Baby-cut carrots as convenience incentives – quality-based price discrimination on retail fresh-cut produce

ABSTRACT

Empirical evidence of quality-based price discrimination (second degree) is limited. I find consumers have positive and heterogenous valuations for the baby-cut attribute of carrots, and I model and establish evidence that retailers utilize this quality attribute to price discriminate. From a welfare perspective, I show the development and introduction of high-quality substitutes, pre-cut and pre-processed versions of fresh produce, increase retail profits with minimal impact on consumer surplus under quality-based price discrimination.

KEYWORDS:

• Quality-based second degree price discrimination
• Marketing
• Fresh-cut produce
• Carrots

JEL CLASSIFICATION:

• D4
• D6
• L12
• Q18

Disclaimer

The findings and conclusions in this publication are those of the author and should not be construed to represent any official USDA or U.S. Government determination or policy.

The analysis, findings, and conclusions expressed in this report should not be attributed to IRI.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=58340

² I note that my linear specification and discrete quality assumption result into a perfectly discriminating monopolist. A more general specification shows that low valuation consumers get priced at zero surplus and high valuation consumers get priced with rent surplus $\left({\theta }_h-{\theta }_l\right)V\left(F\right)$ remaining if quality F is continuous (see Tirole 1988).

³ Due to the rent surplus under a more general specification, there is a possible scenario where the retailer only offers the high value product. The retailer prices at the high valuation consumers’ WTP and prices out the low valuation consumer.

Additional information

Funding

This research was supported in part by the U.S. Department of Agriculture, Economic Research Service.