintings, diamonds and wine. The reason a particular Beanie Baby – or anything, really – can sell for a high price is because, when an item is attractive but rare or difficult to get, it becomes more valuable. Economists describe this situation as the demand being greater than the supply. </p>
<h2>Beanie bubble</h2>
<p>Beanie Babies were launched in 1993 by a toy company called Ty. In the late 1990s, <a href="https://www.penguinrandomhouse.com/books/313121/the-great-beanie-baby-bubble-by-zac-bissonnette/">some people went nuts</a> for these plush toys. The craze started with <a href="https://www.realclearmarkets.com/2019/10/09/a_look_back_at_the_beanie_baby_bubble_227222.html">collectors in the Chicago suburbs but quickly spread</a> – helped by the rise of online auction websites such as eBay. Collecting Beanie Babies became a fad not just among kids who thought they were cute or wanted to play with them, but also among adults who thought the plushies offered a way to get rich quick.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/527054/original/file-20230518-15-dksmo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Close-up of a table with a small stuffed animal in a clear plastic case in the middle. On either side, hands exchange US dollars." src="https://images.theconversation.com/files/527054/original/file-20230518-15-dksmo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/527054/original/file-20230518-15-dksmo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/527054/original/file-20230518-15-dksmo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/527054/original/file-20230518-15-dksmo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/527054/original/file-20230518-15-dksmo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/527054/original/file-20230518-15-dksmo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/527054/original/file-20230518-15-dksmo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A successful bidder pays $200 for a Princess Beanie Baby during a Beanie Baby auction at a California mall in 1998. The auction attracted hundreds of people who stood in line starting at 3 a.m. for the chance to bid.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BeanieBeaniesAuction/56d17d8970774dc28ff4519d41af0cb9">AP Photo/John Hayes</a></span>
</figcaption>
</figure>
<p>As more and more people started looking for certain Beanie Babies – especially those Ty had produced only in very limited quantities – resale prices went up. A bear given to Ty’s employees for Christmas quickly started selling for <a href="https://www.wbur.org/hereandnow/2015/03/02/beanie-baby-bubble">more than $5,000 on eBay</a>. </p>
<p>Some buyers believed collecting Beanie Babies was a great way to make money. They bought at high prices, thinking they could resell at even higher prices. </p>
<p>Economists call this a bubble. A bubble is when a lot of enthusiastic people buy a particular thing at prices that far exceed its true value. It’s happened <a href="https://fortunly.com/infographics/historical-financial-bubbles-infographic/">many times throughout history</a>, with everything from companies to gold to artworks.</p>
<p>The hype about Beanie Babies started to cool down at the turn of the century, as collectors began to realize that many of the stuffed animals were not scarce after all. When people started to sell their collections, <a href="https://thehustle.co/the-great-beanie-baby-bubble-of-99/">prices fell even further</a>. </p>
<h2>Rarity makes a Beanie worth more</h2>
<p>Today, only a tiny fraction of Beanie Babies are worth something. Their value has nothing to do with how nice they look or how much fun they are to play with. Valuable Beanie Babies are simply the ones that are very rare.</p>
<p>For example, Ty sometimes made small batches of animals with slightly different materials. Ty also gradually changed the tag – the heart-shaped paper attached to the animal’s head with its name. The Babies with the <a href="https://www.lovetoknow.com/home/antiques-collectibles/value-beanie-babies">oldest tags are typically more valuable</a>. Occasionally, Ty <a href="http://www.aboutbeanies.com/Tag_Errors.shtml">goofed with the spelling</a> on the tags. For example, Pinchers the lobster was <a href="https://nerdable.com/beanie-baby-tag-errors-to-look-out-for/">for a short time labeled as “Punchers.</a>” </p>
<p>To be worth money, rare Beanie Babies must also be in perfect condition. In fact, the most valuable animals have never been played with: they look brand-new, still have their tags and are stored in plastic cases.</p>
<p>This is similar for other collectibles. The most expensive bottles of wine or postage stamps are the ones that are old, rare and have never been opened or used. Rarity and condition are very important in determining the price of lots of collectibles, including Pokémon and <a href="https://doi.org/10.1111/joie.12262">Magic: The Gathering cards</a>, as well as <a href="https://www.nytimes.com/2023/04/13/technology/heritage-auctions-vintage-videocassettes.html">videocassettes</a> and sports memorabilia.</p>
<h2>Beanie Babies’ value is what people will pay</h2>
<p>It’s a little hard to know what rare Beanie Babies are worth now, because every toy is different and prices vary widely.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/527081/original/file-20230518-25-a06z7v.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Screen shot of an eBay listing for $11,000 of a Patti the platypus Beanie Baby" src="https://images.theconversation.com/files/527081/original/file-20230518-25-a06z7v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/527081/original/file-20230518-25-a06z7v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=314&fit=crop&dpr=1 600w, https://images.theconversation.com/files/527081/original/file-20230518-25-a06z7v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=314&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/527081/original/file-20230518-25-a06z7v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=314&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/527081/original/file-20230518-25-a06z7v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=394&fit=crop&dpr=1 754w, https://images.theconversation.com/files/527081/original/file-20230518-25-a06z7v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=394&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/527081/original/file-20230518-25-a06z7v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=394&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">An owner can list a Beanie Baby for any price on a site like eBay, but that doesn’t mean a buyer will pay that much.</span>
<span class="attribution"><span class="source">Screen capture by The Conversation</span></span>
</figcaption>
</figure>
<p>Just because someone lists their <a href="https://www.ebay.com/itm/394419857304">Patti the platypus for $11,000</a> doesn’t mean a buyer will come forward to pay that amount for it. The best way to learn about the current value of something is to look at recent sales of items that are very similar. </p>
<p>Even if some Beanie Babies are worth a lot of money today, nobody knows if they will keep their value in the future. It’s possible a new toy will come along that people like better. </p>
<p>The truth is, <a href="http://doi.org/10.1257/aer.20160522">prices of all collectibles fluctuate over time</a>, as people’s tastes – and their beliefs about other people’s tastes – change. The value of anything is what other people are willing to pay for it. </p>
<hr>
<p><em>Hello, curious kids! Do you have a question you’d like an expert to answer? Ask an adult to send your question to <a href="mailto:curiouskidsus@theconversation.com">CuriousKidsUS@theconversation.com</a>. Please tell us your name, age and the city where you live.</em></p>
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<p class="fine-print"><em><span>Christophe Spaenjers does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An expert in high-end collectibles explains why certain items can become valuable – and also how they can lose worth.Christophe Spaenjers, Associate Professor of Finance, University of Colorado BoulderLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1628452021-06-29T15:35:03Z2021-06-29T15:35:03ZWhy efforts by Côte d’Ivoire and Ghana to help cocoa farmers haven’t worked<figure><img src="https://images.theconversation.com/files/408344/original/file-20210625-14-21a4xy.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">West African cocoa farmers are largely poor despite the value of their crop</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Cocoa_farmer_David_Kebu_Jnr_holding_the_finished_product,_dried_cocoa_beans_ready_for_export._(10687070725).jpg">Irene Scott/Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>A <a href="https://www.voicenetwork.eu/wp-content/uploads/2019/09/190905-VOICE-Position-on-West-African-Cocoa-Floor-Price.pdf">cocoa pricing agreement</a> designed to protect farmers in Côte d’Ivoire and Ghana from destitution is <a href="https://www.reuters.com/article/ivorycoast-ghana-cocoa-idUSL5N2O3518">being circumvented</a> by multinationals, the main buyers of cocoa beans. </p>
<p>Cocoa is the plant from which chocolate is made. Côte d’Ivoire and Ghana together account for <a href="https://www.statista.com/statistics/263855/cocoa-bean-production-worldwide-by-region/">65% of global cocoa production</a>, but farmers in these two countries earn less than <a href="https://theconversation.com/ghanas-cocoa-farmers-are-trapped-by-the-chocolate-industry-124761">6% of the chocolate industry’s total revenue</a>.</p>
<p>The cocoa bean value chain has five major segments. The first is cocoa bean production, which involves local farmers. The second is sourcing and marketing, which involves local and international traders and exporters of cocoa beans and semi-processed products. The third is processing, which involves grinders and chocolate manufacturers. The fourth is distribution, which involves retailers. And finally, there are the consumers. </p>
<p>Cocoa growers’ share of the final product has reduced over the years as traders, brands and retailers have taken a bigger cut. For example, according to <a href="https://www.fairtrade.org.uk/wp-content/uploads/legacy/Cocoa-commodity-briefing-6May16.pdf">Fairtrade</a>, when cocoa prices were high in the 1970s, cocoa accounted for up to 50% of the value of a chocolate bar. This fell to 16% in the 1980s and today farmers receive around 6% of the value. Cocoa farmers in Ghana now make roughly $1 a day (this often includes being subsidised by the Ghanaian government). Those in Côte d’Ivoire make <a href="https://www.weforum.org/agenda/2020/11/cocoa-chocolate-supply-chain-business-bar-africa-exports/">around</a> $0.78 a day.</p>
