I was ordering food at a local Burger King today and an elderly gentleman was complaining about the cost of coffee there. “At McDonalds you can get senior coffee for 53 Cents.” he said. He was referring to a phenomenon that I have seen elsewhere, pricing for special groups of people. In this case, McDonalds was willing to sell him the same product in the same container for a lower price due to his age. Sometimes this goes the other direction with “kids tickets” to circuses or “student” pricing at movie theaters if you can show you have a college or university ID. I can see an advantage to lowering prices for young people if you want to get them “hooked” before they reach their peak of buying power. This is one reason Microsoft sells student priced software. But what of McDonald’s “senior coffee?” Is this because they think these people are less likely to buy the product at all? Is this a loss leader for people who generally do not buy fast food? Under what business model does selling the same product in the same container to senior citizens for a lower price make sense? I am not complaining by the way, I am just asking from an economic point of view.
Demand elasticity is different for different groups of people, which is how price discrimination comes about. While old people are not willing to pay as much for coffee as active people, they will patronize the stores outside of peak hours, meaning the marginal demand/marginal cost equilibrium will be lower.
You will make more money if you lower prices for old people and it will not cost you anything more.
I think stranger put it well, but I had a couple thoughts.
Retired persons (or seniors) probably tend to go to McDonalds less that the younger crowd, due to the unhealthy food and a fixed income (retirement plan, social security, etc.)
By offering senior discounts, McDonalds draws in consumers that it would otherwise not have. And you can bet they aren’t selling the coffee for less than they pay for it, so they are in effect making less of a profit but getting more sales. And hey, maybe old man winter might want an Egg McMuffin along with it.
It’s just a way to boost sales and draw in customers it would otherwise not have.
These discounts apply to Student discounts as well. While the student may pay less for a ticket, he has to pay the same rediculous price for popcorn and a soda. Once you get them in the door, odds are they buy something else that is not discounted.
I’m not sure if this rationalization works across the board, as Taco Bell offers a 15% discount on all products to seniors, and many franchises offer police officers their order for free.
A few thoughts:
There’s no such thing as a “loss leader” in any exchange. All exchange, no matter what it is, is only occurring because that which is received is valed more than that which is given away in exchange. All exchange is subjectively profitable at the moment of exchange. It is a very common error, however, to mistake the actual goods being exchanged with some preconceived narrow defintion of a marginal unit of a “notional” supply.
You didn’t say the elderly person decided to NOT purchase the nominally higher priced coffee from Burger King. I’m betting he did trade money for the Burger King coffee. This shows there is a wide overlapping range of mutual profit from possible exchanges. Alhtough this person may have profitted more from purchasing McDonald’s coffee he nevertheless increased his subjective wealth by trading money for Burger King coffee. (Edit: Actually that last sentence is a mistake. Only if the person actually left Burger King and went to McDonald’s to purchase coffee could that person have actually further increased his subjective value profit from exchange.)
There are lots of possible reasons why trading the same product in the same container for different prices to different individuals “makes sense”. Celebrities can often trade their fame to luxury goods providers for “free” luxury item “gifts”, yet still profit both parties to the exchange. The luxury goods providers are profiting from the possibility that the masses will want what the celebrities want. So even though they are “nominally” exchanging luxury goods for no money, they are also purchasing, or trading for, advertising buzz. So called promotional “give aways”, such as being the one millionth customer, are not in the least exchanges which register economic loss. On the contrary, they are by definition mutually profitable exchanges. The error is the opposite of conflation, innacurate restriction to a preconceived marginal unit of suppy when the actual supply is indeed a conflation of distinctly separate supplies bundled into the mutually profitable exchange.
I’m going to also add in an example on the opposite end of a spectrum, charging a higher price than “normal”. Concessions at sporting events commonly charge “high” prices for their concession foods. Nevertheless, when peole actually trade money for that food, they are increasing their subjective value profit by doing that exchange. People may also consume a larger meal before attending an event with, competition restricted or eliminated, food services bundled with entertainment events. People may attempt to smuggle in food and alcohol to these events, even going so far as positively valuing the chance they will avoid detection more than the chance they will be discovered and refused admittance or have their food confiscated, or their tickets revoked. This may make the price of attending extended time period entertainment events higher than the nominal ticket price, and is duly weighed in present and future decisions whether to attend or not attend such events. That means changes in bundled supplies of trade events can increase or decrease the degree of subjective profitability of the exchange even though the main element of the trade, the ticket price, remains nominally the same. This is why in some cases of disaster, such as power going out in a movie showing, it is more PROFITABLE for the movie theater to trade ticket price refunds to the consumers rather than to not trade ticket price refunds to the consumers. Every actual present tense exchange is only occurring because that which is received is value MORE than that which is given away in exchange.
