Question

While in an airport, I once overheard two physicians say the following, “the vendor showed me how to do the procedure for a hip replacement with their new artificial hip and it was easy. What I didn’t understand is the pricing. If we buy one hip at a time our cost is $21,000 apiece, but if we buy 24 at once the cost comes to $11,000 apiece.” Illustrate and explain the pricing that the physician faces and its consequences.

Answer 1

It is second degree price discrimination . It occurs when a company charges a different price for different quantities consumed, such as quantity discounts on bulk purchases . Such price discrimination targets consumers with volume preferences , encourages consumers to buy in bulk thus raising sales and hence profit . It occurs in monopoly markets .

As a consequence the physician tries to buy in bulk and not a single piece .