<p>The living-income differential <a href="https://www.voicenetwork.eu/wp-content/uploads/2019/09/190905-VOICE-Position-on-West-African-Cocoa-Floor-Price.pdf">programme</a>, launched last year, was designed by both countries to help cocoa farmers escape poverty by adding a premium to the prevailing market price. But only a month after the launch of the programme, <a href="https://www.reuters.com/world/africa/ivory-coast-says-chocolate-traders-failing-pay-farmers-living-wage-premium-2021-06-18/">authorities in the two countries disclosed</a> that confectionery multinationals were refusing to pay farmers the agreed living wage. </p>
<p>The US multinational <a href="https://www.reuters.com/world/africa/ivory-coast-says-chocolate-traders-failing-pay-farmers-living-wage-premium-2021-06-18/">Mondelz</a>, for instance, was recently accused of paying a negative country differential. Last year another US firm, <a href="https://www.confectionerynews.com/Article/2020/11/23/Hershey-move-of-buying-cocoa-on-futures-market-threatens-LID-agreement-with-Ghana-and-Cote-d-Ivoire">Hershey</a>, bought from futures exchanges to avoid paying the differential and other companies are changing their buying patterns as well. </p>
<p>I have <a href="https://www.academia.edu/36081141/Sustainability_winners_and_losers_in_business-_biased_cocoa_sustainability_programmes_in_West_Africa">studied the relationship</a> between growers in the two countries and global buyers in <a href="https://theconversation.com/ghanas-cocoa-farmers-are-trapped-by-the-chocolate-industry-124761">previous articles</a>. As it is currently structured, the living-income differential programme is sending the wrong signal to cocoa farmers. And multinational buyers will benefit from it at the expense of farmers.</p>
<h2>The main problem</h2>
<p>Just before the October 2020 cocoa growing season, Ghana <a href="https://www.reuters.com/article/cocoa-ghana-idUSL5N2GL5J1">announced</a> that the guaranteed sum paid to cocoa farmers would increase by 28% per tonne for the new growing season. Côte d’Ivoire implemented a 21% increase in the price of the main crop of the 2020/2021 season. </p>
<p>These announcements were part of the living-income differential programme, which made headlines in 2019 when the two countries came together to form an agreement to provide a living wage to more than a million small scale cocoa farmers.</p>
<p>On the surface, the agreement looked like a cartel; it was even dubbed “COPEC”, a snide reference to the oil exporting cartel OPEC. But there are many problems with this arrangement. Both Ghana and Côte d’Ivoire were betting on the willingness of multinational companies to exhibit compassion by declaring their support. Instead of restricting supply to increase prices, the mechanism simply adds a premium of $400 per tonne to prevailing world market prices (which are mainly affected by the amount of cocoa in the market), without addressing market leakages and the effect of the premium on both world market prices and future supplies.</p>
<p>Unsurprisingly, there has been a general decrease in demand since the programme was launched, along with reports of confectionery multinationals’ buying indirectly to avoid the premium. Hershey openly diversified its cocoa sources the moment the living income differential came online. Other confectionery multinationals are doing the same indirectly, because the official demand is now significantly lower than in previous years. Multinationals are blaming this on the effect of COVID-19 on cocoa demand. </p>
<p>However, this explanation could be an excuse, because there is some evidence that confectionery sales have actually increased during <a href="https://www.theguardian.com/business/2020/oct/31/chocolate-sales-soar-uk-shoppers-comfort-eat-at-home-covid">the lockdown</a>. Both Ghana and Côte d’Ivoire are likely to have a great deal of unsold cocoa at the end of the season, which will further reduce the market price.</p>
<p>Indeed, the Ivorian government has already announced a reduction of producer prices by 9% <a href="https://www.confectionerynews.com/Article/2021/04/19/Cote-d-Ivoire-lowers-guaranteed-price-paid-to-its-cocoa-farmers-while-demanding-more-output">by April 2021</a>; Ghana may not follow suit but the <a href="https://www.bloomberg.com/news/articles/2021-06-21/biggest-cocoa-harvest-in-decade-spurs-record-debt-sales-by-ghana">debt incurred by the Cocoa Board</a> could well increase. Both countries <a href="https://www.confectionerynews.com/Article/2021/06/24/Ghana-and-Cote-d-Ivoire-launch-new-threats-to-cocoa-companies-over-LID-payments">have promised</a> to name and shame companies that are not complying with the payments.</p>
<p>The obvious problem with the differential is that it is bound to increase cocoa supply (because more farmers will move into cocoa production) and reduce demand through official channels. Both outcomes will further increase the supply of cocoa and drive prices downward. The $400 premium or more could be wiped out of cocoa prices as a result of the extra supply that the programme creates.</p>
<p>One bargaining position available to African countries is to exclude from sustainability programmes any firms that fail to comply with the programme. Multinationals claim that sustainability programmes are for the good of farmers, but they actually perform practical commercial functions such as guaranteeing supply and giving certain firms the stamp of ethical sourcing needed to placate environmental and humanitarian groups and possibly avoid lawsuits. </p>
<h2>Solving the problem</h2>
<p>One solution to the above problem, which both Ghana and Côte d’Ivoire are trying to solve, is to control and restrict supply instead of simply adding a price premium.</p>
<p>In 1987, when <a href="https://www.latimes.com/archives/la-xpm-1989-07-12-mn-3402-story.html">cocoa prices collapsed</a>, the then president of Côte d’Ivoire, Félix Houphouët-Boigny, responded by implementing a withholding scheme. The country then controlled roughly 40% of the market. However, this was not enough to control cocoa prices. <a href="https://www.jstor.org/stable/160925?seq=1#metadata_info_tab_contents">Scholars</a> have often suggested that Houphouët-Boigny failed to control cocoa prices in the 1980s because new supplying countries (such as Malaysia) made up for the shortfall. </p>
<p>Restricting supply is the one sure way to influence price. However, this measure must be implemented differently from Houphouët-Boigny’s rash decision in 1987. Together, Ghana and Côte d’Ivoire control 65% of the world cocoa market; they would only need to team up with three other countries (Indonesia, Nigeria and Cameroon) to gain a share large enough to fully control cocoa prices. </p>
<p>However, given the current structure of the sector in both countries, this would be difficult to achieve for two reasons. First, the IMF has already liberalised the marketing system in both countries, so what Houphouët-Boigny did in 1987 would now be almost impossible. The second, and perhaps most important, reason is that the so-called sustainability programmes organised by multinationals in both countries are in effect productivity programmes, in that they are structured to increase production and supply. Hence, they are inimical to any attempt to control supply.</p><img src="https://counter.theconversation.com/content/162845/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael E Odijie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ghana and Côte d'Ivoire’s best option is to control and restrict supply instead of simply adding a price premium.Michael E Odijie, Research associate, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/983292018-06-21T19:08:30Z2018-06-21T19:08:30ZA traveller’s guide to airline price discrimination<figure><img src="https://images.theconversation.com/files/223774/original/file-20180619-126563-btir1d.jpg?ixlib=rb-1.1.0&rect=62%2C117%2C5170%2C3428&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">RyanAir like most airlines ise price discrimination techniques to attract customers. Find out how.</span> <span class="attribution"><a class="source" href="https://pxhere.com/en/photo/881618">Pxhere</a></span></figcaption></figure><p>Summer is underway, and it’s the perfect time to plan a getaway. After spending days deciding where you would like to go, you finally pick a destination. Flights are only a click away, right? But once you’re seated on the airplane, you might not be aware that a person right next to you may have paid a completely different fare for the same trip.</p>
<p>You might wonder, why would airlines discriminate between consumers in the first place and what are they trying to gain? The answer lies with the economic concept called <a href="http://catalogue.pearsoned.co.uk/educator/product/Essentials-of-Economics/9781292082240.page">“price discrimination”</a>.</p>
<h2>Same product, different price</h2>
<p>Price discrimination is a pricing strategy that involves firms charging different prices to consumers for the same or similar products or services. The motivation simple: the desire to sell more units and earn more money. By charging different prices to different customers, companies can grab the maximum consumer surplus available in the market.</p>
<p>The practice is present across different industries and it is more common than you might think – in fact, most companies do it all the time. Every time you a “two-for-one special”, student discount, reduction coupon or voucher, you’re witnessing price discrimination in action.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/223776/original/file-20180619-126543-x3oj8e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/223776/original/file-20180619-126543-x3oj8e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/223776/original/file-20180619-126543-x3oj8e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/223776/original/file-20180619-126543-x3oj8e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/223776/original/file-20180619-126543-x3oj8e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/223776/original/file-20180619-126543-x3oj8e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/223776/original/file-20180619-126543-x3oj8e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Price discrimination works in most industries, and coupons are one tool companies use.</span>
<span class="attribution"><a class="source" href="https://upload.wikimedia.org/wikipedia/commons/thumb/0/06/Coupon_Pile_%2810865752156%29.jpg/2048px-Coupon_Pile_%2810865752156%29.jpg">Carol Pyles/Wikimedia</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Price discrimination has been most successfully implemented and developed across a wide range of services such as transportation (<a href="https://www.bloomberg.com/news/articles/2017-05-19/uber-s-future-may-rely-on-predicting-how-much-you-re-willing-to-pay">flights, trains, car services such as Uber</a>), tourism and hospitality (<a href="https://www.economist.com/free-exchange/2016/02/29/disney-discovers-peak-pricing">restaurants, hotels, amusement parks</a>), communication services such as mobile phones, and even electricity.</p>
