Concepts of price discrimination and barriers to entry

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1) Suppose that the governmental authorities wished to decrease use of a pesticide that is leaching into groundwater supplies in a watershed by 60% from current use levels. Discuss the advantages and/or disadvantages of distributing marketable pesticide permits to each farm operating in the watershed equal to 40% of its current level of use of that pesticide, versus simply ordering each farm to reduce pesticide use to 40% of current levels under threat of heavy fines for non-compliance.

2) Discuss the following excerpt from a recent story in the Wall Street Journal. In your discussion demonstrate that you can use the concepts of: "price discrimination and "barriers to entry" to explain:

A) the current success of Harrah's strategy; and,B) the prospects for continued success with the strategy.

TUNICA, Miss. -- She doesn't know it, but Linda Maranees is the subject of a behavioral experiment that could change the odds of the gambling business. The Memphis, Tenn., retiree, her blouse bedecked with sequined cards and dice, has just received invitations to two nearby slot tournaments, along with vouchers for $200, all courtesy of Harrah's Entertainment Inc.

"Harrah's is savvy," says Ms. Maranees, who admits that once in the casino door, she is bound to spend much more than what Harrah's has given her. That is exactly what the Las Vegas-based company is banking on. Over the past two years, Harrah's has quietly conducted thousands of clinical-style trials to determine what gets people to gamble more. Based on its findings, Harrah's has developed closely guarded marketing strategies tailored individually to the millions of low-rollers who make up its bread-and butter business.

The results are impressive enough that other casino companies are copying some of Harrah's more discernible methods.

At the center of Harrah's strategy is a former Harvard professor named Gary Loveman and a vast mathematical model much like the ones that airlines use to fill seats with the highest-paying fliers. But this one scores gamblers on how profitable they can be to Harrah's. Richard Mirman, the company senior vice president who refined the model, boasts that it is Harrah's "secret recipe" -- on a par with the famous unrevealed formula of Kentucky Fried Chicken. The model tells Harrah's marketers how to appeal to gamblers such as Ms. Maranees, based on data tracking their previous behavior in casinos. Spitting out "behavior modification reports," Harrah's computers suggest that Ms. Maranees -- an avid slot-tournament player -- will respond best to a cash offer, while Tina Montgomery, a real-estate agent from nearby Oxford, Miss., is better motivated by a free hotel room. As Ms. Montgomery gambles downstairs, she explains, "my husband stays in the room."

Reference no: EM13816761

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