# Price discrimination (great read!)



## Tyler Durden (17 January 2013)

I found this great article from the SMH yesterday and wanted to share it:



> Have you heard about the trick they use in fruit shops? If they want to make money from a large load of lettuce they divide it into two. They put half in a ''bargain bin'' and charge something like $3 a kilo. They put the other half at the quality end of the store and charge $6. The well-heeled and uncertain pay $6. Those with less money and keener for value pay $3.
> 
> It earns the shop much more than if it had just charged $6 (if mightn't have been able to shift all the lettuce) and much more than if it had just charged $3 (rich folks would have kept the extra $3 in their pockets). It also makes more than if the shop had just charged a single price somewhere in between, such as $4.50. Well-off customers would have still hung on the extra dollars and some needy customers would have still been priced out. The technique is called price discrimination. It may be retail's most clever invention, and it's everywhere.




http://www.smh.com.au/opinion/polit...rmed-and-you-may-pay-less-20130115-2crip.html

Really an eye-opener for me, and in general just makes me think why we as humans like to divide everything into 'classes'.

Thoughts?


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## tech/a (17 January 2013)

It's a strange twist---human nature.

I've put prices UP on equipment I can't sell and it goes.
We are one of the more expensive in our field and the
HIGHER price projects come our way because clients
Fear loss. If they go with the cheapies what happens if 
Something goes wrong or they go broke --- any guarantee
Disappears.

I make sure they question it!


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## Gringotts Bank (17 January 2013)

Interesting article, thanks.

A heck of a lot of consumers are fooled so easily.  If an item is expensive, it must be good.  If it's hard to source, it must be good.  If it's imported, it must be good.  If a celebrity tells me so, it must be good.

I heard a story from a restaurant owner in Melbourne.  In the opening 2 weeks he made it so that it was impossible to see from the street how busy it was inside.  For the entire week, he told his staff to tell potential customers he was fully booked 2 weeks ahead.  Of course they jumped at the opportunity to take a spot for 2 weeks time and told their friends "it was fully booked!!"  No customers for two weeks, and a really solid "opening" with people everywhere thereafter.  I guess so long as you can back it up with good food... but then again, taste buds can be manipulated it you're tricky enough.  Make the plate HUGE and the food tiny - that's a must!

Humans eh?  Useless lot!


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## burglar (17 January 2013)

Tyler Durden said:


> ... Thoughts?




I had noted that once, different price out front!
I thought the owners were too lazy to put the same price on all the items.

Looking back, I'm glad I didn't buy there!!


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## pixel (17 January 2013)

Gringotts Bank said:


> Interesting article, thanks.
> 
> A heck of a lot of consumers are fooled so easily.  If an item is expensive, it must be good.  If it's hard to source, it must be good.  If it's imported, it must be good. * If a celebrity tells me so, it must be good.
> *[...]
> Humans eh?  Useless lot!




A guy that can hit a golf ball over a paddock gets paid a *quarter of a Billion dollars* to wear Nike shoes.
Obscene! I'll never buy Nike gear.


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## Boggo (17 January 2013)

pixel said:


> Obscene! I'll never buy Nike gear.




Add another reason...
http://www.abc.net.au/news/2013-01-...ilitary-to-intimidate-factory-workers/4465058


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## Ijustnewit (17 January 2013)

I have spent allot of my life working in marketing ( retail ) . An extremely successful method is the sending out of Gift Vouchers for a certain dollar value . To use the voucher you must for example spend over $200 on certain product ranges. It's amazing how many people will use those vouchers as they see it as "free money". Thing is that until that voucher arrived they had no intentions of buying anything at all , but they feel the need to use the voucher otherwise they are giving up the "free money". Of course if the voucher was not sent , they would have saved the money spent on something they may have not really needed.


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## McLovin (17 January 2013)

Price = quality. Generic pharmaceuticals are a great example. They are scientifically the exact same thing and have the exact same effect, infact the government wouldn't allow it to be sold if that wasn't the case but people still buy the more expensive brand name. There's value in a brand! Who knew!!!