<p>When it comes to airline pricing, a whole new playing field was created with the introduction of <a href="http://aviationknowledge.wikidot.com/aviation:low-cost-airlines:a-brief-history-the-current-state">low-cost carriers in the 1970s</a>, when Pacific Southwest Airlines was founded. An additional boost came in the mid-1990s with the introduction of the <a href="https://www.bbc.com/news/business-22888304">“peanut airlines”</a> such as Easyjet and Ryanair in Europe and their peers in Australia, New Zealand and Asia in the early 2000s.</p>
<p>Now, what are the factors that are going to influence the airfare you pay?</p>
<h2>Timing is key</h2>
<p>First, everything depends on <em>when</em> you purchase your ticket. If you buy in March for a trip that will take place in August, you are going to pay significantly less than someone who buys a ticket at the last minute. Generally, people who plan their holidays well in advance are more concerned about paying a lower price than those who book it closer to the departure date.</p>
<p>As a consequence, airlines use the mechanism known as <a href="http://www.economicslive.com/intertemporal-price-discrimination">inter-temporal pricing</a>, which allows them to target both “price sensitive” and “price insensitive” consumers. This represents a form of price discrimination, particularly evident among low-cost airlines. As <a href="https://www.airasia.com/my/en/about-us/ir-what-is-lcc.page#Fare">Air Asia explains</a>: </p>
<blockquote>
<p>“Want cheap fares, book early. If you book your tickets late, chances are you are desperate to fly and therefore don’t mind paying a little more.”</p>
</blockquote>
<p>You might have also experienced a frustrating situation when the price of an airfare (or a hotel booking) changes from one day to another, or even on an hourly basis.</p>
<p>This happens because airlines want to attract price-sensitive consumers and therefore have a certain number of economy tickets set aside to be sold at lower prices. If these seats start filling up quickly, the airline will boost the price for those that remain.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/223790/original/file-20180619-126566-ftgr5t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/223790/original/file-20180619-126566-ftgr5t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=499&fit=crop&dpr=1 600w, https://images.theconversation.com/files/223790/original/file-20180619-126566-ftgr5t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=499&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/223790/original/file-20180619-126566-ftgr5t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=499&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/223790/original/file-20180619-126566-ftgr5t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=627&fit=crop&dpr=1 754w, https://images.theconversation.com/files/223790/original/file-20180619-126566-ftgr5t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=627&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/223790/original/file-20180619-126566-ftgr5t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=627&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Want to stay in Paris? Most prices show that the offers are the ‘last ones’ available.</span>
<span class="attribution"><a class="source" href="https://www.booking.com/searchresults.fr.html?aid=305370&label=msn-xHvPMSH3Wep_IGxtnkWu0g-80195664841875%3Atikwd-138067627116%3Aloc-66%3Anes%3Amtb%3Adec%3Aqssorry+booking+is+sold+out&lang=fr&sid=226fe0214c031f0750a5afd4d89df3f5&sb=1&src=city&src_elem=sb&error_url=https%3A%2F%2Fwww.booking.com%2Fcity%2Ffr%2Fparis.fr.html%3Faid%3D305370%3Blabel%3Dmsn-xHvPMSH3Wep_IGxtnkWu0g-80195664841875%253Atikwd-138067627116%253Aloc-66%253Anes%253Amtb%253Adec%253Aqssorry%2520booking%2520is%2520sold%2520out%3Bsid%3D226fe0214c031f0750a5afd4d89df3f5%3Binac%3D0%26%3B&ssne=Paris&ssne_untouched=Paris&city=-1456928&checkin_monthday=30&checkin_month=6&checkin_year=2018&checkout_monthday=1&checkout_month=7&checkout_year=2018&no_rooms=1&group_adults=2&group_children=0&from_sf=1">Booking.com</a></span>
</figcaption>
</figure>
<h2>Travel in mid-September on a Sunday morning</h2>
<p>The airfare will also depend on the months during which you will travel. Most people have limited options and would usually take off during school holidays. For these people, vacationing in mid-September would not really be an option. Knowing this, airlines differentiate between peak and off-peak demand periods and charge different rates of airfares.</p>
<p>This is known as the <a href="https://businessjargons.com/peak-load-pricing.html">peak-load pricing</a>, the practice of charging higher prices in high-demand periods. Another example where peak-load pricing is applied would be travelling in different periods of the day. Generally, there are flight times that are considered as “unpopular” and for those the demand is lower.</p>
<p>An example would be an early Sunday morning flight. Airfares for return flights on a Sunday evening will be more expensive than those for the same flight on a Sunday morning, simply because people want to make the most of their vacation or weekend, and thus choose to take a later flight.</p>
<h2>It’s either seat options <em>or</em> a Saturday night stay-over</h2>
<p>Airlines also use <a href="https://www.investopedia.com/terms/v/versioning.asp">versioning</a>, a form of price discrimination where different prices are applied based on the quality of the transport service provided. Several forms of the same ticket are available to customers. The high-quality version of an airfare is more expensive but provides traveller with options such as flexibility to modify flight dates and even cancellation of the ticket without paying a penalty.</p>
<p>On the opposite end, the low-quality version of the airfare is “restricted”. There are also versions that are considered as “damaged”, such as a fare with a Saturday night stay-over. Additionally, low-cost airlines like Easyjet or Ryanair charge for extras such as choosing your seat or checking in luggage. Other examples of versioning include travelling in business class – the airfare is higher than for economy class because passengers benefit from more space, better meals, as well as more personalized attention from the airline staff.</p>
<p>Finally, quantity discounts and frequent-flyer loyalty programs are also ways how airlines apply different pricing for airfares. In the case of Ryanair, the airline will provide a personalized quote on demand for those travelling in bigger groups, while Wizz Air has a <a href="https://wizzair.com/en-gb/information-and-services/wizz-services/wizz-discount-club">discount club</a>, with different options tailored to passengers’ specific needs, such as traveling as a couple or in groups of up to five members.</p>
<p>Like any other companies, airlines target consumers by using different pricing policies to increase sales – and there’s no reason why you shouldn’t do the same. So if you’re planning a trip this summer, be it on your own, with another person, or with a group of friends or family, keep these points in mind in order to secure the best possible deal when booking your airfare.</p>
<p>Price discrimination does not have to be a negative thing, as there are consumers who clearly benefit from it. Some even go further and use <a href="http://www.regardnomade.com/comment-voyager-pas-cher-erreur-prix-billet-discount/">special websites</a> such as <a href="https://www.secretflying.com/">SecretFlying</a> or <a href="https://www.holidaypirates.com/flights">HolidayPirates </a> to take advantage of mistakes made by companies using price discrimination. Airline companies play the game, and you can too.</p><img src="https://counter.theconversation.com/content/98329/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jovana Stanisljevic ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>Price discrimination is a strategy companies use to charge different prices to consumers for the same or similar product or service. How does it work?Jovana Stanisljevic, Professor in International Business, Department POS, Grenoble École de Management (GEM)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/901382018-02-13T22:11:51Z2018-02-13T22:11:51ZCan government-approved pot beat street weed?<figure><img src="https://images.theconversation.com/files/206105/original/file-20180213-44627-d94fwz.jpg?ixlib=rb-1.1.0&rect=154%2C22%2C4669%2C2663&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Workers produce medical marijuana at Canopy Growth Corporation's Tweed facility in Smiths Falls, Ont.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span></figcaption></figure><p>A key goal of legalizing recreational cannabis is squeezing out illegal suppliers. But how competitive will legal cannabis retailing be <a href="http://www.cbc.ca/news/canada/toronto/joint-ventures-black-market-1.4528840">against established black markets</a>? </p>
<p>That’s a key question for federal and provincial politicians. <a href="http://www.cbc.ca/news/politics/liberal-marijuana-pardon-legal-1.4484496">Governments don’t like</a> pot consumers funding organized crime. </p>
<p>That question may also interest investors. They’ve pushed up <a href="https://www.bnn.ca/marijuana">cannabis stock prices</a> and created demand for <a href="https://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/fourth-canadian-marijuana-etf-to-begin-trading-next-week/article37927503/">four cannabis exchange-traded funds</a>. <a href="http://business.financialpost.com/commodities/agriculture/u-s-tobacco-seller-buys-majority-stakes-in-pei-and-ontario-cannabis-companies-in-what-may-be-first-for-industry">Alcohol and tobacco companies</a> have bought stakes in cannabis growers. Suppliers of hydroponic equipment and <a href="http://www.cbc.ca/news/canada/ottawa/ontario-shopify-marijuana-online-shopping-1.4531228">online retailing software</a> could benefit too. </p>
<p>To answer the question, consider the “four Ps” that marketers work with in every industry. Those are the <em>product</em> characteristics, <em>price</em> charged, <em>place</em> where sold and <em>promotion</em> activity. From this viewpoint, legal vendors have some potential advantages. But they face major challenges under current government plans.</p>
<h2>Pricing challenges</h2>
<p><em>Price</em> is the competitive element politicians mention most. In Colorado, cheap legal cannabis means <a href="http://www.cbc.ca/news/canada/calgary/legal-cannabis-sales-1.4504855">black markets control only 20 per cent</a> of state sales. But in Washington state, where prices are higher, black markets capture 50 per cent.</p>
<p>In Canada, governments agree cannabis prices must be competitive. They’ve suggested <a href="http://www.cbc.ca/news/politics/finance-ministers-pot-tax-1.4442540">$10 per gram</a>, including excise and sales taxes.</p>
