Price discrimination - Revision history

Vipul: /* Price discrimination practiced for profit */

2016-09-11T18:12:31Z

Price discrimination practiced for profit

← Older revision		Revision as of 18:12, 11 September 2016
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	\| Separate price for each buyer \|\| Seller prices at <math>y</math> for <math>A</math> and <math>z</math> for <math>B</math>, both buy. \|\| <math>\! y + z - 2x</math> \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math>		\| Separate price for each buyer \|\| Seller prices at <math>y</math> for <math>A</math> and <math>z</math> for <math>B</math>, both buy. \|\| <math>\! y + z - 2x</math> \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math>
	\|-		\|-
	\| Perfectly competitive market with a market price of <math>w > x</math> \|\| seller prices at <math>x</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 2(x - w)</math> \|\| <math>\! y + z - 2w</math> \|\| <math>\! y + z - 2x</math>		\| Perfectly competitive market with a market price of <math>w > x</math> \|\| seller prices at <math>w</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 2(x - w)</math> \|\| <math>\! y + z - 2w</math> \|\| <math>\! y + z - 2x</math>
	\|}		\|}

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	\| Separate price for each buyer \|\| Seller prices at <math>y</math> for <math>A</math> and <math>z</math> for <math>B</math>, both buy. \|\| <math>\! y + z - 2x</math> \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math>		\| Separate price for each buyer \|\| Seller prices at <math>y</math> for <math>A</math> and <math>z</math> for <math>B</math>, both buy. \|\| <math>\! y + z - 2x</math> \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math>
	\|-		\|-
	\| Perfectly competitive market with a market price of <math>w > x</math> \|\| seller prices at <math>x</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 2(x - w)</math> \|\| <math>\! y + z - 2w</math> \|\| <math>\! y + z - 2x</math>		\| Perfectly competitive market with a market price of <math>w > x</math> \|\| seller prices at <math>w</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 2(x - w)</math> \|\| <math>\! y + z - 2w</math> \|\| <math>\! y + z - 2x</math>
	\|}		\|}

Vipul: /* Price discrimination practiced for profit */

2016-09-11T18:11:35Z

Price discrimination practiced for profit

← Older revision		Revision as of 18:11, 11 September 2016
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	\| Separate price for each buyer \|\| Seller prices at <math>y</math> for <math>A</math> and <math>z</math> for <math>B</math>, both buy. \|\| <math>\! y + z - 2x</math> \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math>		\| Separate price for each buyer \|\| Seller prices at <math>y</math> for <math>A</math> and <math>z</math> for <math>B</math>, both buy. \|\| <math>\! y + z - 2x</math> \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math>
	\|-		\|-
	\| Perfectly competitive market \|\| seller prices at <math>x</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math> \|\| <math>\! y + z - 2x</math>		\| Perfectly competitive market with a market price of <math>w > x</math> \|\| seller prices at <math>x</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 2(x - w)</math> \|\| <math>\! y + z - 2w</math> \|\| <math>\! y + z - 2x</math>
	\|}		\|}

Vipul: /* Price discrimination practiced for profit */

2016-09-11T18:11:09Z

Price discrimination practiced for profit

← Older revision		Revision as of 18:11, 11 September 2016
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	\| Separate price for each buyer \|\| Seller prices at <math>y</math> for <math>A</math> and <math>z</math> for <math>B</math>, both buy. \|\| <math>\! y + z - 2x</math> \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math>		\| Separate price for each buyer \|\| Seller prices at <math>y</math> for <math>A</math> and <math>z</math> for <math>B</math>, both buy. \|\| <math>\! y + z - 2x</math> \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math>
	\|-		\|-
	\| Perfectly competitive market \|\| seller prices at <math>x</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math> \|\| <math>\! y + z - 2x</math>		\| Perfectly competitive market with a market price of <math>w > x</math> \|\| seller prices at <math>x</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 2(x - w)</math> \|\| <math>\! y + z - 2w</math> \|\| <math>\! y + z - 2x</math>
	\|}		\|}

Vipul: /* Confusion and conflation */

2014-05-21T17:11:32Z

Confusion and conflation

← Older revision		Revision as of 17:11, 21 May 2014
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	* Confusing price discrimination that is, in a specific instance, profit-based, with price discrimination practiced for taste-based reasons.		* Confusing price discrimination that is, in a specific instance, profit-based, with price discrimination practiced for taste-based reasons.

