The Secret of Second-Degree Price Discrimination Hidden in Sydney Supermarkets

I frequently see a familiar yellow sign in front of the milk fridge at Coles on the weekends: Buy two, get one free; bottles start at A$2.1.  However, the same milk is sold under a different label on weekdays: 10% off, A$3.2 per bottle.  Initially, I believed this to be a straightforward inventory clearance trick.  My economics textbook's chapter on "second-degree price discrimination," however, made me realize that these seemingly straightforward promotions are actually a well-thought-out economic tactic.

My roommate asked me a question that led to my first serious foray into supermarket promotions.  She only ever purchased one bottle of milk because she was an international student living alone.  However, she found that purchasing three bottles on the weekends—even though she only paid for two—was less expensive than purchasing one bottle during the week.  "Why would the supermarket encourage customers to buy more when it might expire before they could finish it?" she asked me.  I began to listen more intently after hearing that question.  I quickly found that Coles' "buy two, get one" sales almost always apply to high-frequency necessities like milk, bread, and eggs, whereas snacks and beverages are more frequently included in spend A$20, save A$5 promotions.The timing is not random either; heavy discounts typically appear on weekends, while weekdays are marked by smaller cuts.

I had a quick conversation with a stock clerk to grasp the reasoning.  He clarified that products with a short shelf life, such as milk, must be carefully controlled in inventory; if they don't sell right away, they will soon need steep price reductions or possibly be thrown out.  Despite appearing generous, a "buy two, get one" promotion is actually a ploy to encourage large purchases all at once.  The supermarket reduces inventory risk and increases immediate sales by encouraging family shoppers, who inherently consume milk on a regular basis, to stock up.  Smaller weekday discounts are more appropriate for single customers, such as my roommate, who will not purchase more than they actually need, even if the unit price is lower. This way, the store effectively segments its customers, optimizing sales without wasting promotional resources.

This made me think of second-degree class-based price discrimination: businesses create various purchase bundles that lower the unit price as quantity increases.  Essentially, there are two types of consumers: large and small buyers. Differentiated pricing maximizes profits.  Coles' milk strategy is ideal.  "Buy two, get one free" is used to entice bulk buyers, while small discounts are used to keep lone shoppers.  Despite feeling like they are getting a good deal, both groups stay within the store's price range.

I also observed how meticulously the labels are made.  The boldest line on the "buy two, get one" sign always reads A$2.1 per bottle, while the original price of A$3.2 is displayed next to it.  Customers believe they are saving a lot of money because of this visual contrast.  While weekday shoppers typically only purchase one bottle, I frequently witness people leaving on the weekends with three bottles at once.  It's interesting to note that people who buy more milk also frequently buy bread and eggs, which obliquely increases sales of other breakfast items.

These insights have led me to view promotions as accurate instruments for demand screening rather than as charitable deeds.  Bread expires more quickly than milk, so it's crucial to clear inventory as soon as possible. This makes a "buy three, get two free" offer on bread seem even more aggressive.  A "buy two, get one" promotion for eggs operates differently because consumers are happy to purchase extra because they store well and don't have to worry about spoiling.  The fundamental reasoning is always second-degree price discrimination based on product features, regardless of the products and strategies used.

The discount alone no longer draws me in when I see a supermarket promotion.  I quickly determine whether I actually need this much and whether it will expire before I finish it.  Regardless of how alluring the deal appears, I avoid it if the answer is no.  One of the most significant changes my "economic observation notes" have brought about is this little habit: I've gone from passively accepting promotions to actively evaluating their reasoning to ultimately making decisions based on my own needs.

Ultimately, each discount tag on a grocery store shelf serves as a real-life economic case study.  They serve as a reminder that pricing is always determined by a thorough analysis of customer behavior.  Understanding this reasoning as a customer is beneficial not only for outsmarting the retailer but also for making more sensible purchases and ensuring that every dollar goes to the places that really count.