<p>But Statistics Canada estimates <a href="https://www.statcan.gc.ca/pub/13-610-x/cannabis-eng.htm">market prices fell below $7.50</a> last year, and <a href="http://www.cbc.ca/news/politics/statistics-canada-cannabis-pot-price-1.4524891">farther since then</a>. <a href="http://www.cbc.ca/news/canada/british-columbia/bring-it-on-pop-up-cannabis-vendors-defy-vancouver-police-crackdown-1.4500550">Vancouver street prices</a> reportedly are near $5. And street vendors don’t charge tax.</p>
<p>Meanwhile, <a href="http://business.financialpost.com/business/most-provinces-yet-to-lock-up-marijuana-supply-as-clock-ticks-toward-legalization">most provinces lack confirmed supplies</a>, so they risk product shortages initially. Growers might prefer exporting their limited stocks to Germany’s higher-priced medical cannabis market.</p>
<p>Provincial governments could face awkward choices. If they price high to cover costs, they’ll be uncompetitive. If they price low to compete, taxpayers may end up subsidizing drug users.</p>
<p>Longer term, <a href="https://www.theglobeandmail.com/report-on-business/canada-marijuana-boom-bust/article37830962/">more growing capacity</a> will come online and enable lower prices.</p>
<p>Other pricing questions remain unanswered. Will all products share the same price? Or will prices differ by brand? Will each retailer set their own prices?</p>
<h2>Retailers lack convenience</h2>
<p>The <em>places</em> cannabis is sold also affect competitiveness. The western provinces will allow private-sector retailers. Ontario and its eastern counterparts are keeping retail in the public sector.</p>
<p>The public-sector plans lack convenience due to limited store numbers. That aids the black market.</p>
<p>For example, <a href="https://news.ontario.ca/mof/en/2017/09/ontarios-cannabis-retail-and-distribution-model.html">Ontario plans 150 outlets</a> by 2020. That’s only one per 95,000 people, about as common as Walmart. It’s enough for planned shopping trips, but not for consumers who have unexpectedly run out. </p>
<p>By contrast, Ontario has 2,067 locations selling alcoholic beverages: One per 7,000 people. Those include liquor agency outlets, beer stores and wineries. </p>
<p><a href="https://www.dwpv.com/en/Insights/Publications/2017/Quebec-Releases-Framework-for-Recreational-Cannabis">Quebec also expects 150 cannabis outlets</a> eventually, or one per 56,000 people. <a href="http://www.cbc.ca/news/canada/new-brunswick/nb-province-retail-model-legalized-marijuana-1.4370233">New Brunswick plans 20</a>, so one per 38,000.</p>
<p>Contrast those numbers with Colorado’s. <a href="http://www.cbc.ca/news/canada/toronto/joint-ventures-black-market-1.4528840">It has more than 800 stores</a>, or one per 6,250 people.</p>
<p>Private stores out West will likely be more numerous. But they’re banned from selling alcohol or tobacco. That specialization will restrict retailers’ revenue sources and the number of viable stores.</p>
<p>Provincial plans <a href="http://www.cbc.ca/news/canada/toronto/cannabis-lounge-legalization-marijuana-toronto-1.4497434">have barely mentioned on-site consumption</a>. Countless bars and restaurants serve alcohol drinkers. Licensed cannabis “lounges” similarly could serve cannabis users, especially renters in non-smoking buildings and <a href="http://www.cbc.ca/news/canada/hamilton/niagara-falls-cannabis-questionnaire-1.4505797">American tourists</a>. Otherwise, those groups may stick with black markets.</p>
<h2>Product advantages</h2>
<p>Consumers can’t evaluate cannabis <em>products</em> without smoking them. The cannabidiol (CBD) and tetrahydrocannabinol (THC) concentrations vary greatly. Consumers also can’t detect contaminants like pesticides and mould.</p>
<p>Quality-assurance measures therefore could give legal cannabis products a competitive edge. Each province except Saskatchewan plans a single public-sector wholesaler. That centralization will facilitate large-scale testing.</p>
<p>Consider Ontario’s liquor agency. Its <a href="http://www.lcbo.com/content/lcbo/en/corporate-pages/about/media-centre/quick-facts.html#.Wf-8vltSypo">Quality Assurance Lab</a> examined 28,000 beverages last year, rejecting 11 per cent.</p>
<p>Quality assurance, combined with recognizable brand names, would help products develop performance reputations. Some may offer a mild buzz, others a powerful high. Consumers could learn to rely on consistently performing brands, instead of unpredictable street weed.</p>
<p>However, <a href="https://theconversation.com/wheres-the-weed-branding-is-essential-for-cannabis-companies-87400">branding faces challenges</a>. Federal law <a href="https://lop.parl.ca/About/Parliament/LegislativeSummaries/bills_ls.asp?source=library_prb&ls=C45&Parl=42&Ses=1&Language=E#a19">limits package designs</a>. No people, animals or lifestyle images are allowed.</p>
<p>Some critics even <a href="http://www.cbc.ca/news/health/marijuana-cma-1.4520512">want plain packages</a>, to discourage cannabis adoption. But that would make it harder for growers to establish reputations, neutralizing a key advantage over illicit products.</p>
<p>It would also reduce growers’ incentive to boost quality, especially if prices are fixed. As near generics, they’d instead try to lower production costs. Or perhaps hike THC numbers to stand out. Should we encourage cheaper, stronger pot?</p>
<p>The lack of edibles, like brownies and beverages, is a glaring gap. Ottawa won’t legalize those for another year. Unlawful suppliers keep market control until then.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/206267/original/file-20180213-44639-1qp56kd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206267/original/file-20180213-44639-1qp56kd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206267/original/file-20180213-44639-1qp56kd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206267/original/file-20180213-44639-1qp56kd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206267/original/file-20180213-44639-1qp56kd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206267/original/file-20180213-44639-1qp56kd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206267/original/file-20180213-44639-1qp56kd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A cupcake edible is shown at a stall at a Green Market pop-up event in Toronto in December 2016.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Chris Young</span></span>
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<h2>Promotion limits</h2>
<p>Federal rules also <a href="https://lop.parl.ca/About/Parliament/LegislativeSummaries/bills_ls.asp?source=library_prb&ls=C45&Parl=42&Ses=1&Language=E#a18">limit <em>promotional</em> activity</a>. “Informational” ads are OK. But no evoking emotions, and no lifestyle depictions involving recreation or excitement.</p>
<p>Those clauses undermine legal cannabis’ competitiveness. Good ads evoke emotions. Lifestyle images explain complex products simply. And isn’t this law about “recreational” use? Growers consequently have proposed <a href="https://www.medicalcannabiscouncil.ca/s/Guidelines-for-Cannabis-EN-Nov-6.pdf">more flexible rules</a>.</p>
<p>Because federal law prohibits self-service, sales staff will be important. Store ownership may matter here. Public-sector staff might be better at consumer education and harm reduction. Private-sector sellers may respond better to customer preferences and market trends.</p>
<p>Regarding in-store promotion, New Brunswick will display products under glass. Consumers will see packaging, read labels and visually compare products.</p>
<p>But Ontario wants things “similar to how tobacco is now sold.” That implies <a href="http://sfoa-training.com/the-law/display-promotion/">customers won’t see or touch products</a> before purchase. It’ll be tough for consumers to develop preferences, and for growers to build reputations. That further weakens legal products’ competitiveness.</p>
<h2>Prognosis is mixed</h2>
<p>Overall, governments’ retailing prospects look mixed. Legal cannabis could stand out on product quality if growers earn reliable reputations. But edibles remain absent for now. Promotion could give legal cannabis another edge, if governments loosen up the rules.</p>
<p>Black markets will initially out-compete the provinces with convenient places. That will decrease over time, especially out West. But it won’t disappear without legalized lounges. Illegal vendors may always have some price advantage. Provinces can minimize that by forgoing profits.</p><img src="https://counter.theconversation.com/content/90138/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael J. Armstrong does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In competing with Canada’s black markets, legal cannabis has potential strengths and weaknesses. Most flow directly from governments’ policy choices.Michael J. Armstrong, Associate professor of operations research, Goodman School of Business, Brock UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/815622017-08-08T19:47:58Z2017-08-08T19:47:58ZThe NBN needs subsidies if we all want to benefit from it<p>Half of all Australians are now <a href="http://www.nbnco.com.au/corporate-information/media-centre/media-releases/one-in-two-australians.html">able to connect to the NBN</a>. But <a href="http://www.nbnco.com.au/content/dam/nbnco2/documents/Q3-FY17-external-results-presentation.pdf">around 40%</a> of eligible households have chosen not to connect to the network. <a href="http://ace2017.org.au/wp-content/uploads/2017/07/Troy-Barry-Full-Paper.pdf">Our modelling</a> shows that subsidising the NBN is key to encouraging more Australians to connect. This would benefit the economy as a whole, but hurt the government’s plans to privatise the network.</p>
<p>The <a href="http://www.financeminister.gov.au/media-release/2016/11/18/government-loan-secures-nbn-rollout">government is currently counting</a> both on receiving ongoing revenue from the NBN, as well as the proceeds from its eventual privatisation. To achieve both goals, the NBN charges for access to the network.</p>
<p>Switching from a pricing model that charges for access to the network to one that subsidises access will mean the government won’t get a <a href="https://web.archive.org/web/20110220174537/http://data.dbcde.gov.au/nbn/NBN-Implementation-Study-complete-report.pdf">return on its investment</a>.</p>
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Read more:
<a href="https://theconversation.com/the-nbn-how-a-national-infrastructure-dream-fell-short-77780">The NBN: how a national infrastructure dream fell short</a>
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<h2>The NBN’s pricing model</h2>
<p>The NBN currently <a href="http://www.nbnco.com.au/content/dam/nbnco2/documents/nbn-corporate-plan-2017.pdf">charges internet service providers</a>, such as Telstra, for access to the network. The internet service providers then <a href="https://www.accc.gov.au/speech/communications-at-the-turning-point">sell the service on</a> to consumers - businesses and households.</p>