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## Julia (17 January 2013)

McLovin said:


> Price = quality. Generic pharmaceuticals are a great example. They are scientifically the exact same thing and have the exact same effect, infact the government wouldn't allow it to be sold if that wasn't the case but people still buy the more expensive brand name. There's value in a brand! Who knew!!!



There have been several examples of the generics not being bioequivalent, certainly some years ago.  Hopefully it occurs less often now.
There is also the consideration that some people might consciously choose to pay a bit extra in order to support research based companies.  If we only had generic manufacturers, who would outlay the gazillions required to fund ongoing research, I wonder.


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## McLovin (17 January 2013)

Julia said:


> There is also the consideration that some people might consciously choose to pay a bit extra in order to support research based companies.  If we only had generic manufacturers, who would outlay the gazillions required to fund ongoing research, I wonder.




Isn't that why they're given patent protection, so they can earn back their investment?

FWIW, the largest single spender in the US of medical R&D is the government through the NIH.


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## Julia (17 January 2013)

McLovin said:


> Isn't that why they're given patent protection, so they can earn back their investment?
> 
> FWIW, the largest single spender in the US of medical R&D is the government through the NIH.



That might cover their investment in that drug.  It doesn't cover their investment in the hundreds of others they work on that never make it to the market.


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## McLovin (17 January 2013)

Julia said:


> That might cover their investment in that drug.  It doesn't cover their investment in the hundreds of others they work on that never make it to the market.




Of course it does. The prices they charge for their drugs are a function of their total investment into R&D (+ all the other costs associated with the product), not just the investment into what makes it to market. It's not really any different to any other R&D dependent company does, the successes pay for the failures.

One of the reasons I'm so anti resource stocks is that they spend years finding and developing these mines and then can only accept a commodity price once they finally have mined their product.


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## FlyingFox (17 January 2013)

Julia said:


> There have been several examples of the generics not being bioequivalent, certainly some years ago.  Hopefully it occurs less often now.
> .....




I think they are getting much stricter on this. However it is possible that drugs are not bioequivalent because the exact manufacturing procedure was not followed and you get different isomers etc.


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## FlyingFox (17 January 2013)

McLovin said:


> Of course it does. The prices they charge for their drugs are a function of their total investment into R&D (+ all the other costs associated with the product), not just the investment into what makes it to market. It's not really any different to what Apple or Intel does.




Not defending big pharma. They do make a lot of money but in many cases this is proportional to the risk involved in drug discovery. To give you an example, in the last five years the big pharma have been developing quite a few drugs for Alzheimer's disease, a handful of which have made it to last stage clinical trails. So far non of them have passed the clinical trials and would have cost those companies up to a billion dollars maybe more. I forgot numbers but I think to get a drug to stage 3 clinical trial is something in the order of a 100-500 million. To market is over 1 billion. 

In that manner it is quite different to Apple or Intel. The risk of failure are much much higher and the product development costs are much higher as well.


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## McLovin (17 January 2013)

FlyingFox said:


> Not defending big pharma. They do make a lot of money but in many cases this is proportional to the risk involved in drug discovery.
> 
> ...
> 
> In that manner it is quite different to Apple or Intel. The risk of failure are much much higher and the product development costs are much higher as well.




I'm not disputing that at all. I'm saying they calculate IRR on total R&D spend, not on R&D spent on successes. In that sense they are no different to any other company that needs to earn back its cost of capital.


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## FlyingFox (17 January 2013)

McLovin said:


> I'm not disputing that at all. I'm saying they calculate IRR on total R&D spend, not on R&D spent on successes. In that sense they are no different to any other company that needs to earn back its cost of capital.




Agreed.


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## pixel (17 January 2013)

McLovin said:


> Of course it does. The prices they charge for their drugs are a function of their total investment into R&D (+ all the other costs associated with the product), not just the investment into what makes it to market. It's not really any different to any other R&D dependent company does, the successes pay for the failures.
> 
> One of the reasons I'm so anti resource stocks is that they spend years finding and developing these mines and then can only accept a commodity price once they finally have mined their product.