In this case it’s possible McDonald’s wishes to not only trade coffee for money but also trade coffe for money PLUS a senior friendly-family friendly image which pays off in profit in the form of more future customers who will trade higher nominal quanities of money for the same coffee. The possibility of the future pay off has positive economic trade value at the moment of exchange with all seniors who nominally trade 55 cents for a cup of coffee. McDonald’s is profiting from every one of these exchanges, even if the cost of the coffee was greater than 55 cents, as long as (and by definition of trade it must be the case) the additional subjective value of the seperate additional “not so easily seen” bundled goods nets positive subjective value profit from the trade exchange.
This is an instance of product differentiation. Mises addresses the phenomenon in Human Action, and provides a number of reasons as to why it is not the same thing as price discrimination.
I do not see how you are saying that selling the same cup of coffee to a senior for a lower price is product differentiation. Since the two products (coffee sold to a young person and coffee sold to a senior) are the same product, this is true price discrimination. McDonald’s knows that they can sell more coffee if they offer a discount to a senior. If they had not offered it at a discount, the seniors would not buy as much coffee since they tend to value their coffee less than younger people on less-strict budgets. McDonald’s is not selling the coffee at a loss since the marginal cost is almost nothing on beverages.
Stranger had the response correct when he pointed out the demand elasticity. If you think of a demand curve, you can sell a larger quantity of a good at a lower price. If you can sell to some at a higher price and some at a lower price and are able to prevent arbitrage (most people don’t want to buy second-hand coffee), you can make more money.
Edit: Inquisitor, if you were responding to rtr’s comment that the senior coffee is a bundled good, then I agree.
Doesn’t the mere fact that the price differential cannot be eliminated by arbitrage indicate that there is in fact product differentiation?
I would say that once coffee is sold, it is a different product because no one really wants “secondhand coffee,” they want “fresh coffee” because then they know where it came from. Coffee bought from McDonalds at the cash register is the same no matter who buys it (ignoring the fact that sometimes it may be fresher than other times). Coffee bought from different places, however, is a different product. This is why coffee at Starbucks costs more than coffee from a gas station.
All people who buy tickets at a movie theater go to see the same movie, but some pay the “student” price, others pay the “child” price, and others pay the “senior” price. However, seeing a movie at the matinee time is a different product and is priced differently from an evening movie.
Well I had in mind the objection leonidia brought up, but I guess I see your point.
Thanks to all wo responded!
Ryan
Different social groups have different average amounts of income, making the income and substitution effects different for each group, such that the equilibrium price depends on which group you’re selling to.
Having a discount for seniors can therefore make more profit, because the lower price is more acceptable to seniors, as they can afford it and don’t need to either forego coffee or substitute it for something cheaper.
I think they do it because the public appreciates the appearance of ‘helping out the senior citizens.’ Almost nobody will think less of them for it, and a good amount of people will think McDonald’s is more of a charitable company.
i think rtr is quite wrong in saying there is no such thing as a “loss leader” in any exchange. anybody who has worked in a large and successful business will realize that there are cost accountants who are able to establish the breakeven cost (in a pure accounting sense) of every product, otherwise how could successful/unsuccessful product lines be evaluated. “loss” in this sense is purely an accounting term, nobody denies there may be a marketing/social/pscyhological payoff, but this is a different animal.
Wrong. If what you say were true then those businesses would be BETTER OFF not making any one of those trades you call “loss leaders”. How are those businesses becoming “large” and “successful” if they are giving away their assets for LESS then what those assets are worth?
“Accounting loss” is purely a lowering of observed market subjective value that has nothing to do with the action of any present tense trade.
