There are several lessons that can be learned from monopolistic behavior (and misbehavior) for those interested in engaging in monopolistic competition. The first lesson that can be gleaned relates to the behavior of the cable TV companies. Monopolies tend to take their customers for granted, as was the case with cable TV subscribers in previous decades. As soon as alternate products became available with better features, such as those provided by satellite and optical fiber carriers, consumers started to abandon the cable TV ship. They felt little allegiance to cable providers because of the years of neglect. The cable provider’s strategy was to make a profit by providing few existing and new features, keep raising subscription rates, and providing poor service. There was enduring ill will toward cable providers because they did not constantly differentiate and improve their services and they were unwilling to streamline costs. Service has improved dramatically and, in some instance, surpasses the competition, but the remnants of ill will survive. 1
Companies have to be very cautious how they use price differentiation to personalize prices lest they incur the wrath of customers. Amazon found this out in 2001 when they started to sell their DVDs at different prices.
The price test, which ran early, last week, affected dozens of Amazon’s top-selling titles. Because of the test, which assigned prices at random to customers as they shopped, some customers found DVDs at prices up to $15 greater than other customers. Amazon spokesman Bill Curry said that Amazon would reimburse customers who ordered DVDs affected by the test for the difference between the price they paid and the lowest test price. Although Amazon has no plans to do any more pricing tests, the company guarantees that should it run another one, customers will pay the lowest test price even if they order goods at a higher price during the test. 2
Personalized pricing can tick-off consumers when consumers find out that they are paying a premium for the same product or service. Some of the current ill will directed toward the airline companies is related to the wide range of prices charged for identical seats and, of course, to their very proficient use of versioning in the form of baggage surcharges, meals, early boarding, and fast tracking through security. In 1995, the average U.S. domestic price for an airplane ticket was $292. 3 In 2009, the average airplane ticket price was $309. This is equivalent to $220 in 1995. The airlines turned to product differentiation in order to achieve profitability.
It is sometimes necessary for producers to use approaches that disguise personalized pricing approaches. Here are a few of the strategies used by businesses to engage in product and service differentiation; some of them are more acceptable to consumers than others:
- Charging higher prices where you have bundled other products with low variable costs with the original product.
- Charging lower prices if the customer buys a product or service that will be consumed 6 months or a year into the future.
- Permit customers to purchase products at a reduced price because they are part of a price-sensitive customer segment such as the student or senior citizen populations.
- Make a customer submit a rebate coupon in order to get a lower price.
- Offer the product at a lower price if they wait a couple of days before they receive the product. Offer the customer a lower price the next day.
- Give customers the opportunity to play a game that lets them win the product at a lower price.
- De-bundle services and charge for each service (airlines are a good example).
It should be noted that some consumers will figure out how to game these systems. They will then pass this information on and it will eventually reach a substantial number of consumers as the specter of efficient markets looms its ugly head.