Mysteries in Swiss Watch

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Mysteries in Swiss Watch

Economy is everywhere in our daily life. According to Samuelson (47), microeconomics is a science about the usage and allocation of scarce resources. Rather than a science only existing in textbooks, microeconomics is much more related to real life. Many interesting phenomena can be explained by the theory of microeconomics, like the mysterious price of Swiss watch.

Why is the price of Swiss watch much higher in Switzerland than the price in Hongkong?

As is known to all, the possession of a Swiss watch represents a fancy life style, a high social status and a juicy fortune. According to Oberecker (23-56), the price of product is likely to be relatively lower in the country of origin than other consuming places, considering the cut of transportation cost, communication cost and marketing cost. Appling to the case of Swiss watch, the price of Swiss watch is likely to be lower in Switzerland than other cities. However, the fact stands the opposite, that the price of Swiss watch is much higher in Switzerland than that in Hongkong (Federation of the Swiss watch industry FH). Possible reasons of the phenomenon are proposed that Hongkong is a free port with the wide permission for goods from all over the world to trade. However in fact, according to Liu and Serfes (5-5), the inner reason of the phenomenon has nothing to do with Hongkong’s free port issue, but a typical example of third-degree price discrimination.

According to the general theory in microeconomics (Nicholson 35-55), the price is positively related to the demand, thus the lower the price, the larger the demand. However, the price sensitivity of consumers varies along their social status and incomes that the higher the income, the lower the price sensitivity. Therefore, if there is only one dominant supplier in the market, namely a monopoly, different prices can be made in different markets to attract consumers with different price sensitivity. The price discrimination is called the third-degree price discrimination (Phillips 82-83). As for consumers with high price sensitivity, the income of whose is likely to be relatively low, the price of product should be in a low setting, because the price elasticity of demand of these consumers is quite high, meaning they’re more likely to switch to the other products than the consumers with high income and low price sensitivity. According to the differentiation of price sensitivity and price elasticity of demand, strategies of pricing should be made that higher price for consumers with higher income and lower price for consumers with lower income.

In the case of Swiss watches, the third-degree price discrimination is quite obvious. Being a symbol of social status and wealth, Swiss watches are definitely luxury goods, and the manufacturers of which are in a status of monopoly. The market demand curves are different in Hongkong and Switzerland, and the equilibrium quantity of both markets is defined according to the equation “MR_A=MR_B” (Benhabib and Nishimura 284-306),  and the total quantity can be calculated accordingly (Ravallion 474). In order to achieve profit maximization, Swiss watches manufacturers would try their best to adjust the quantity to the point of MR_A=MR_B. Thus, different prices are set accordingly. According to The World Bank, the average income of Switzer is much higher than that of Hongkong residents, meaning the price elasticity of demand is less than that of Hongkong residents. Therefore, the market of Switzer and Hongkong can be treated as two different markets, applying the third-degree price discrimination theory, which will result in the phenomenon that the price of Swiss watches is higher than that in Hongkong market despite the fact that Switzerland is the origin country for Swiss watches.

Not only applied in the case of Swiss watches, the theory of third-degree price discrimination can also be applied in many other fields of firm strategies, like brand differentiation, product differentiation and service discrimination (Armstrong and Vickers 579-605). It is indeed a good example of microeconomics theory applied in real life, and achieves great effect.

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