An Economic Analysis of Price Discrimination: Adidas Jersey Case Study

This essay analyzes the price discrimination strategy employed by Adidas in the New Zealand sports apparel market during the 2011 Rugby World Cup, focusing on the pricing of the All-Blacks jerseys. The essay identifies the market conditions that allowed Adidas to implement price discrimination, including its monopoly power as the exclusive manufacturer and distributor and the high demand for the jerseys. It explores the economic principles behind price discrimination, the importance of preventing resale from cheaper markets, and the application of the ultimatum game to model consumer behavior. Furthermore, the essay examines the role of price elasticity and how it influences Adidas's profit maximization strategy. The analysis highlights how Adidas capitalized on the inelastic demand for the jerseys to charge a premium price, thereby maximizing profits, and the implications of such pricing strategies on consumer welfare and market dynamics.

Running head: Price Discrimination
Price Discrimination
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Running head: Price discrimination
QUESTION ONE
The New Zealand sports ware market can be categorized as a competitive market between the
retailers though the presence of only one licensed manufacturer and distributor ensures that the
market operates as a monopoly. The Rugby World Cup held in New Zealand provided an
opportunity for sports manufacturers to sale their products. In our case however, only one
manufacturer had the exclusive rights to make and distribute the national team Jersey, Adidas.
The firm decided to price the jersey at the premium rate of $220 for each which at the least is
exorbitant keeping in mind that the same replica sold for half the price in other markets namely
the United States.
The Adidas country manager argued that the disparity could be attributed to currency fluctuation
alongside other factors such as shipping. However, data does not support the argument as the
additional costs add up to only a maximum of 35% of the retail price in the United States and
other costs cannot be explained by the current or previous currency exchange rates. Adidas being
a commercial firm aims to maximize its profits whenever possible. The difference in price can
therefore be explained by price discrimination which is a pricing strategy that sales identical
goods or services at varying prices to different markets or market segments. The strategy aims to
maximize profit by charging the absolute maximum amount that a consumer is willing to pay.
The seller Can maximize his profit and sales to the different markets by selling at a price close-to
their maximum willingness to pay. The seller increases or reduces his/her price based on
location, financial status and product demand in a particular area (Mark, 2006). In our study
case, the financial status of the targeted consumers Can be considered to be High as New
Zealand is a high-income economy and a member of the OECD. Therefore, the consumers have

Running head: Price discrimination
a High spending power and can afford to buy the jersey at a premium price. Secondly, the
demand for the jersey in the country was high as it was during the Rugby World Cup and
national pride and support for the national team (All Blacks) were at an all-time high. Therefore,
the prevailing conditions were suitable for the use of price discrimination.
Nevertheless, for the practice to be able to function in a particular market some key structural
realities have to exist. One, the firm must have a market power close a monopoly to been able to
manipulate the market (Mark, 2006). As stated earlier, Adidas has exclusive rights for the
manufacture and distribution of the national rugby official team jersey, in effect a monopoly.
Secondly, the supplier must-have the ability to prevent resale of the product from the cheaper
priced market to the more expensive one. Adidas, through manipulation and persuasion was able
to get international retailers to remove New Zealand from their distribution list thereby closing
that avenue to consumers.
Sales Revenue
The diagram above shows the sales difference between a
product with price discrimination and another
without price discrimination. The lower one
exhibits the characteristics of price discrimination.
QUESTION 2
Adidas moved to stop and shut down moves by
disgruntled consumers Who sought to order cheaper
jerseys online because this would be a violation of one of

Running head: Price discrimination
the principle requirement for price discrimination to function properly. As stated above, the firm
must have the ability to prevent arbitration which in essence is Resale of the product from the
cheaper market to the expensive one. If allowed, buying of the overseas jerseys by consumers
would distort the market and render the whole price discrimination strategy unviable. The
cheaper overseas version would undercut Their business besides being a public relations
nightmare that portrays The firm as money grabbing institution without the fans interest at heart.
QUESTION 3
A seller’s sole aim is usually to maximize profit which translates to charging the highest possible
price that the seller is willing and able to pay. Adidas, therefore, in the pursuit of maximizing
profit chose to price discriminate and offer the consumers a price higher than the equilibrium. I
the Ultimatum Game, there are two players in the game, the responder and the proposer. In our
case, the firm Adidas is our proposer Whereas the New Zealand World Rugby fans are the
responders. The proposer always makes the first move which can either be rejected or accepted
by the responder with both parties seeking to maximize their outcomes (Maschler & Zamir
2013).
The first player may choose to either make a fair proposal or tilt the balance to his Favor. In a
Competitive market, any proposals (pricing) that are not fair is rejected by the responder
(consumer). Shifts in prices have a considerable elasticity within the market greater than one
which means that other variables (demand) respond to such changes (Maschler & Zamir 2013).
Increase in prices lead to decreases in sales volume as consumers seek cheaper alternatives
elsewhere in the market resulting in decreased revenue streams. However, in our case study, the
New Zealand sports jersey market is by and large a monopoly. Therefore, the market is inelastic

Running head: Price discrimination
and Quantity demanded does not change drastically to the different pricing policies adopted by
the monopoly. The kit manufacturer Adidas can therefore offer a price above the market
equilibrium as it is insulated against market forces that may diminish the demand of its products.
The New Zealand fan is in effect left with no alternative but to accept the unfair offer thereby
creating a Nash equilibrium. The lack of competing Firms thereby provides the consumer with
no other viable alternatives.
Price elasticity effect on price discrimination
The graphs above show price discrimination in practice whereby the elasticity of the market has
a great influence on the firms’ profit.
References
Mark, A. (2006) Price Discrimination. Department of Economics. University College London. 2,
1-38. Retrieved from: http://else.econ.ucl.ac.uk/papers/uploaded/222.pdf
Maschler, M., Solan, E., & Zamir, S. (2013). Game Theory. Cambridge: Cambridge University
Press. Doi: 10.1017/CBO9780511794216

Running head: Price discrimination