	Alternatively, even without confusing these many issues, it may be argued that even if price discrimination is not discriminatory in intent and is purely profit-based, it is still immoral because of its greater impact (in terms of prices) on some individuals/groups compared to others, and hence must be ~~acted~~.		Alternatively, even without confusing these many issues, it may be argued that even if price discrimination is not discriminatory in intent and is purely profit-based, it is still immoral because of its greater impact (in terms of prices) on some individuals/groups compared to others, and hence must be forbidden or critiqued.

	==Legal regulation of this strategy==		==Legal regulation of this strategy==

Vipul: /* In non-competitive markets */

2014-02-22T01:49:04Z

In non-competitive markets

← Older revision		Revision as of 01:49, 22 February 2014
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	In a market where some sellers have market power, the conditions for price discrimination (difficult to resell, easy to prevent leakage of low-price versions to high-price buyers) may exist even with completely rational behavior, zero transaction costs and perfect information.		In a market where some sellers have market power, the conditions for price discrimination (difficult to resell, easy to prevent leakage of low-price versions to high-price buyers) may exist even with completely rational behavior, zero transaction costs and perfect information.

	For the extreme case of a monopoly, see [[determination of price and quantity ~~traded~~ by price-discriminating monopolistic firm in the short run]].		For the extreme case of a monopoly, see [[determination of price and quantity supplied by price-discriminating monopolistic firm in the short run]].

	===With variable transaction costs and variable degrees of imperfect information===		===With variable transaction costs and variable degrees of imperfect information===

Vipul: /* In non-competitive markets */

2014-02-22T01:48:18Z

In non-competitive markets

← Older revision		Revision as of 01:48, 22 February 2014
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	In a market where some sellers have market power, the conditions for price discrimination (difficult to resell, easy to prevent leakage of low-price versions to high-price buyers) may exist even with completely rational behavior, zero transaction costs and perfect information.		In a market where some sellers have market power, the conditions for price discrimination (difficult to resell, easy to prevent leakage of low-price versions to high-price buyers) may exist even with completely rational behavior, zero transaction costs and perfect information.

			For the extreme case of a monopoly, see [[determination of price and quantity traded by price-discriminating monopolistic firm in the short run]].

	===With variable transaction costs and variable degrees of imperfect information===		===With variable transaction costs and variable degrees of imperfect information===

Vipul: /* Influence by market actors on politicians to convince them of price discrimination */

2013-04-30T20:34:41Z

Influence by market actors on politicians to convince them of price discrimination

← Older revision		Revision as of 20:34, 30 April 2013
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	\| Seller <math>C</math>'s cost of serving the buyer \|\| 2 \|\| 6		\| Seller <math>C</math>'s cost of serving the buyer \|\| 2 \|\| 6
	\|-		\|-
	\| Seller <math>D<math>'s cost of serving the buyer \|\| 1 \|\| 5		\| Seller <math>D</math>'s cost of serving the buyer \|\| 1 \|\| 5
	\|}		\|}

Vipul: /* Influence by market actors on politicians to convince them of price discrimination */

2013-04-30T20:34:26Z

Influence by market actors on politicians to convince them of price discrimination