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We are talking about strict economic profit from exchange. At the moment of every exchange, someone is either A.) better off from doing the exchange, B.) worse off from doing the exchange, or C.) indifferent from doing the exchange. In the cases of B.) and C.) there’s absolutely no reason for the exchange to occur. It doesn’t matter if the exchange is a “charitable donation”, a fire sale sell off of excess inventory, or “free” product samples. All of that action is only occurring because that which is receieved is valued more than that which is given away in exchange; all action is undertaken with the purpose to go to a state of lesser dissatisfaction from a state of greater dissatisfaction.
The actions undertaken prior to what you arbitrarily call the “breakeven cost” are only undertaken because the subjective value of undertaking those actions (for whatever subjective reasons whatsoever) is GREATER than the subjective value of not undertaking those actions at the moments that every one of those actions were undertaken. Just like “credit” has positive economic value, just like promises have positive economic value, just like expectations, beliefs, hopes, dreams have positive economic value to specific acting individuals. Trading for or accumulating investment capital only occurs because the trading for or accumulating of investment capital profits those that are trading for or accumulating investment capital. The particular use or aim of any marginal unit of investment capital is only occurring because that use is subjectively valued more than any other possible use (or NON-USE) of that particular marginal unit of investment capital.
By the automatic “stop loss orders” of the absence or cessation of trade, or by the continued production and trade of those product lines. “Successful/unsuccessful” product lines are evaluated exactly the same way every trade exchange whatsoever is evaluated, by whether or not it is occurring in the present tense. The only reason any action whatsoever, including trade, is occurring in the present tense is because that which is received is valued more than that which is given away in exchange.
Even if there is an “accounting loss” from lowered market subjective value of some thing, exchange of that same some thing will still only occur if exchange of that same some thing is more valuable than not exchanging that same some thing. It doesn’t matter what the “supply” is, it doesn’t matter what the “demand” is, it doesn’t matter what the “price” is, all exchange only occurs because it increases positive economic value. Therefore, there is no such thing as a “loss leader” in any exchange. If the conception of “loss leader” is a fairly common conception in the field of economics, then I have just added yet another Nobel Prize quality demonstration to my list.
Ah, yes, the public appreciates it.
The public doesn’t mind them frying food in beef lard in Indian countries, putting industrial waste, fecal matter, and large amounts of trans fat in their foods, paying their employees low wages, employing child labor, encouraging obesity including childhood obesity through targeting children, abusing intellectual property law, putting forth misleading advertising, and manufacturing (as opposed to cooking) food which, in my opinion, is rather bland.
…But oh, they provide cheap coffee for the elderly. How sweet. What a wonderful multi-national corporation.
sorry to burst your bubble, rtr, but business runs first and foremost on a cost accounting basis (accountancy profession defines profit and loss in an objective and codified manner). you’re confusing economic value with profit and loss (an accounting concept). as you rightly say, exchange occurs even if a notional accounting loss is incurred because there is an expected payoff in non-monetary terms.
good luck with the nobel prize, the million dollars should come in handy!
Price is only tied to cost for purely competitive firms. The less competitive an industry is, the greater the difference between price and cost for firms in that industry.
Larger companies, like McDonald’s and Wal-Mart, engage in public relations campaigns and lobbying primarily in order to discourage the public from using the government to regulate them.
I’m sure it has some positive effect on boosting sales from increasing popularity (for consumers who boycott businesses for moral reasons), but it’s rather minimal. The idea that they engage in ad campaigns and charity because it’s profitable is hilarious!
Nathyn is just here to get a rise out of excitable individuals. He seems to have failed thus far, though.
No, I’m not.
I really do want to know a lot more about Austrian economics, because even though I think it’s a load of you-know-what, it’s so widely influential that I frequently come across Austrian economic arguments and they leave me frankly confused. It’s hard to dispute a complex argument when you’re not exactly certain how it goes.
It’s taken me a substantial amount of time and effort to even understand the economic basis for the Federal Reserve and why most economists believe a return to the gold standard would cause a depression.
If I was simply here to get arise out of you, there are far more efficient methods than economic debate.
I’d also like to note that it was one of you guys from the old forum who invited me here!
Okay, then why bring up such an argument pertaining to McDonalds? You accuse Austrians of infusing ideology in things, yet you immediately switch to some problem you have with McDonalds, when the phenomenon being discussed is economic.
I suggest, if you’re here to learn, to drop all your preconceptions of what Austrians are or what they believe, and find out what Austrianism in fact consists in. If you’re still unsatisfied, then you may pronounce it to be false, or whatever.