I "get" and agree with your first paragraph, McLovin;

but what do you mean by "anti resource stocks"?
You're not advocating to "leave it in the ground", are you?
Maybe you're reluctant to buy/ trade them because of the high risk of failure? 

If the latter, I'd contend that - unlike a Pharma company - a mining (incl oil) explorer will have a fair idea of the product's price, even accounting for some variation into the future. Once they have shore up a JORC resource and draft a PFS, DFS, BFS, they'll have a fair idea of (1) what's in the ground, (2) how much it'll cost to get it out, and (3) what they can sell it for.
I do agree though that many a gamble is taken on hope and those hopes are dashed when they find nothing is there or someone else has beaten them to the punch. Look no further than AXE's graphite trumped by SYR.


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## burglar (17 January 2013)

pixel said:


> I "get" and agree with your first paragraph, McLovin;
> 
> but what do you mean by "anti resource stocks"?
> You're not advocating to "leave it in the ground", are you?
> ...




AXE has stuff other than Graphite, (though 1 poster has said it's crap)


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## McLovin (17 January 2013)

pixel said:


> but what do you mean by "anti resource stocks"?




As an investment they're not for me. If someone wants to dig 'em up, I don't mind. 



			
				pixel said:
			
		

> If the latter, I'd contend that - unlike a Pharma company - a mining (incl oil) explorer will have a fair idea of the product's price, even accounting for some variation into the future. Once they have shore up a JORC resource and draft a PFS, DFS, BFS, they'll have a fair idea of (1) what's in the ground, (2) how much it'll cost to get it out, and (3) what they can sell it for.




Let's assume they know what 1 and 2 will be, how will they know what 3 will be before the mine is even built? 

Shareholders will wear any failures for any commodity business because the market won't pay a cent more than it has to. If the cost of extraction blows out they have to grin and bear it. If the market price falls below their cost of production, too bad. By contrast, and within reason, a pharma company can pass on the costs to the end user as higher prices and they can set the price.


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## DocK (17 January 2013)

pixel said:


> A guy that can hit a golf ball over a paddock gets paid a *quarter of a Billion dollars* to wear Nike shoes.
> Obscene! I'll never buy Nike gear.




You might like this:


http://mynorthwest.com/646/517954/AntiNike-message-in-new-Macklemore-video


> Nike executives might not be thrilled with the new video "Wings" from Seattle rap artist Macklemore.
> 
> It sets another story from Macklemore's childhood to music, with his take on how Nike's Air Jordan shoes played a dominant role in youth, and how his friend Carlos' brother "got murdered for his."
> 
> ...


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## Tyler Durden (17 January 2013)

I was in a rush to get to work when I posted the article, so I want to post some of my thoughts now.

1. It's kinda amazing how much our perception of something is affected merely by the 'value' tag attached to it, when the value has just been assigned by someone else. I remember looking at a voice recorder being sold for $7 and thought about getting a bunch to re-sell. I thought it was a pretty good bargain. Then I found another place that sold the same thing for $2. Instead of thinking "wow! I just found a better deal", I started wondering if there was anything wrong with the product, and then in the end decided not to get it because "there must be a catch, it must be damaged or something".

I wonder if it has to do with our reliance on information of others from ancient times. Kinda like a caveman offering another an apple, suggesting it tastes good. The receiver would believe him and eat it only because of that belief. So if someone (anyone) tells us that something is good because of it's value, then we are to automatically believe in it?

2. Mum: Eat it.
Me: Why? I don't like it.
Mum: It's expensive, so it's good for you.

That was when I was young, and to this day she still does it and I still don't understand it. "Why would I have to like something just because it's expensive?" I wondered. I often got more joy out of eating cheaper (and tastier) junk food.

