Why are promotions such as 'buy one get one free' considered risky for firms when forecasting consumer surplus and willingness to pay?

• A. They can make it difficult to predict how much consumers are actually willing to pay for each unit, leading to inaccurate demand estimates.
• B. They always guarantee higher profits regardless of consumer behavior.
• C. They reduce consumer surplus by increasing the price of the product.
• D. They eliminate the need for market research on consumer preferences.

Answer: (A)

Verified step by step guidance

1. Understand the concept of consumer surplus, which is the difference between what consumers are willing to pay for a good and what they actually pay.
2. Recognize that promotions like 'buy one get one free' change the effective price per unit, making it challenging to determine the true willingness to pay for each individual unit.
3. Analyze how this pricing strategy can distort demand estimates because consumers might purchase more due to the promotion, not necessarily because of their underlying valuation of the product.
4. Consider that inaccurate demand estimates can lead firms to misjudge consumer preferences and willingness to pay, which complicates forecasting and pricing decisions.
5. Conclude that because of these uncertainties, such promotions are risky for firms when trying to predict consumer surplus and set optimal prices.