Aging Becomes Even Less Appealing
Subject Price discrimination
Topic Product Markets
Key Words Net worth, discounts, retailers, companies, bankruptcy
News Story

It used to be that getting old brought certain advantages, like 10 percent off a hotel room, or a few dollars off dinner. But now that one in five Americans is 55 or over, and many have a higher net worth than younger people, many companies are having second thoughts. It does not make sense for movie theaters, for example, to offer senior discounts to patrons who drive up in Mercedes cars.

The discounts for seniors began in 1955 when the National Retired Teachers Association obtained lower health insurance premiums for its members. This group spawned the American Association of Retired Persons (AARP), which negotiated deals with hotels and other vendors. Retailers found that senior discounts helped them induce the descendants of the Depression to spend money. Over time, banks, airlines and restaurants followed suit. Practically every company eventually offered discounts, even stores offering haircuts.

However, many of these businesses are now eliminating price breaks because seniors often have more money than younger customers, and are living longer. As the senior age group increases in size, the discounts are becoming expensive. Delta Air Lines has dispensed with its senior club, in which seniors paid an annual fee in return for lower prices, although senior discounts and coupon books still exist. In Florida, some of R.J.Gator's HomeTown Grill and Bar restaurants have amended their early bird specials to exclude weekends in the snowbird season. Meantime, General Cinema Theaters has pulled out of Florida and filed for bankruptcy due in part to the volume of discounted tickets it sold.

(Updated October 1, 2001)

1. There are two conditions that have to be met before price discrimination can occur.
a) What are they?
b) Explain carefully how they were met from the mid-1950s until recently.
2. Draw a diagram of an imperfectly competitive product market, such as the market for meals in family-style restaurants. Be sure to include the demand and marginal revenue curves and the marginal and average total cost curves. Mark the equilibrium single price and quantity.
a) Draw the new (discontinuous) price line when early-bird specials are introduced. Assume that some existing customers are able to purchase their meals more cheaply, and some new customers are attracted.
b) What is the effect on the producer surplus (the difference between the price and the marginal cost)?
c) Why may profits rise when price discrimination is introduced? Why may profits fall?
d) Under what conditions might some restaurants shut down in the short run?
3. Why is price discrimination becoming less common? Consider the conditions for price discrimination and analyze how they have changed.
Source No Author, "Older consumers finding fewer perks," St. Petersburg Times, September 1, 2001.

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