<p>Our model tried to find an NBN access price that would generate the greatest benefit to consumers, internet service providers and the network. We set our model in the future - when the NBN has been fully constructed, the cost of construction has been paid, and the government is preparing to privatise it.</p>
<p>In order to maximise the shared economic benefit from the network, <a href="http://ace2017.org.au/wp-content/uploads/2017/07/Troy-Barry-Full-Paper.pdf">we found</a> that the access price has to be less than zero - a subsidy. The network shouldn’t be charging internet service providers to access the network, it should instead pay them to connect. </p>
<p>The internet market in Australia is dominated by four large internet service providers (Telstra, Optus, TPG and Vocus) so we can’t expect the subsidy to be fully passed on. But competition means consumer prices would drop, and the number of customers connecting to the network would increase by as much as 25%. The benefit to the economy as a whole would outweigh the costs, but the cost falls entirely on the NBN, which would have to run at a loss. </p>
<h2>The NBN as a public service</h2>
<p>We know that <a href="https://www.accc.gov.au/speech/ceteris-paribus-competition-is-king">regulators want the NBN to benefit the whole economy</a>. This requires more customers to connect to the network. Our model shows that means prices need to be reduced. </p>
<p>This will weigh on the plans to privatise the NBN. There was a similar issue over access to Telstra’s copper network, which was marked by <a href="https://www.accc.gov.au/media-release/competition-tribunal-affirms-accc-decision-to-reject-telstras-ulls-undertaking">repeated litigation</a> and public wrangling between Telstra and the Australian Competition and Consumer Commission over access pricing. </p>
<p>Private companies won’t invest in infrastructure such as the NBN unless they can earn a profit in return. In fact, neither <a href="https://www.accc.gov.au/media-release/accc-perplexed-by-telstra-decision-on-fibre-to-the-node-investment">Telstra</a> nor <a href="https://www.accc.gov.au/system/files/ACCC%20draft%20decision%20on%20FANOC%20SAU%20-%20Dec%2007.pdf">its competitors</a> managed to build a fibre network themselves precisely because they couldn’t agree with the ACCC on how much profit they would be allowed to make from it. </p>
<p>But the NBN is financed and currently owned by the government. This means it doesn’t necessarily have to run at a profit. </p>
<p>Our model shows the NBN should be treated like other services the government provides - roads, education and doctors visits. All of these services can theoretically be provided by the private sector but are subsidised because the benefits of broad access outweigh the costs. </p>
<p>Any guarantee of a profitable NBN also means that the benefit to consumers and the economy will be suboptimal. With the nbn Co. due to finish construction and be polished up ready for privatisation in <a href="http://www.nbnco.com.au/content/dam/nbnco2/documents/nbn-corporate-plan-2017.pdf">less than four years</a>, it’s time for our politicians and regulators to start transparent conversations with the public, investors and broadband businesses about how many consumers will be connected to Australia’s broadband future.</p><img src="https://counter.theconversation.com/content/81562/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Troy S Barry owns shares in Telstra. He receives funding from an Australian Government Research Training Program Scholarship. </span></em></p><p class="fine-print"><em><span>Ishita Chatterjee owns shares in Telstra and TPG. </span></em></p>Almost half of eligible households haven’t connected to the NBN. New modelling shows the NBN needs subsidies if we want more people to connect and the economy to benefit from it.Troy S Barry, PhD Candidate in Economics, The University of Western AustraliaIshita Chatterjee, Economics lecturer, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/791562017-07-04T23:37:48Z2017-07-04T23:37:48ZAre smart meters delivering on their promise?<figure><img src="https://images.theconversation.com/files/174897/original/file-20170621-30227-1tdhgvy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A technician checks a smart meter data in this file photo. Research suggests the technology fails to affect consumer behaviour.</span> <span class="attribution"><a class="source" href="http://www.cpimages.com/fotoweb/cpimages_details.pop.fwx?position=11&archiveType=ImageFolder&sorting=ModifiedTimeAsc&search=smart%20and%20meter&fileId=7ED4E565C8CEED2778801C7E3A1D5E69FE75CC55B658603987FEF24F300B62227BF497D18515FAB7978750CE214B0837D1853405FB9357B8BCCED882E87BBD237FB8AA4256EBE41ABA3AC6C467B1C31AE297922C28FCC5CFEB24C714341D0405A11D3A4EAB27323FDEADF0B5F2DA31C067E2AA708E1D0BEA2A96816691E277359E84A2A89C57963F">(AP Photo/Toby Talbot)</a></span></figcaption></figure><p>Smart meters have two clear goals: to save energy and to shift consumer use of energy from on-peak to off-peak hours. </p>
<p>But new research suggests smart meters and time-of-use electricity pricing in Ontario have only modestly reduced residential energy demand during the most expensive peak periods.</p>
<p>Smart meters that measure hourly electricity consumption have been installed in homes across Ontario to enable time-of-use (TOU) pricing with a goal of setting different prices of electricity throughout the day. For example, on summer weekdays, one kilowatt-hour of electricity costs 7.7 cents from 7 p.m. to 7 a.m., and 15.7 cents from noon to 5 p.m. The price difference is meant to give residential customers an incentive to use less electricity during peak-demand times.</p>
<p>We recently published a <a href="https://doi.org/10.1016/j.enpol.2017.03.015">study in the Journal of Energy Policy in which we asked: Is time-of-use pricing effective?</a> Compared to flat pricing (previously used in Ontario), has there been any change in electricity consumption during high-demand periods?</p>
<h2>Past research inconclusive</h2>
<p>Previous studies that attempted to answer these questions produced no common methodology or results. So we set out to produce a clear, objective, transparent, efficient and reproducible study.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/175924/original/file-20170627-11993-3f3rcl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/175924/original/file-20170627-11993-3f3rcl.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/175924/original/file-20170627-11993-3f3rcl.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/175924/original/file-20170627-11993-3f3rcl.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/175924/original/file-20170627-11993-3f3rcl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/175924/original/file-20170627-11993-3f3rcl.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/175924/original/file-20170627-11993-3f3rcl.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>The above graph summarizes our results. The x-axis corresponds to the hour of the day, and the y-axis measures the average hourly household consumption. The red time zone corresponds to on-peak (highest) pricing, followed by mid-peak pricing in yellow and off-peak (lowest) pricing in green. We excluded weekends and holidays since off-peak pricing is in effect all day on those days. The solid black line denotes actual consumption during the summer of 2011, just before the introduction of time-of-use pricing in November 2011. The dotted blue line corresponds to our prediction of what the consumption would have been had that pricing been in place. The prediction is based on actual consumption during the summer of 2012, keeping in mind the difference in weather and the number of working days between the two summers.</p>
<p>Using smart-meter data from 20,000 households in southwestern Ontario for nine months before and after TOU pricing was introduced on Nov. 1, 2011, we compared the summers of 2011 and 2012. Our approach adjusted for variances in pricing, weather and working days, which can affect electricity consumption due to factors such as air-conditioner use.</p>
<h2>Demand not being shifted</h2>
<p>What did we find? Our analysis showed that on-peak and mid-peak consumption fell by about 2.5 per cent, while off-peak consumption remained about the same. This suggests that electricity demand is not being shifted to off-peak periods, but is being conserved. </p>
<p>We hope our results will help the Ontario government and other jurisdictions to determine whether time-of-use pricing and smart meters are as effective as intended, or whether new initiatives should be considered to reduce or shift residential demand.</p>
<p>We also encourage policy makers to make more electricity consumption data available to validate new pricing schemes and conservation programs. Our analysis would not have been possible without access to smart-meter data from before and after the introduction of TOU pricing. Additionally, policy makers should demand that the studies they commission have clear and transparent methodologies.</p><img src="https://counter.theconversation.com/content/79156/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Catherine Rosenberg receives funding from federal and provincial agencies including NSERC and ORF. She has also recently received funding from industry, including Hydro One, Cisco, and IBM. </span></em></p><p class="fine-print"><em><span>Lukasz Golab receives funding from NSERC </span></em></p>Data suggests a smart-meter plan to shift electricity use to off-peak hours has had almost no impact.Catherine Rosenberg, Professor in Electrical and Computer Engineering and Canada Research Chair in the Future Internet, University of WaterlooLukasz Golab, Associate Professor and Canada Research Chair, University of WaterlooLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/781802017-05-24T20:17:33Z2017-05-24T20:17:33ZThe economics behind Uber’s new pricing model<p>Uber <a href="https://www.bloomberg.com/news/articles/2017-05-19/uber-s-future-may-rely-on-predicting-how-much-you-re-willing-to-pay">is changing the way it calculates fares</a>, moving to a system that charges what customers are “willing to pay”, based on factors like whether you are travelling to a wealthy suburb. But while this change has been met with <a href="https://twitter.com/psaffo/status/866720509416710144">mild outrage</a>, it is actually a very common practice called “price discrimination”. </p>
<p>Price discrimination is a firm’s attempt to capture the difference between the value a consumer puts on a product and how much they actually pay. Firms do this by charging different prices to different consumers and exploiting differences in willingness to pay. </p>
<p>While this sounds like it comes at the expense of consumers, economic theory shows that <a href="http://www.jstor.org/stable/pdf/1821366.pdf?refreqid=excelsior%3Aab06254cf6a0f8710757d5b1607545b2">society as a whole can benefit</a> if certain conditions are met. For example, if Uber’s new pricing means it can enter new markets or reduce customer waiting times, price discrimination could increase society’s overall welfare.</p>
