Question

First-time subscribers to the magazine “The Economist” pay a lower rate than repeat subscribers. Does this pricing scheme benefit the publishers of the magazine? Explain why and how.

Answer 1

Answer.)

This is an example of price discrimination by indicators ( also known as third-degree price discrimination). The market is segmented into new subscribers and repeat subscribers. New subscribers, know the product less well and are thus likely to be more price sensitive. Moreover, the fact that they have not subscribed in the past indicates that they are likely to be willing to pay less than current subscribers. It is therefore optimal to set a lower price for new subscribers.