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This Financial Times article explores personalised pricing that Walmart could use, driven by advances in artificial intelligence. Walmart says it has decided not to use this pricing method. These questions consider the economic issues associated with this type of pricing.
Questions
a. Explain the difference between the consumer and producer surplus. [4]
Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the market price. Producer surplus is the difference between the minimum price a producer is willing to accept and the market price of the good.
b. Explain how the consumer surplus differs between the buyers of a particular good in a Walmart supermarket. [4]
Consumer surplus may differ among Walmart consumers because their incomes vary, so they are willing to pay different prices for a good. High-income Coca-Cola buyers, for example, may be willing to pay more than low-income buyers, even though they both pay the same price.
c. Explain how personalised pricing in Walmart might lead to a transfer of surplus from the consumer to the producer. [4]
Personalised pricing is when Walmart charges different consumers different prices for the same good based on their willingness to pay. Walmart could use customers’ purchasing data to identify buyers who are willing to pay a higher price and charge them more. This would reduce their consumer surplus, as the difference between their willingness to pay and the price paid decreases.
d. Explain how some consumers might gain from personalised pricing. [4]
Personalised pricing may benefit some Walmart consumers because they could be charged less than the existing market price. For example, a low-income consumer might pay less for a brand of washing powder because pricing data suggests they would be willing to buy the washing powder at a lower price if that was the price they were charged.
Total [16]
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