@@ Line 227: / Line 227: @@
 Some market actors try to convince politicians that their competitors are practicing price discrimination. One self-interested motivation for doing this is if the competitors are in fact providing lower prices to certain segments of the market. In some of these cases, the real price discrimination story may be altogether opposite.
-Let us say there are two buyers <math>A</math> and <math>B</math> and two sellers <math>C</math> and <math>D</math>. Let us say that for seller <math>C</math> the cost of serving buyer <math>A</math> is <math>2</math> units and the cost of serving buyer <math>B</math> is <math>6</math> units. For seller <math>D</math>, the cost of serving buyer <math>A</math> is <math>1</math> unit and the cost of serving buyer <math>B</math> is <math>5</math> units.
+Let us say there are two buyers <math>A</math> and <math>B</math> and two sellers <math>C</math> and <math>D</math>. Let us say that for seller <math>C</math> the cost of serving buyer <math>A</math> is <math>2</math> units and the cost of serving buyer <math>B</math> is <math>6</math> units. For seller <math>D</math>, the cost of serving buyer <math>A</math> is <math>1</math> unit and the cost of serving buyer <math>B</math> is <math>5</math> units. In a tabular form:
 Let us say further that seller <math>C</math> is charging both buyers <math>5</math> units. In this case, seller <math>C</math> is engaging in a cross-subsidy -- subsidizing buyer <math>B</math> using a large margin from buyer <math>A</math>. Such a cross-subsidy can be viewed as price discrimination, under the more general definition of Stigler.
-Suppose seller <math>D</math> chooses to sell to <math>A</math> at <math>1.1</math> units and to <math>B</math> at <math>5.5</math> units. Note that <math>D</math> is not price-discriminating in any sense of the word, since <math>D</math> is setting the price in the same proportion to the cost of production for both buyers. However, the net result is that <math>D</math> is charging <math>B</math> a little more than <math>C</math> is, and charging <math>A</math> a lot less. Also note that since <math>C</math>'s production costs for both kinds of customers are higher than <math>D</math>'s prices charged, <math>C</math> cannot change its prices to become more competitive.
+Suppose seller <math>D</math> chooses to sell to <math>A</math> at <math>1.1</math> units and to <math>B</math> at <math>5.5</math> units. Note that <math>D</math> is not price-discriminating in any sense of the word, since <math>D</math> is setting the price in the same proportion to the cost of production for both buyers. In a tabular form, the prices are:
 However, <math>C</math> can try to convince politicians to crack down on <math>D</math> and force <math>D</math> to offer uniform prices, despite the difference in costs of serving the two kinds of customers, and ''also'' to serve both kinds of customers.

Vipul at 16:22, 24 April 2013

2013-04-24T16:22:03Z

Vipul: /* Expository book references */

2010-09-11T15:32:56Z

Expository book references

← Older revision		Revision as of 15:32, 11 September 2010
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	\|-		\|-
	\| {{booklink\|UndercoverEconomist}} \|\| 29-55 \|\| Chapter 2 (''What supermarkets don't want you to know'') \|\| \|\| [http://books.google.com/books?id=YAA8hPloNRcC&pg=PA29 Google Books]		\| {{booklink\|UndercoverEconomist}} \|\| 29-55 \|\| Chapter 2 (''What supermarkets don't want you to know'') \|\| \|\| [http://books.google.com/books?id=YAA8hPloNRcC&pg=PA29 Google Books]
			\|-
			\| {{booklink\|Freedomnomics}} \|\| 22-32 \|\| \|\| \|\| [http://books.google.com/books?id=4JLPkjRUvM4C&pg=PA22 Google Books]
	\|-		\|-
	\| {{booklink\|NakedEconomics}} \|\| 19-20 \|\| Chapter 1 (''The Power of Markets: Who Feeds Paris?'') \|\| \|\| [http://books.google.com/books?id=TYuRuI_VKxMC&pg=PA19 Google Books]		\| {{booklink\|NakedEconomics}} \|\| 19-20 \|\| Chapter 1 (''The Power of Markets: Who Feeds Paris?'') \|\| \|\| [http://books.google.com/books?id=TYuRuI_VKxMC&pg=PA19 Google Books]

← Older revision		Revision as of 16:22, 24 April 2013
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	Suppose a seller produces a good at a price of <math>x</math> money units per piece, and there is no competition. Buyer <math>A</math> is willing to pay a maximum of <math>y</math> units for the good, and buyer <math>B</math> is willing to pay <math>z</math> units for the good. In other words, the [[reservation price]]s of buyers <math>A</math> and <math>B</math> are <math>y</math> and <math>z</math> units respectively.		Suppose a seller produces a good at a price of <math>x</math> money units per piece, and there is no competition. Buyer <math>A</math> is willing to pay a maximum of <math>y</math> units for the good, and buyer <math>B</math> is willing to pay <math>z</math> units for the good. In other words, the [[reservation price]]s of buyers <math>A</math> and <math>B</math> are <math>y</math> and <math>z</math> units respectively.

	We first consider the case where <math>\! z > y > x</math> and <math>\! z - x > 2(y - x)</math>. For instance <math>\! x = 5, y = 10, z = 30</math>.~~<toggledisplay>~~		We first consider the case where <math>\! z > y > x</math> and <math>\! z - x > 2(y - x)</math>. For instance <math>\! x = 5, y = 10, z = 30</math>.

