This is not a case analysis. Part 1. Assuming the consumer willingness-to-pay is

Question

This is not a case analysis.

Part 1. Assuming the consumer willingness-to-pay is uniform for bottled water, depict the price response functions for bottled water before the Flint water crisis and at the end of 2015 in the same figure. You may assume that the market size at the end of 2015 is larger for bottled water (as it should be the case). Moreover, you should indicate the retail prices for bottled water in the same figure. Indicate and label the prices in the figure. True values are not required. You must create a figure. One is not provided.

Part 2. Consumer surplus is an important measure of effectiveness of a pricing policy on consumer welfare, which is particularly indespensible for markets in crisis. Using the figure in part 1, identify three key areas contributing to the increase in consumer surplus and explain the key drivers corresponding to each of these areas.

Part 3. After January 2016, as a result of donations, the consumers could also get bottled water from donation/emergency centers. Explain if/how canabalization happens. Explain if/how arbitrage happens.

Part 4. According to local store managers, the retailers had not offered any price incentives such as quantity discounts to donors during the donation period. However, one may argue that offering discounted prices to donors could have helped struggling Flint residents indirectly and that would have been an ethical pricing strategy during the water crisis. Please discuss your thoughts on this pricing strategy in general, and explain why retailers may not be able to sustain such a humanitarian pricing strategy.

Explanation / Answer

Part 1 - The company can consider a provider serving the customers with heterogeneous willingness-to-pay. A standard approach models this as an adverse selection problem, resulting in a non- linear pricing schedule. Motivated by empirical evidence that consumer's utility becomes discontinuous when goods are offered for free, examine situations where giving away increases the provider's profit.

The company can study how consumer's quality perception may be affected by the price markdowns and how a firm should, in turn, optimize its pricing strategy. They can experimentally elicit the relationship between consumer's perceived quality, discount, and pricing. We then characterize the firm's optimal policy based on the relationship estimated from data.

Part 2 - Consumer Surplus is a measure of the economic welfare that people gain from purchasing and then consuming goods and services. It is well defined as the total amount that the consumers are willing and able to pay for a good or service and the total amount that they actually do pay.

When the demand for the goods or services is perfectly elastic, then the consumer surplus is zero. Whereas, when the demand is perfectly inelastic, then the consumer surplus is infinite. In such a situation, the demand does not respond to the price change. Finally, when the demand is inelastic, then the consumer surplus will be more and more potential because there will be some buyers who are willing to pay a high price to continue consuming the product.

Part 3 - The bottled water industry has always been at the forefront of relief efforts during the emergencies or natural disasters. This was seen most recently when IBWA members immediately stepped forward to provide the citizens of Toledo, Ohio, with safe, clean, bottled water when the public water system was contaminated by a toxin from an alga bloom in the Lake Erie. Throughout many years, bottled water companies have responded to the need for clean water after incidents such as the 2013 chemical spill in Charleston, West Virginia, Hurricanes Sandy and Katrina, and various floods, wildfires fires, and earthquakes.

The bottled water industry also supports a very strong public water system, which is required for providing citizens with clean and safe drinking water. In fact, many bottled water companies use public water sources for their products. Once the water enters the bottled water plant, several processes are employed to ensure that it meets the U.S. Food and Drug Administration’s purified water standard. Such treatments may include one or more of the following - reverse osmosis, distillation, micro-filtration, carbon filtration, ozonation, and ultraviolet (UV) light. The finished water product is then placed in a bottle under the sanitary conditions and sold to the consumer.

Part 4 - Research suggests that the general public are far more likely to donate unused vouchers and unwanted items that they are to part with cash. Charities can make the most of this willingness to give by accepting a particular range of different 'coupons' and deals that they can share directly with service users or use themselves to buy food for those are in need. Giving something back to the donors in the form of a discount or reward can greatly increase their desire to make a particular donation, so the vouchers can work out well for all parties involved in such charitable processes.

Many online and offline charity fundraisers are finding that vouchers and rewards encourage more and more donations. Almost everyone wants to do their bit to help out, but money is tight for many people and we are all seeking to cut our spending in the uncertain economic climate. Studies suggest that poorer people are actually more likely to give to charity than those who are having higher incomes. This helps if there is some little reward or bonus for donating, experts have found.

Whether you work for a particular charity, donate to one or accept help from one, vouchers can benefit you. If you want to know more about receiving the help or donating in your area, get online and search for information on local charity voucher schemes. There are many ways you could help make a difference to someone’s life through something as simple as a free dinner ticket or a discount on clothing – and you might get a great deal back in return as well.

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