Provide an explanation for why “buy one, get one free” deal is not the same as “half -price” sale.
When markets are competitive, firms cannot experiment with price, which compels them to take extraordinary measures to increase consumer-based, without reducing the producer-surplus. Buy One, Get One Free is also such a market strategy that aims to increase the market share without compromising on producer surplus. It is imperative to understand that when the producer surplus decreases, so does the profit and when the consumer surplus increases, his/her ability to buy increases. Therefore, discounts are different from buying one get one free offer, as discounts directly increase the real income (Landsburg).
EXPLANATION
When the price of a product decreases, the real income increases. This real income a consumer can spend on a different product or service. It implies that when the price of a product decreases, opportunities for a consumer increase, which mostly translates into buying other products or services (substitution effect). Buy One Get One Free offer does not affect real income, as a consumer only gets one additional item for free. Also, it is a strategy to increase the sales, which ensures higher revenue and thus higher profit.
In the diagram above, we can see how consumer surplus changes from discount scenario to buy one get one free scenario. The increase in the consumer surplus indicates an increase in real income, which directly and positively impacts the budget (increase its actual size).
A competitive firm acknowledges that it can increase its profit by increasing its market share or sales. One of the strategies to increase the number of sales is by offering the additional unit for free at the same price. It increases revenue (because sales have increased) without compromising on producer-surplus. However, if the producer surplus reduces with the increase in market-share/sales, the increase in market-share/sales will have a small impact on profit. Therefore, strategies are adopted by competitive firms, which allow them to swell their profit without seriously reducing producer surplus.
Work Cited
Landsburg, Steven. Price Theory and Applications. 9. Cengage Learning, 2013.
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