<p>Price discrimination takes many forms, such as Coca-Cola’s infamous vending machines that increase soft drink prices <a href="http://www.nytimes.com/2005/06/27/business/why-variable-pricing-fails-at-the-vending-machine.html">as the outside temperature increases</a>, or <a href="https://theconversation.com/woman-tax-on-everything-makes-us-buy-into-gender-inequality-33855">charging more for pink razors</a>. </p>
<p><a href="http://www.sciencedirect.com/science/article/pii/S0167718714000174">Cheap movie tickets on Tuesdays</a> are another example of price discrimination, as are the different priced tickets <a href="https://www.jstor.org/stable/1593706?seq=1#page_scan_tab_contents">at the theatre</a> and <a href="http://www.sciencedirect.com/science/article/pii/S0165176512005708">concerts</a>. Pharmaceutical companies <a href="https://www.hcs.harvard.edu/hghr/online/price-discrimination-method/">charge different prices in different countries</a>, and car dealers <a href="http://www.crest.fr/ckfinder/userfiles/files/pageperso/xdhaultfoeuille/DDF_auto_discr.pdf">negotiate and give out discounts</a>.</p>
<p>The airline industry is often regarded as the champion of price discrimination. <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1475-4932.2010.00653.x/pdf">It price discriminates</a> on almost every aspect of a fare - from the time a booking is made to the type of seat booked, and, of course, the actual route flown.</p>
<p>The only surprise is that Uber hasn’t implemented such a system before now. Its success has, in large part, been driven by a business model that so cleverly mimics a free-functioning market, notably with its “<a href="https://www.uber.com/info/how-surge-works/">surge pricing</a>”.</p>
<h2>What is price discrimination?</h2>
<p>Price discrimination is the practice of charging different “types” of consumers different prices for the same product or service. </p>
<p>Broadly, “type” might be based on an observable characteristic (age, gender or residency status for example) or some unobservable characteristic that is revealed through the consumer’s actions or preferences (coupon discounts, early bird specials, happy hour deals and so on). </p>
<p>Regardless of the mechanism, the objective is to exploit the different “willingness to pay” (WTP) between consumers and thereby increase profits. WTP describes the maximum amount a consumer <em>would</em> pay for a particular product or service. Given consumers differ in incomes and other circumstances, this presents an opportunity that firms may exploit through price discrimination. </p>
<p>Economists generally refer to three types of price discrimination – first degree, second degree, and third degree. </p>
<p>First degree generates the most profit. It involves each consumer paying the maximum price they are willing to pay and the firm extracting all of their WTP. </p>
<p>With the exception of some <a href="http://web.stanford.edu/%7Ejdlevin/Papers/AFP.pdf">internet auctions</a>, pure first degree price discrimination isn’t very common. But we can see versions of it where consumers pay a fixed fee in addition to ongoing fees (such as residential water pricing), and where a single price covers both access and (limited) consumption (such as internet services with data limits). If properly designed, these alternative pricing systems mimic first degree price discrimination by capturing the maximum profit available.</p>
<p>Second degree price discrimination involves providing discounts for bulk purchases. While generally not achieving the same level of profits as first degree, the profits from second degree price discrimination still dominate over simple uniform pricing (where one price is charged to all consumers).</p>
<p>This type of pricing doesn’t require a consumer to necessarily be identified by an observable characteristic, rather they reveal their “type” through their purchases. For example, a consumer who buys a 24-pack of soft drink cans at the supermarket generally receives a discount (per can) over the shopper who buys a single can.</p>
<p>Third degree price discrimination involves selling the same good or service to different segments of a market, based on willingness to pay. This is implemented using some identifiable consumer attribute, such as geography or age. An example would be train operators charging different prices to adults and students.</p>
<h2>Price discrimination based on geography</h2>
<p>It is this third type of price discrimination that Uber is adopting. Although some customers will object to paying different amounts for the same distance travelled, Uber is certainly not the first company to exploit a geographic dimension when it comes to pricing decisions. </p>
<p>Many other businesses similarly base pricing decisions on location and (implicitly) the WTP of consumers in the markets they serve. For example, cafes, restaurants and bars operating in popular tourist destinations often charge substantially more than similar venues in neighbourhood locations. Although this may, to some extent, reflect higher costs, that typically doesn’t explain the entire difference.</p>
<p>The subtle point is what economists refer to as “<a href="https://www.amazon.com/Economics-Price-Discrimination-Louis-Phlips/dp/0521283949">net prices</a>”, which occur only when price differences for different versions of the same good are not reflected in different costs.</p>
<p>So is Uber’s plan to charge prices according to the customers’ locations something that should cause users to take to the streets in mass protest, or at the very least raise concerns of regulators? Probably not. After all, it isn’t as if Uber is itself a monopoly. There are always taxis as an alternative. But, of course, the taxi industry has always been partial to a little price discrimination itself. It just isn’t as good at it.</p><img src="https://counter.theconversation.com/content/78180/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jordi McKenzie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Charging consumers different prices for the same service is actually a very common practice called “price discrimination”.Jordi McKenzie, Senior Lecturer in the Department of Economics, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/722772017-03-16T19:16:56Z2017-03-16T19:16:56ZWhy consumers fall for ‘sales’, but companies may be using them too much<p>When you walk through an Australian mall you are bombarded with signs saying “buy one, get one free” and “70% off”, and shops seem to be perpetually running sales. This is understandable, as the presence of a sale sign, even without a price reduction, can <a href="https://www.jstor.org/stable/2626826?seq=1#page_scan_tab_contents">increase sales</a>. But there is such a thing as too much discounting. </p>
<p><a href="http://www.nelsonpricing.com.ar/biblioteca_pricing/2001_02_Are_sale_signs_less_effective_when_more_products_have_them_Anderson_E.pdf">Research shows</a> that discounts become less effective as more products are put on sale. There’s also <a href="http://dx.doi.org/10.1108/09590550910966187">a limit</a> to how much you can discount a product, as customers have a minimum amount they will pay for something. </p>
<h2>How we determine ‘good value’</h2>
<p>Prices affect consumers <a href="https://www.researchgate.net/publication/225683380_The_dual_role_of_price_Decomposing_consumers'_reactions_to_price">depending on factors</a> such as how often they visit the store, how much they spend, whether they are visiting to buy or browse, and their ability and willingness to retain, process and recall prices.</p>
<p><a href="http://journals.ama.org/doi/abs/10.1509/jmkg.2005.69.4.84?code=amma-site">Behavioural pricing research</a> shows that consumers hold in their minds an internal reference price that is based on their previous experiences with a brand, competitor brands, or similar products. This internal reference price is central to how we make decisions about what to buy because it is how we determine if prices encountered in the market have changed and whether product offerings are a good value. </p>
<p>Reference prices become particularly important when a higher “regular” price is contrasted with the lower “sale” price. Consumers think something is a “good deal” when their internal reference price is higher than the sale price.</p>
<p>However, the difference between “regular” prices and “sale” prices can only be perceived at a certain point. In order to change behaviour the difference must be greater than what is called a “differential price threshold” – the minimum amount required to <a href="https://www.jstor.org/stable/3149411?seq=1#page_scan_tab_contents">cause a change in perception</a>. </p>
<p>To illustrate, it is <a href="https://www.jstor.org/stable/1252160?seq=1#page_scan_tab_contents">unlikely</a> that someone shopping for a shirt priced at $49.99 will react spectacularly if it were reduced to $47.49 – a discount of only 5%. But they might if it were reduced to $39.99 – a 20% discount. Thus, providing consumers with more meaningful savings increases purchases. </p>
<p>In this case, a 20% discount is more attractive not only because it is four times larger than 5%, but also because it changes the left-most digit in the price – from a 4 to a 3 ($49.99 to $39.99). This provides an important cue for consumers. <a href="https://academic.oup.com/jcr/article/32/1/54/1796360/Penny-Wise-and-Pound-Foolish-The-Left-Digit-Effect">Research shows</a> that the left-most digit is very important in price perception – that’s why so many prices end in 99 cents. </p>
<h2>Discounts can go too far</h2>
<p>All consumers have a minimum and maximum price they are willing to pay for a product or service. For instance, a consumer may doubt the quality of a barber service if the price is less than $10 for a haircut. The same consumer may find the service too expensive if paying $100 or more. </p>
<p>The closer the price point of a product to their maximum/minimum price thresholds, the lower the consumers’ uncertainty about the purchase. <a href="http://dx.doi.org/10.1108/09590550910966187">One study</a> showed that when a laptop was discounted by more than 50% there was a decline in willingness to buy.</p>
<p>Increasing the frequency of discounts can also have negative consequences for the brand and retailers’ image. Each time a consumer experiences a discount it is added to his/her reference price used for future purchases. The higher the frequency of discounts for a brand, the higher the likelihood that the sale price will become the new reference price, reducing consumers’ willingness to buy the product at full price. </p>
