Heavy Lifting - thoughts and web finds by an economist
     I also contribute to Division of Labour Load HL's Front Page
Monday, April 18, 2005

More on Bose pricing

After some more discussion with Courtney on the pricing by Bose, I think we might have found made some more progress in figuring out was is going on. To recap, Bose charges a single price for their Bose wave radio. You can pay the $1238 all up front or spread it out over 12 months interest-free. The implicit cost of paying up front is approximately $10 at an interest rate of 1.75%.

Typically the zero-interest financing is offered in lieu of an instant rebate. This type of pricing scheme can sort customers effectively. However, Bose doesn't offer a rebate, or any price differentiation, between those who take 12 months to pay or a single transaction.

So far, the possibile explanations include a transactions cost argument - some customers do not want to deal with 12 transactions and are willing to pay the $10 to avoid the multiple transactions. Various price discrimination schemes. One might be third degree price discrimination based on the credit/non-credit distinction if those without credit have lower price elasticity than those with credit. An alternative might be second degree price discrimination, sorting customers by their willingness to bear risk (of not being able to pay off the credit card in the future). Either way, those without credit subsidize those without credit.

Talking with Courtney, however, she mentioned that Bose does not offer its own credit card, like Best Buy and other retailers. Best Buy, for instance, will offer one year of no-interest, but using their credit card. At the end of one year the interest kicks in, retroactively, and if enough customers make bad predictions about their ability or likelihood to pay within the year Best Buy stands to gain. On the other hand, Best Buy also bears the risk of the customer defaulting on the credit, and this likely increases the interest rate that Best Buy will charge.

The ability to charge those who do not pay in a year more than those who do pay within the year implies that the price of a refrigerator is likely greater than it would be if there were no financing available. However, the price will be lower than if there was indefinite zero-interest financing and Best Buy increased the price of the refrigerator by the amount of interest it would have earned otherwise.

Because Bose doesn't offer its own credit card it therefore shifts the cost of enforcement and (most of?) the risk of default to Mastercard or Visa. If this is the case, then zero-interest financing will increase the price of the radio but less than if if Bose bore the full costs of the financing.

If a customer puts a Bose radio on their credit card, they pay the interest to Bose (which they will do whether they pay once or over twelve months) and potentially pay more interest to the credit card company. It might be tempting for a consumer to use the "interest-free" financing but it might incur double interest. Sounds like putting the Bose on your credit card can work if the customer makes the payment every month but also might dramatically increase the final cost of the radio.

Bose gains getting some of the interest they would have earned if they offered their own credit card but they avoid the risk of default. That said, I am not sure what would happen if the customer defaulted on their credit card before the radio was paid off (does anyone else?).

Now I see some more benefit to what Bose is doing, anybody else?

Comments: Post a Comment


Le Chai - galerie du vin



Posts that contain Craig Depken per day for the last 90 days.


Heavy Lifting's Main Page
Email Me
Atom Feed

Heavy Lifting

Great Links

Money I Found Today

Heavy Lifting - Firehose style (56k warning)

Recent Posts

- More on Bose pricing



Site Meter Blogroll Me!


Modified maystar design
powered by blogger