Tesla’s Battery Update: Price Differentiation Tactics Revealed

In early September, 2017 the car manufacturer Tesla released an update that would extend the battery life of some models of its cars for customers in the hurricane Irma evacuation zone. According to a report by NBC News, the update would give owners of certain Tesla models the ability to drive an additional 30 to 40 miles without needing to charge. The aim of the upgrade was to help people escape the effect of the hurricane during a period when electricity and time for charging would be difficult to come by.

Initially, this upgrade appears to be a great benefit to Tesla’s public relations. In light of the emergency circumstances, the company released the upgrade, which would normally cost between $4,500 and $9,000 according to the NBC News report, to affected users for free, albeit temporarily (by the end of September, the update had expired, according to an article in The New York Times). It appears to be a rare moment of corporate altruism–and it may still be, despite what else it reveals about the company’s practices.

A closer examination into the upgrade reveals at least one salient fact: the company released a software upgrade, not a hardware upgrade. The affected batteries always had the capability to reach the extended range, but they were being held back by their software. Why? Because it allows Tesla create multiple price points and differentiate between customers who are willing to pay different amounts.

With one product at one price point, a company has no ability to price discriminate. A person who has a very high willingness to pay will be charged the same price as someone whose willingness to pay is equal to the market price, and the company will be unable to capture any of the consumer surplus from those who are willing to pay more. With two (or more) price points, the company can capture that consumer surplus by offering a more expensive version to people who are willing to pay more and a less expensive version to people who are willing to pay less.

Tesla is not the only company to differentiate this way. For example, airlines typically offer three types of seats for three different prices; first class, business class, and economy. The airline knows that flying economy is not exactly the most pleasant experience, and they want their customers to think so too. That way, customers might be inspired to purchase a more expensive ticket.

Similarly, offering a variety of battery ranges is an easy way for Tesla to increase its ability to differentiate products and therefore increase the amount of consumer surplus it can capture. As for the logic of a difference in software as opposed to a difference in hardware, the only reason for Tesla to make this decision would be if it is less expensive to produce one type of battery and restrict it for some models rather than to produce two types of batteries.

Whether the public will find lasting issue with Tesla’s augmented price differentiation, and whether that issue will translate to a change in demand, remains to be seen. It is important, however, to remember that, no matter what anyone feels about its profit maximizing decisions, Tesla was under no obligation to release the update at all.

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