prevents entrepreneurial shoppers in these situations from buying a large
number of units at the special price and re-selling them to others at a
higher price? The answer is that firms usually place quantity limits on
special deals, thus preventing any large-scale arbitrage that would
undermine their pricing policy.
Hurdle Pricing
Market segments are often well defined but very difficult for the firm to
detect. For example, we all know people who are sufficiently impatient
that they must buy the latest Hollywood movie available for purchase on
DVD or from iTunes. Whereas many other people are prepared to wait
several months until it is available at a considerably lower price. This
pricing strategy is intentional and is an example of hurdle pricing. The
firms producing these goods know that some people are patient and
others are impatient. By setting a high initial price and a lower price only
after several months, the firms are setting a “hurdle” that consumers must
“jump over” in order to get the low price. In this case, the hurdle is that
consumers must wait several months. This same type of hurdle exists in
the pricing of high-priced hardcover books and lower-priced paperback
books that are released several months later. In this case, the slightly
altered products do have different costs, although the cost differences are
considerably smaller than the differences in prices.
Hurdle pricing exists when firms create an obstacle that consumers must overcome in order to
get a lower price. Consumers then assign themselves to the various market segments—those
who don’t want to jump the hurdle and are willing to pay the high price, and those who
choose to jump the hurdle in order to benefit from the low price.