Reader Philip Goldberg sent this photo of iced coffee pricing. Readers, what kind of consumer might order the medium instead of the large? What’s the store’s incentive to price the two products the same? And, most important, where is this magical place that sells iced coffee for only $1.49!?
Photo: Philip Goldberg
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A store looking to bring in extra business (and hoping you buy something else in addition to that coffee) would have a reaso to put them up at the same price. McDonald’s 1$ for any drink promotion is a good example of this. They’ll still make a profit off of the beverage and might get some extra sales from people who wouldn’t normally stop in.
And consumers who are watching/counting their calories would still go with the smaller size. Every little bit counts, and it’s easier to get a medium drink and drink all of it then to get a large and only finish of 75% (or whatever the size difference is).
If there is a Small option, this would make a lot of sense (it will influence people to upgrade from Small to Large). If not, maybe it’s just an experiment.
More likely, they have run out of Medium sized cups.
And if Philip Goldberg is this Philip Goldberg, then the miracle coffee shop is in Shanghai. Whether this proves or disproves the theory of Chinese currency manipulation is unclear.
McDonalds is offering all size drinks for $1 right now.
I think the main reason you might get a smaller drink is if you want to self-enforce consumption of less calories.
Easy questions for an economist – the person who orders the medium has reached a plateau in their utility function for coffee, such that the additional amount offered by a large has no positive utility. (You could also think about the small marginal cost of carrying around a heavier coffee when you did not want to drink it all, and an aversion to wasting the leftover coffee by throwing it out.)
The store, obviously, is using the pricing to encourage consumers on the margin (roughly indifferent between medium and large at the regular prices before this discount) to consume more coffee, and thus caffeine. Caffeine is addictive, so this makes them more likely to increase their future coffee consumption, presumably benefiting this store.
This pricing strategy also makes the additional coffee (difference between medium and large) appear to be free, and there is a strong allure to free even if otherwise you would have been happy with a medium, or small, coffee.
The “magical place” is 7-11. They sold the medium for $.99 last summer. This isn’t much different than popcorn at the movie theater, where for $.25 more, you get twice as much. I’m not incentivized to buy the large simply because of the price. This is a ready made product with flavoring, cream and sweetener already added, much like the starbucks frappuccino. So to order a larger size, I would also be getting more calories.
“What’s the store’s incentive to price the two products the same?”
To get rid of a surplus of large cups. Maybe they’re faulty in some way. Holes at both ends, perhaps.
Calorie-counters don’t need/want the large, despite the pricing
What kind of customer would buy the medium?
The same kind that only goes through the all-you-can-eat line once, instead of twice. Somebody who just doesn’t want the extra coffee, either because they don’t want the calories, or they don’t want the caffeine, or they don’t want the liquid… or maybe the large doesn’t fit in their cupholder.
Given an unlimited supply with no incremental cost, consumption will be driven by demand, and demand isn’t unlimited.