	{\| class="~~wikitable~~" border="1"		{\| class="sortable" border="1"
	! Situation !! How the seller acts and buyers respond !! Producer surplus !! Consumer surplus !! Social surplus		! Situation !! How the seller acts and buyers respond !! Producer surplus !! Consumer surplus !! Social surplus
	\|-		\|-
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	\|}		\|}

	Note that in practice, the surpluses listed as zero will be slightly greater than zero, because of some lack of perfectness in information and competition.~~</toggledisplay>~~		Note that in practice, the surpluses listed as zero will be slightly greater than zero, because of some lack of perfectness in information and competition.

	We next consider the case where <math>\! z > y > x</math> and <math>\! z - x < 2(y - x)</math>. A numerical example would be <math>\! x = 5, y = 10, z = 12</math>.~~<toggledisplay>~~		We next consider the case where <math>\! z > y > x</math> and <math>\! z - x < 2(y - x)</math>. A numerical example would be <math>\! x = 5, y = 10, z = 12</math>.

	{\| class="~~wikitable~~" border="1"		{\| class="sortable" border="1"
	! Situation !! How the seller acts and buyers respond !! Producer surplus !! Consumer surplus !! Social surplus		! Situation !! How the seller acts and buyers respond !! Producer surplus !! Consumer surplus !! Social surplus
	\|-		\|-
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	\|}		\|}

	In both cases, we see that the seller benefits from price discrimination. In the first case, the benefit is through the expansion of the market to buyer <math>A</math>. In the second case, the seller benefits by being able to charge <math>B</math> more rather than being forced to charge <math>B</math> the same as <math>A</math>.~~</toggledisplay>~~		In both cases, we see that the seller benefits from price discrimination. In the first case, the benefit is through the expansion of the market to buyer <math>A</math>. In the second case, the seller benefits by being able to charge <math>B</math> more rather than being forced to charge <math>B</math> the same as <math>A</math>.

	Note that although the term ''profit'' is used here, price discrimination may well be practiced in the same manner by institutions or firms that are not ''profit-making'', including governmental institutions and private nonprofits.		Note that although the term ''profit'' is used here, price discrimination may well be practiced in the same manner by institutions or firms that are not ''profit-making'', including governmental institutions and private nonprofits.
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	{{further\|[[Price discrimination is efficient when expanding available markets]]}}		{{further\|[[Price discrimination is efficient when expanding available markets]]}}

	Consider the example discussed earlier: a seller can produce a good at <math>x</math> units per piece, and there are two buyers, each of whom has to decide whether to buy the good or not, and their reservation prices are <math>y</math> and <math>z</math> respectively, with <math>z > y > x</math> and <math>z - x > 2(y - x)</math>.~~<toggledisplay>~~		Consider the example discussed earlier: a seller can produce a good at <math>x</math> units per piece, and there are two buyers, each of whom has to decide whether to buy the good or not, and their reservation prices are <math>y</math> and <math>z</math> respectively, with <math>z > y > x</math> and <math>z - x > 2(y - x)</math>.

	{\| class="~~wikitable~~" border="1"		{\| class="sortable" border="1"
	! Situation !! How the seller acts and buyers respond !! Producer surplus !! Consumer surplus !! Social surplus		! Situation !! How the seller acts and buyers respond !! Producer surplus !! Consumer surplus !! Social surplus
	\|-		\|-
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	\|-		\|-
	\| Perfectly competitive market \|\| seller prices at <math>x</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math> \|\| <math>\! y + z - 2x</math>		\| Perfectly competitive market \|\| seller prices at <math>x</math> units, both <math>A</math> and <math>B</math> buy \|\| <math>\! 0</math> \|\| <math>\! y + z - 2x</math> \|\| <math>\! y + z - 2x</math>
	\|}~~</toggledisplay>~~		\|}