3. It's funny how something as artificial as the price can act as such a material distinction between people. Take the lettuce example in the article. The rich people who bought the $6 would be thinking "I'm getting something so much better than that other cheap stuff", and the poor people who bought the $3 lettuce would be thinking "damn, maybe one day I can afford some nice lettuce like the $6 ones".

BUT IN REALITY THEY ARE THE SAME THING!!! So why do we feel so different about it??


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## Julia (17 January 2013)

McLovin said:


> Of course it does. The prices they charge for their drugs are a function of their total investment into R&D (+ all the other costs associated with the product), not just the investment into what makes it to market. It's not really any different to any other R&D dependent company does, the successes pay for the failures.



Do you have any first hand experience of the industry?  Can  you provide proof that the successes pay for the failure across the industry?



FlyingFox said:


> I think they are getting much stricter on this. However it is possible that drugs are not bioequivalent because the exact manufacturing procedure was not followed and you get different isomers etc.






FlyingFox said:


> Not defending big pharma. They do make a lot of money but in many cases this is proportional to the risk involved in drug discovery. To give you an example, in the last five years the big pharma have been developing quite a few drugs for Alzheimer's disease, a handful of which have made it to last stage clinical trails. So far non of them have passed the clinical trials and would have cost those companies up to a billion dollars maybe more. I forgot numbers but I think to get a drug to stage 3 clinical trial is something in the order of a 100-500 million. To market is over 1 billion.
> 
> In that manner it is quite different to Apple or Intel. The risk of failure are much much higher and the product development costs are much higher as well.



Exactly.  Thank you, Flying Fox.

There seems to be a general perception that some businesses do not have an intrinsic right to be for profit, viz the banks and now pharmaceuticals.  No doubt others that don't come to mind at present.

McLovin, let's just say the major players in the pharmaceutical industry were to withdraw on the basis that they couldn't satisfy their share holders.  Who do you think would take over the research function?


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## banco (17 January 2013)

I don't think pharmaceuticals can be equated to ipads.  Noone is going to die if they don't have access to ipads.


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## McLovin (17 January 2013)

Julia said:


> Do you have any first hand experience of the industry?  Can  you provide proof that the successes pay for the failure across the industry?






> There are lots of expenses here. A single clinical trial can cost $100 million at the high end, and the combined cost of manufacturing and clinical testing for some drugs has added up to $1 billion. But the main expense is failure.
> 
> ...
> 
> ...



(bolding mine)

http://www.forbes.com/sites/matthew...uly-staggering-cost-of-inventing-new-drugs/2/




Julia said:


> McLovin, let's just say the major players in the pharmaceutical industry were to withdraw on the basis that they couldn't satisfy their share holders.  Who do you think would take over the research function?




The cost of capital would rise, there'd still be people willing to back new drugs. Unless I'm misunderstanding the question.


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## Julia (17 January 2013)

McLovin said:


> The cost of capital would rise, there'd still be people willing to back new drugs. Unless I'm misunderstanding the question.



I'm asking who is going to take the initiative to start the research into potential new medicines if there were no pharmaceutical companies prepared to do so?


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## Julia (17 January 2013)

On second thoughts, forget the question.  It's fruitless trying to fight the bias against so called big pharma.
For whatever reason, the perception exists that they are all a bunch of unprincipled bastards, unconcerned about anything other than extreme profits.


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## FlyingFox (17 January 2013)

I agree that they cost their failure's into their products (not only the current product but all of them). They have to. However sometimes even that may not be enough to pay off the development cost in the time period of patent protection in which case they do rely on their brand value.



McLovin said:


> ....
> The cost of capital would rise, there'd still be people willing to back new drugs. Unless I'm misunderstanding the question.





Don't know about this. Pharma do ride on the back of a lot of government funding and research but they do serve a purpose in getting that research to drugs. There is a lot of research going into many rarer diseases but no successful treatments because it is not financially viable for pharma to put money into this.