<p>Consumers soon learn that if they wait, they will get a better deal. This is why many Australian retailers offer consumers a guarantee of lower prices. For example, Coles’ <a href="https://theconversation.com/down-down-but-not-different-australias-supermarkets-in-a-race-to-the-bottom-48151">pricing campaign</a> assures consumers that they do not need to worry about future price increases. </p>
<p>The certainty associated with deals posted weekly gives consumers a sense that prices are not increasing and helps the brand to form a lower price image. Similarly, 7-Eleven has <a href="https://www.itnews.com.au/news/7-eleven-app-lets-users-lock-in-cheapest-petrol-price-416292">developed an app</a> that lets consumers “lock in” a fuel price for up to seven days. </p>
<h2>The takeaway</h2>
<p>As we can see from the research into how prices affect consumers, we love a bargain. But it’s not as simple as lowering prices. We analyse products through a number of different lenses, including our preconceived notions about the product, brand and store. </p>
<p>Our internal price comparison system can be inaccurate for infrequent purchases, but it is <a href="https://www.jstor.org/stable/2489682?seq=1#page_scan_tab_contents">decent for products we constantly buy</a>. In the end, a deal is a good deal if we pay less than we expected to. </p>
<p>But that doesn’t mean companies should go crazy with discounts. This can have long-term impacts on perceptions about the product, brand and store. And that, in turn, has knock-on effects such as reducing the reference price for other products.</p><img src="https://counter.theconversation.com/content/72277/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicolas Pontes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Discounts can be really powerful in driving sales, but companies should be wary of overusing them.Nicolas Pontes, Lecturer, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/312122014-09-03T15:17:48Z2014-09-03T15:17:48ZWhy the butcher, the baker and the hotelier are adopting the honesty box<figure><img src="https://images.theconversation.com/files/58149/original/4w64bnsf-1409743870.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Pay-what-you want at the British Museum.</span> <span class="attribution"><a class="source" href="http://commons.wikimedia.org/wiki/File:British_Museum_Dome.jpg">Eric Pouhier/Wikipedia</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Across the street from my office is a museum full of fascinating collections that include paintings, sculptures, porcelains, and ancient archaeological finds. The chance to admire them all costs you nothing, as entrance is free. Except, to be more precise, visitors are allowed to pay whatever they want, with no strings attached, into a donation box at the entrance to the museum. </p>
<p>Written on the donation box is a plea in large print: “Thank you for helping us keep admission to our museum free.” The plea is there to encourage customers to pay what they think visiting the museum is worth. It’s known as an “honesty box” and has been the subject of my recent <a href="http://www.jbs.cam.ac.uk/fileadmin/user_upload/faculty/downloads/mak-vincent-paywhatyouwant.pdf">research</a>. We found this system can actually be a viable way for companies to make substantial long-term profits.</p>
<h2>Business sense</h2>
<p>Using an honesty box, or paying what you want for a service, is a pricing system that’s been around for many years. For example, car parks in small towns and villages have used them for lack of other alternatives, as enforcing payment (like hiring cashier staff) would be too costly. Charities that offer services free of charge but ask users for donations arguably operate on a pay-what-you-want basis, because of non-profit-oriented principles. </p>
<p>But in recent years, even profit-oriented enterprises that have had no economic problem operating under fixed pricing have started trying out pay-what-you-want systems. Examples include bakeries, restaurants, independent music bands and this summer saw <a href="http://www.independent.co.uk/travel/hotels/honesty-box-hotels-you-decide-how-much-you-pay-9622062.html">five hotels in Paris adopt the model</a>.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/58137/original/5kcsdfs3-1409739028.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/58137/original/5kcsdfs3-1409739028.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/58137/original/5kcsdfs3-1409739028.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/58137/original/5kcsdfs3-1409739028.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/58137/original/5kcsdfs3-1409739028.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=549&fit=crop&dpr=1 754w, https://images.theconversation.com/files/58137/original/5kcsdfs3-1409739028.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=549&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/58137/original/5kcsdfs3-1409739028.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=549&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Run on trust.</span>
<span class="attribution"><a class="source" href="http://www.geograph.org.uk/photo/2965341">Michael Ely</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>To the cynica, the most surprising outcome of these exercises might be that there were customers who actually paid for the services they enjoyed and didn’t take advantage of the honesty box. In the case of the pay-what-you-want Parisian hotels, one of them claimed that the first guest who took part in their experiment was willing to part with €140 for a night.</p>
<p>The fact is that people do have some sense of decency: they care about fair dealings and they care about the morality of quid pro quo. As one <a href="http://www.smartertravel.com/blogs/today-in-travel/pay-what-you-want-at-hotels-in-paris.html?id=19351031">commenter</a> said about the Parisian hotels: “If … you only pay a euro or two for your stay, you’ll probably feel like an ass. As you should.” It would not be surprising if this sentiment is shared by many.</p>
<h2>Bait and hook strategy</h2>
<p>That said, counting on your customers’ sense of decency may not make sufficient business sense to justify pay-what-you-want. Left to their own discretion – however fair-minded they are – customers typically would not pay as much as the usual, going-rate prices (the going rates for the pay-what-you-want Parisian hotels, incidentally, were around €150 or more).</p>
<p>But, a pay-what-you-want deal may lead to indirect benefits for the seller. For example, if a visitor walks into a museum because admission is free, he or she might eventually decide to spend money inside the museum, from buying postcards and art books to enjoying afternoon tea in the arty museum café. The logic behind this is similar to the logic that leads to printers being sold cheaply to lock customers into buying their expensive ink cartridges – a commonly used pricing ploy that is called a <a href="http://conversableeconomist.blogspot.co.uk/2013/01/are-loss-leaders-anticompetitive-free.html">“loss leader” or “bait and hook” strategy</a> in business textbooks.</p>
<p>Publicity is another possible indirect benefit of pay-what-you-want. If a seller does something as counter-intuitive as letting customers decide what to pay, the policy is likely to make a headline or two, and the news might go viral. The seller would have its proverbial fifteen minutes, which could be a golden promotional opportunity that translates to additional revenues, improved brand reputation and a new customer base.</p>
<h2>Keeping the service free</h2>
<p>And then there is the idea captured in the donation plea: “Thank you for keeping our admission free.” If you make a donation to a pay-what-you-want museum that you would like to visit regularly and other people do likewise, then all the donations could help keep the museum financially afloat and prevent it from resorting to measures such as charging an exorbitant admission fee. Your donation today, therefore, may save money for you in the future. </p>
<p>If sellers could highlight the idea of “keeping us free” when persuading people to pay voluntarily, pay-what-you-want could be a sustainable pricing policy. We already have one prominent example of this in the digital age: Wikipedia. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/58150/original/dc9dm5qs-1409744350.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/58150/original/dc9dm5qs-1409744350.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=125&fit=crop&dpr=1 600w, https://images.theconversation.com/files/58150/original/dc9dm5qs-1409744350.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=125&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/58150/original/dc9dm5qs-1409744350.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=125&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/58150/original/dc9dm5qs-1409744350.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=157&fit=crop&dpr=1 754w, https://images.theconversation.com/files/58150/original/dc9dm5qs-1409744350.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=157&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/58150/original/dc9dm5qs-1409744350.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=157&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The call for voluntary donations.</span>
<span class="attribution"><a class="source" href="http://gorumors.com/tag/wikipedia">Anand Srinivasan</a></span>
</figcaption>
</figure>
<p>Wikipedia never charges you a dime for taking a scoop (in fact any number of scoops) out of its vast ocean of knowledge. The website and its associated services survive on donations, and whenever it runs a donation campaign, one of its oft-used pleas is that if it does not receive enough donations this time, it might have to carry ads or charge for admission in the future. </p>
<p>Our research suggests that, with sufficient social momentum among customers to collectively support the seller, this type of plea could indeed drive up payment substantially under pay-what-you-want. Then an honesty box certainly isn’t a bad policy after all.</p><img src="https://counter.theconversation.com/content/31212/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vincent Mak does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Across the street from my office is a museum full of fascinating collections that include paintings, sculptures, porcelains, and ancient archaeological finds. The chance to admire them all costs you nothing…Vincent Mak, University Lecturer in Marketing, Cambridge Judge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/258202014-04-29T20:30:07Z2014-04-29T20:30:07ZOnly at the movies? Home truths about cinema ticket pricing<figure><img src="https://images.theconversation.com/files/47233/original/vzz55kj8-1398742581.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The cinema industry needs to be more open to changing its distribution model.</span> <span class="attribution"><span class="source">palomaleca</span></span></figcaption></figure><p>In the last fortnight, senior executives from cinema operators in Australia, including Village Roadshow and Palace Cinemas, have come out defending their <a href="http://www.smh.com.au/business/20-movie-tickets-the-price-of-australian-wages-says-village-roadshow-20140421-370ex.html">decision to raise movie ticket prices</a>. But do their arguments hold water?</p>
