Hello Everyone,

I can't believe it's already been a week since we got back from China.  I hope everybody's jet lag is dying down.  I was taking mid-afternoon naps until Saturday.  I am sure everybody remembers the unique experience we all had in the Chinese markets.  It was far different than what we are used to here.  However, the economic principle behind their system of haggling is very common even in the United States.


The principle used in the Chinese markets is price discrimination.  Price discrimination is a method of altering the price to fit a given situation in order to take advantage of optimal demand.  We see it all the time in our everyday life.  Ever been to a matinee movie or go on a student night?  These are forms of price discrimination.  For lower income students, these times are money-savers.  Many students might not even go see a movie if it wasn't for these times.

So a question you may ask is why doesn't everybody take advantage of these times.  For many, the price difference is not substantial enough to give up seeing a Friday or Saturday night movie.  The fact that the price is more during these times is inconsequential to this decision.  These individuals will go see a movie regardless of the price.


Movie theatres have figured out that they can increase the amount of customers they serve by offering this deal.  Furthermore, these money conscious buyers will go during the day and on nights where the theatre is not very busy.  This eliminates the possibility of opportunity costs forming from the discount.  For those that do not know, opportunity cost are the next best alternative in economics.  If the movie theatre was packed with normal patrons on a student night, any normal patrons turned away due to sold out shows is an opportunity cost for the theatre.  However, having student night on slower nights when the shows do not sell out leaves no opportunity cost.  It simply increases sales.

The price given for the matinee or student night is always enough to cover any variable costs.  This allows the tickets sold to contribute towards the fixed cost of the theatre.  In most cases, these prices do not cover all of the fixed costs.  This represents the an economic contribution margin.  The business cannot sell at this price all the time, but it can do it part of the time.


Now back to the Chinese markets, the sellers in these markets price their items high.  From their view, any person that can afford to pay these prices will do so without much effort.  People with lower incomes and budgets are more likely to haggle the price down to meet their income or budget constraints.  (And there is also people like me who just have fun haggling and seeing how low we can get them.)

• The first goal of the markets is to sell your supply quickly and turn it over.  
• The second goal is sell for higher prices on average than you could just setting a price with traditional supply and demand curves.

The method the Chinese markets use is the most efficient market other than a purely competitive environment.  Purely competitive markets carry no product differentiations.  Agricultural markets such as grain and produce are good examples of this.  What we saw in the Chinese markets was very close to perfect price discrimination or 1st degree price discrimination.  2nd degree price discrimination refers to selling in bulk or discriminating by quantity bought.  3rd degree price discrimination refers to dividing the market into defined groups, such as seniors, adults, and children with movie tickets.

For more information on price discrimination see: https://www.investopedia.com/terms/p/price_discrimination.asp 

Anyways, I hope everyone else found the trip as engaging as I did.  I loved seeing this principle play in this way.  This is probably why I enjoyed haggling so much.  I can't wait for the next trip.

Jason Alpert