	Thus, price discrimination increases the total social surplus generated. In this situation, price discrimination is preferable for society to the alternative ''single high price''. Nonetheless, it is not preferable to a situation of [[perfect competition]]. Perfect competition not only maximizes social surplus but also gives consumers a larger fraction of it.		Thus, price discrimination increases the total social surplus generated. In this situation, price discrimination is preferable for society to the alternative ''single high price''. Nonetheless, it is not preferable to a situation of [[perfect competition]]. Perfect competition not only maximizes social surplus but also gives consumers a larger fraction of it.
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	Some market actors try to convince politicians that their competitors are practicing price discrimination. One self-interested motivation for doing this is if the competitors are in fact providing lower prices to certain segments of the market. In some of these cases, the real price discrimination story may be altogether opposite.		Some market actors try to convince politicians that their competitors are practicing price discrimination. One self-interested motivation for doing this is if the competitors are in fact providing lower prices to certain segments of the market. In some of these cases, the real price discrimination story may be altogether opposite.

	Let us say there are two buyers <math>A</math> and <math>B</math> and two sellers <math>C</math> and <math>D</math>. ~~<toggledisplay>~~Let us say that for seller <math>C</math> the cost of serving buyer <math>A</math> is <math>2</math> units and the cost of serving buyer <math>B</math> is <math>6</math> units. For seller <math>D</math>, the cost of serving buyer <math>A</math> is <math>1</math> unit and the cost of serving buyer <math>B</math> is <math>5</math> units.		Let us say there are two buyers <math>A</math> and <math>B</math> and two sellers <math>C</math> and <math>D</math>. Let us say that for seller <math>C</math> the cost of serving buyer <math>A</math> is <math>2</math> units and the cost of serving buyer <math>B</math> is <math>6</math> units. For seller <math>D</math>, the cost of serving buyer <math>A</math> is <math>1</math> unit and the cost of serving buyer <math>B</math> is <math>5</math> units.

	Let us say further that seller <math>C</math> is charging both buyers <math>5</math> units. In this case, seller <math>C</math> is engaging in a cross-subsidy -- subsidizing buyer <math>B</math> using a large margin from buyer <math>A</math>. Such a cross-subsidy can be viewed as price discrimination, under the more general definition of Stigler.		Let us say further that seller <math>C</math> is charging both buyers <math>5</math> units. In this case, seller <math>C</math> is engaging in a cross-subsidy -- subsidizing buyer <math>B</math> using a large margin from buyer <math>A</math>. Such a cross-subsidy can be viewed as price discrimination, under the more general definition of Stigler.
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	Suppose seller <math>D</math> chooses to sell to <math>A</math> at <math>1.1</math> units and to <math>B</math> at <math>5.5</math> units. Note that <math>D</math> is not price-discriminating in any sense of the word, since <math>D</math> is setting the price in the same proportion to the cost of production for both buyers. However, the net result is that <math>D</math> is charging <math>B</math> a little more than <math>C</math> is, and charging <math>A</math> a lot less. Also note that since <math>C</math>'s production costs for both kinds of customers are higher than <math>D</math>'s prices charged, <math>C</math> cannot change its prices to become more competitive.		Suppose seller <math>D</math> chooses to sell to <math>A</math> at <math>1.1</math> units and to <math>B</math> at <math>5.5</math> units. Note that <math>D</math> is not price-discriminating in any sense of the word, since <math>D</math> is setting the price in the same proportion to the cost of production for both buyers. However, the net result is that <math>D</math> is charging <math>B</math> a little more than <math>C</math> is, and charging <math>A</math> a lot less. Also note that since <math>C</math>'s production costs for both kinds of customers are higher than <math>D</math>'s prices charged, <math>C</math> cannot change its prices to become more competitive.

	However, <math>C</math> can try to convince politicians to crack down on <math>D</math> and force <math>D</math> to offer uniform prices, despite the difference in costs of serving the two kinds of customers, and ''also'' to serve both kinds of customers.~~</toggledisplay>~~		However, <math>C</math> can try to convince politicians to crack down on <math>D</math> and force <math>D</math> to offer uniform prices, despite the difference in costs of serving the two kinds of customers, and ''also'' to serve both kinds of customers.

	Accusations of price discrimination are often made along with accusations of [[predatory pricing]] (lowering prices below production cost to drive out competitors and achieve market control) and other anti-competitive practices.		Accusations of price discrimination are often made along with accusations of [[predatory pricing]] (lowering prices below production cost to drive out competitors and achieve market control) and other anti-competitive practices.