<p>Already Australians pay a relatively high fee to see films on the big screen. <a href="http://cinemacities.com">A global analysis</a> of the price of cinema tickets relative to GDP has found Australia’s most affordable city for seeing movies is Brisbane (ranked 31st in the world) with most other Australian cities hovering around the mid-50s (Melbourne, 52; Adelaide, 53; Perth, 54; Sydney, 55).</p>
<p>The justification put forward by the exhibition industry for ticket price increases essentially boils down to three key factors, the last two of which are connected: </p>
<p>1) Higher labour costs involved in operating a cinema in Australia compared to other countries<br></p>
<p>2) The impact of illegal downloading <br></p>
<p>3) Lower attendance</p>
<p>Each of these arguments bears closer scrutiny.</p>
<h2>Higher labour costs</h2>
<p>The argument that Australia’s comparatively higher labour costs are influencing ticket prices is made by Graham Burke from Village Roadshow, <a href="http://www.techly.com.au/2014/04/23/will-20-tickets-anything-curb-movie-piracy/">who points out</a> that: </p>
<blockquote>
<p>in Australia we pay approximately $23 an hour for our people; in America, where we operate cinemas, it’s $8 an hour. </p>
</blockquote>
<p>But are we seriously to believe that the recent reduction to skeletal staffing at most mainstream movie theatres is somehow cause for increases in ticket prices? It’s true that in the US many people are paid very low wages; but these wage differentials are not new, so why are they now being mounted as a case for inflating movie ticket prices? </p>
<h2>Illegal downloading</h2>
<p>We then come to the vexed issue of piracy. Benjamin Zeccola of Palace Cinemas <a href="http://www.smh.com.au/entertainment/movies/cinema-chief-defends-20-tickets-saying-illegal-downloads-hurts-industry-20140411-36hdm.html">directly links downloading and file sharing</a> to the need for increased ticket prices.</p>
<p>Certainly the ease at which the latest titles can be downloaded and viewed online is bearing on the industry and contributing to diminished box office returns. But it’s not a straightforward equation. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/47237/original/n62q68hf-1398744613.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47237/original/n62q68hf-1398744613.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/47237/original/n62q68hf-1398744613.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=800&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47237/original/n62q68hf-1398744613.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=800&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47237/original/n62q68hf-1398744613.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=800&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47237/original/n62q68hf-1398744613.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1005&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47237/original/n62q68hf-1398744613.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1005&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47237/original/n62q68hf-1398744613.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1005&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Viktor Hertz</span></span>
</figcaption>
</figure>
<p>In terms of quantifying the cost of piracy the industry cites figures from the <a href="http://www.screenassociation.com.au/uploads/reports/IPSOS_Economic_Consequences_of_Movie_Piracy_-_Australia.pdf">commissioned report by Ipos and Oxford Economics</a> that estimates piracy costs the Australian economy A$1.37 billion in revenue and that 6,100 jobs are lost from movie theft. </p>
<p>But as <a href="https://theconversation.com/profiles/jordi-mckenzie-104303/profile_bio">Jordi McKenzie</a> and W.D. Wallis found in their empirical <a href="http://melbourneinstitute.com/downloads/seminars/2013/130214_McKenzie.pdf">investigation into the impact of file sharing</a> on film revenues in Australia, over the course of 2010 and 2011, the effect illegal downloading had on revenues was actually far less than claimed. </p>
<p>Furthermore, as the ABC’s <a href="http://www.abc.net.au/technology/articles/2014/04/08/3980980.htm">Nick Ross pointed out</a> earlier this month, there is some evidence to suggest that illegal downloading often contributes positively to a film’s (or television series’) fortunes. </p>
<p><a href="http://www.imdb.com/title/tt0499549/">Avatar</a> (2009), which is one of the most successful films at the box office in recent years, also tops the list as the most pirated film of all time, with in excess of 21 million downloads according to <a href="http://torrentfreak.com/top-10-most-pirated-movies-of-all-time-111012/?utm_source=dlvr.it&utm_medium=twitter">Torrent Freak</a>.</p>
<h2>Low attendance</h2>
<p>Certainly attendance figures from the most recent <a href="http://www.ibisworld.com.au/industry/default.aspx?indid=636">IBISWorld Report on Cinemas in Australia</a> reveal that less people opt for a night out at the movies than previously. Between 2012 and 2013 cinema admissions in Australia fell by 0.7% to around 85.3 million. </p>
<p>Over this same time the Motion Picture Distributors Association of Australia (MPDAA) estimated that <a href="http://www.theaustralian.com.au/arts/film/box-office-takings-not-a-pretty-picture/story-e6frg8pf-1226807145683#">box office takings had fallen by 2.3% to $1.1 billion</a>. Yet despite these falls, key operators have managed to return <a href="http://www.villageroadshow.com.au/upload/Document/Annual_Report_2013_InterPDF_All.pdf">healthy profits</a> through increased ticket pricing, especially in relation to “premium” screenings such as 3D movies, which are charged to consumers at a higher rate.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/47238/original/kgj72jbv-1398744738.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47238/original/kgj72jbv-1398744738.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/47238/original/kgj72jbv-1398744738.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47238/original/kgj72jbv-1398744738.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47238/original/kgj72jbv-1398744738.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47238/original/kgj72jbv-1398744738.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47238/original/kgj72jbv-1398744738.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47238/original/kgj72jbv-1398744738.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Danny Choo</span></span>
</figcaption>
</figure>
<p>Simply blaming piracy for low cinema attendances ignores the multitude of factors that contribute to piracy as well as the multitude of reasons that prompt cinema attendance in the first place, and assumes that the sole motivation for going to the cinema is the film itself (content consumption).</p>
<p>But this is not borne out by the evidence which suggests instead that movie audience motivation is highly differentiated and is becoming increasingly so. A 2012 <a href="http://www.screenaustralia.gov.au/getmedia/4972fa65-caa5-4235-86be-1800e4a2815b/rpt_whatto">survey by Screen Australia</a> found that, when asked to identify the single most important reason for attending a cinema, “socialising” topped the list, followed by “tagged along with others”. </p>
<p>And although “cinema ambience” was further down the list of factors it was mentioned by more than 60% of respondents. This also underscores the importance of food and beverage offerings (rather than just ticket sales) to cinema sustainability.</p>
<p>By elevating the impact that piracy has on cinema attendance, other factors that also contribute to lower attendance and diminishing revenues are being ignored at the industry’s longer-term peril. </p>
<p>As many insiders suggest, piracy is also a response to the consumer’s desire for immediate access, as well as a growing perception that much screen based content, including film, is more enjoyable when viewed in the comfort of one’s own home. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/47204/original/fqvrnyr9-1398737185.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/47204/original/fqvrnyr9-1398737185.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/47204/original/fqvrnyr9-1398737185.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47204/original/fqvrnyr9-1398737185.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47204/original/fqvrnyr9-1398737185.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47204/original/fqvrnyr9-1398737185.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47204/original/fqvrnyr9-1398737185.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47204/original/fqvrnyr9-1398737185.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Adam Foster</span></span>
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<p>As such, the increasing size and affordability of large television screens in the home can also help explain why less people are going to the cinema.</p>
<p>Holding on to old business models and failing to recognise the needs and expectations of today’s content consumer is a fraught path. Digitalisation is here to stay. </p>
<p>The technology that makes piracy possible equally represents part of the changed landscape in which the film industry now operates. Rather than bemoaning piracy and ramping up rhetoric in support of harsher penalties the industry needs to be more open to changing its distribution model.</p>
<p>In terms of exhibition it needs to take stock and look at how it can offer a superior or distinguishable experience to attract audiences, and particularly younger audiences back into the cinema. </p>
<p>Raising ticket prices is certainly not the solution the industry, or its patrons, deserve. </p><img src="https://counter.theconversation.com/content/25820/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bronwyn Coate has received funding from the Australian Research Council (ARC) to investigate contemporary film distribution in Australia. </span></em></p><p class="fine-print"><em><span>Deb Verhoeven has received funding from the Australian Research Council (ARC) specifically to study contemporary film distribution in Australia.</span></em></p>In the last fortnight, senior executives from cinema operators in Australia, including Village Roadshow and Palace Cinemas, have come out defending their decision to raise movie ticket prices. But do their…Bronwyn Coate, Researcher Fellow (Cultural economics), Deakin UniversityDeb Verhoeven, Professor and Chair of Media and Communication, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.