You operate a small but popular and profitable restaurant/bar in a college town.

Question

You operate a small but popular and profitable restaurant/bar in a college town. There are several other restaurants and bars nearby. You have conducted a market research study and discovered that the price elasticity of demand for local residents is lower (less elastic) than the price elasticity of demand for college students, who are usually in town only while the college is in session about 9 months out of the year. Discuss at least two pricing strategies you can use to increase your revenues and analyze them in terms of their ability to generate additional profits. Indicate any additional assumptions you are making.

Explanation / Answer

Lower price elasticity means that less change in demand for a unit price change incomparison to that having higher price elasticity of demand.

So here a little change in price for students will make a lots of difference in comparison to locals i.e. a small decrease in price will attract more students. So two strategies can be

a) Discounts for customers with student ID. This will attract more students and add to more revenue but it has to me kept in mind that discounts should be such that marginal cost should not more that marginal revenue.

b) 3 months when students are not in town, so I will discontinue any type of discounts or schemes given to any person to geerate maximum profit as local are relatively inelastic.

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