Thursday, May 15, 2008

Free Day

How many of you got your free iced coffee at Dunkin' Donuts or your free chicken biscuit/sandwich at McDonald's today? You may be asking "How can these firms afford to give away food in a period of rising costs?" Your question provides an opportunity to discuss some basic ideas in economics and personal finance courses.

For economics classes, you might want to focus on the idea of complimentary goods. The demand for one product may be closely linked to demand for another product. In this case it can be amplified depending on the location and terms. In the case of DD, you may go for the coffee, but since you're there and the donuts smell so good...

One other factor is that by getting the iced coffee free, your perception is of a reduced cost for the complimentary good. In the case of McD, the free biscuit/sandwich offer is contingent on the purchase of drink. Again, there is a perception of reduced cost because you're receiving two items for the price of one (with a relatively high profit margin). But there's the smell of other food in the air. Maybe an order of hash browns or french fries..

For the personal finance course, you may want to discuss the idea of complementary goods or loss-leaders. Retailers often use loss-leaders (in this case the free products) to draw the consumer into the store, depending on the sale of higher priced or higher profit margin complimentary goods to offset the loss. (Is there a reason why peanut butter and jelly usually aren't on sale the same week?)

These two concepts are compatible and offer an opportunity to teach both econ and personal finance with the same example. I encourage your thoughts, and I give a HT to fellow Collegiate colleague Rob Wedge for this post.

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