Case for Demand

Cases for Demand

Case 1:Quantity demanded at a negative price: Hoover’s free flight promotion

In Autumn 1992, the British home appliance manufacturer, Hoover, offered two free air travel tickets to every customer who purchased an appliance with a price of £100 or more. Each ticket was valid for round-trip travel to continental Europe or the United States. The market value of a pair of tickets exceeded £400.

For a £100 appliance, Hoover’s effective price was £(100 − 400) ’ −£300; that is, the company was paying each customer £300 to take an appliance. As might be expected, huge numbers of consumers were willing to buy Hoover appliances on those terms. The promotion attracted over 100,000 customers.

Hoover’s management, however, had not anticipated this response. It had to establish a special 250-person task force to deal with the flight bookings and set aside £48 million to cover the cost of over 200,000 free flights. William Foust, president of Hoover Europe, and two other senior executives were dismissed for their role in the promotion.

At the time of the promotion, Hoover was owned by the American appliance manufacturer Maytag. In May 1995, Maytag sold Hoover to an Italian home appliances group for £106 million.

Source: “Hoover ‘Free Flights’ Scheme Costs 48 Million Pounds,” Financial Times, April 21, 1994, p. 7; “Hoover Sold after Free Flights Fiasco,” The Times, May 31, 1995.

Case 2:Mobile Telephony: Pre-paid vis-à-vis Post-paid

Pre-paid service caters to different market segments from contract (also called “post-paid”) service. The pre-paid customer segments include people that the service provider would consider a bad risk for contract service – those without a regular high income, migrant workers, and travelers.

To the extent that it caters to customers with relatively lower income, pre-paid service is an inferior product. As incomes rise, users would upgrade from pre-paid to contract service. In this...