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## McLovin (17 January 2013)

Julia said:


> On second thoughts, forget the question.  It's fruitless trying to fight the bias against so called big pharma.
> For whatever reason, the perception exists that they are all a bunch of unprincipled bastards, unconcerned about anything other than extreme profits.






What bias???...I don't know what you're inferring from what I'm writing but I certainly wasn't implying I thought they were "unprincipled bastards, unconcerned about anything other than extreme profits".

I have no idea what you're talking about.


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## Ves (17 January 2013)

You guys and girls all seem to be talking about different things?


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## banco (17 January 2013)

Julia said:


> On second thoughts, forget the question.  It's fruitless trying to fight the bias against so called big pharma.
> For whatever reason, the perception exists that they are all a bunch of unprincipled bastards, unconcerned about anything other than extreme profits.




Probably because their behavior over the years has generally borne that perception out.


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## McLovin (17 January 2013)

FlyingFox said:


> Don't know about this. Pharma do ride on the back of a lot of government funding and research but they do serve a purpose in getting that research to drugs. There is a lot of research going into many rarer diseases but no successful treatments because it is not financially viable for pharma to put money into this.





Which I already acknowledged when I pointed out the largest single R&D spender in the US is the government.


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## Julia (17 January 2013)

McLovin said:


> What bias???...I don't know what you're inferring from what I'm writing but I certainly wasn't implying I thought they were "unprincipled bastards, unconcerned about anything other than extreme profits".



Whether you were or not is immaterial.  I'm talking about the generalised perception.  See banco's ultra generalisation.
I've been involved in the enormous work of setting up trials etc, the enthusiasm of the medical researchers when they believe they have something that will make a genuine difference to some disease process, and then the disappointment when for whatever reason the hopes are not fulfilled.

It's not all about money.  

You have still not offered any suggestion as to who would initiate the research if the pharmaceutical companies did not.  Governments certainly don't provide sufficient funding.



> I have no idea what you're talking about.



Fine.  Don't worry about it.


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## McLovin (17 January 2013)

Julia said:


> Whether you were or not is immaterial.




The question and the follow up were both in reply to my post. So I assumed they were directed at me.



Julia said:


> I'm talking about the generalised perception.  See banco's ultra generalisation.
> I've been involved in the enormous work of setting up trials etc, the enthusiasm of the medical researchers when they believe they have something that will make a genuine difference to some disease process, and then the disappointment when for whatever reason the hopes are not fulfilled.
> 
> It's not all about money.




That's great for them, it truly is. They enjoy their work. Big pharma expense almost all of their R&D (the failures and successes) and are still wildly profitable enterprises. The fund manager on Wall St cares little about how great researchers feel about the work they are doing, they care about the bottom line, like any other business they are invested in. Fortunately, happy employees often go hand in hand with profit maximisation. It may not be _all_ about money, but overwhelmingly it is. 



Julia said:


> You have still not offered any suggestion as to who would initiate the research if the pharmaceutical companies did not.  Governments certainly don't provide sufficient funding.




I don't know who would pay for it, likely it would be the government. Not that I see why it's at all relevant to anything I've said.


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## FlyingFox (17 January 2013)

I agree with McLovin that you have to price your RD (and marketing) into your products. You can't function as a business otherwise. 

Is it price discrimination when big pharma prices 1B R&D cost into product prices? It can be but probably isn't. Remember the generic came second.

Is it price discrimination that Nike charge 5*cost for a pair of golf clubs or shoes because they paid someone $250M to "market it"?  A waste really.... They may not be any where near 5* better but that is the perception. They can just as easily charge 2* and not pay someone $250M but than you don't have brand value.


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## McLovin (17 January 2013)

FlyingFox said:


> I agree with McLovin that you have to price your RD (and marketing) into your products. You can't function as a business otherwise.




Of course. I'm not sure why it's even a point of discussion. Find me any business that survives long if it can't cover its costs. Pharma isn't a benevolent industry, it's a business. Just like any other business it's entitled to charge, and does, as much as it thinks it can.


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