Price Discrimination and Product Differentiation in Economic Theory: An Early Analysis
TL;DR: The pure theory of discrimination and economic welfare is discussed in this article, where it is shown that the pure theory can be used to derive product differentiation and product differentiation can be seen as an indicator of economic welfare.
Abstract: I. Introduction, 268. — II. Discrimination and its degrees, 269. — III. The pure theory of discrimination and economic welfare, 271. — IV. Product differentiation, 275. — V. Conclusions, 277.
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01 Jan 2004
TL;DR: The thesis of this paper is that what really motivates commercial organizations (even though they often do not realize it clearly themselves) is the growing incentive to price discriminate, coupled with the increasing ability to price discrimination.
Abstract: The rapid erosion of privacy poses numerous puzzles. Why is it occurring, and why do people care about it? This paper proposes an explanation for many of these puzzles in terms of the increasing importance of price discrimination. Privacy appears to be declining largely in order to facilitate difierential pricing, which ofiers greater social and economic gains than auctions or shopping agents. The thesis of this paper is that what really motivates commercial organizations (even though they often do not realize it clearly themselves) is the growing incentive to price discriminate, coupled with the increasing ability to price discriminate. It is the same incentive that has led to the airline yield management system, with a complex and constantly changing array of prices. It is also the same incentive that led railroads to invent a variety of price and quality difierentiation schemes in the 19th century. Privacy intrusions serve to provide the information that allows sellers to determine buyers' willingness to pay. They also allow monitoring of usage, to ensure that arbitrage is not used to bypass discriminatory pricing.Economically, price discrimination is usually regarded as desirable, since it often increases the efficiency of the economy. That is why it is frequently promoted by governments, either through explicit mandates or through indirect means. On the other hand, price discrimination often arouses strong opposition from the public.There is no easy resolution to the conflict between sellers; incentives to price discriminate and buyers' resistance to such measures. The continuing tension between these two factors will have important consequences for the nature of the economy. It will also determine which technologies will be adopted widely. Governments will likely play an increasing role in controlling pricing, although their roles will continue to be ambiguous. Sellers are likely to rely to an even greater extent on techniques such as bundling that will allow them to extract more consumer surplus and also to conceal the extent of price discrimination. Micropayments and auctions are likely to play a smaller role than is often expected. In general, because of strong conflicting pressures, privacy is likely to prove an intractable problem that will be prominent on the the public agenda for the foreseeable future.
261 citations
01 Jan 2000
TL;DR: In this paper, the authors discuss the impact of versioning on the quality of quality adjustment and the welfare implications of using versioning in the context of differentiating between differentials and Goldilocks pricing.
Abstract: This chapter contains sections titled: 1. Introduction, 2. Observable Characteristics, 3. Differential Pricing Infeasible, 4. Unobservable Characteristics, 5. Examples of Quality Adjustment, 6. Welfare Implications of Versioning, 7. Policy, 8. Goldilocks Pricing, 9. Practical Implications, Acknowledgments, Notes, References
231 citations
TL;DR: In this paper, the monopoly problem of designing and pricing a product line of goods distinguished by different quality and warranty levels is addressed, and preference restrictions that restore monotonicity are found.
Abstract: We address the monopoly problem of designing and pricing a product line of goods distinguished by different quality and warranty levels. Consumers vary in their evaluations of these attributes, so that the problem is one of screening. It is sufficiently complex that the local approach commonly used does not work. Instead, we use new techniques for dealing with incentive constraints between nonadjacent consumer types. These techniques allow us to characterize optimal allocations that may not be monotonic. In particular, although the more eager types of buyer do pay higher prices and yield the monopoly higher profit, they may receive lower quality or lower warranty coverage. We find preference restrictions that restore monotonicity: concave risk tolerance implies that warranty coverage increases in type, and constant absolute risk aversion implies that quality increases in type.
227 citations
TL;DR: In this paper, the authors present a survey of some of the insights offered by the economic theory of price discrimination, including the computational costs involved in using complex price discrimination and the welfare consequences of this sort of discrimination.
Abstract: 4. Summary As we indicated at the beginning of this chapter, price discrimination is a ubiquitous phenomenon. Nearly all firms with market power attempt to engage in some type of price discrimination. Thus, the analysis of the forms that price discrimination can take and the effects of price discrimination on economic welfare are a very important aspect of the study of industrial organization. In this survey we have seen some of the insights offered by the economic theory of price discrimination. However, much work remains to be done. For example, the study of marketing behavior at the retail level is still in its infancy. Retail firms use a variety of marketing devices — sales, coupons, matching offers, price promotions, and so on — that apparently enhance sales. The marketing literature has examined individual firm choices of such promotional tools. But what is the ultimate effect of such promotions on the structure and performance of market equilibrium? What kinds of marketing devices serve to enhance economic welfare and what kinds represent deadweight loss? One particularly interesting set of questions in this area that has received little attention concerns the computational costs involved in using complex forms of price discrimination. In the post-deregulation airline industry of the United States, airlines have taken to using very involved pricing schemes. Finding the most inexpensive feasible fight may involve a considerable expenditure of time and effort. What are the welfare consequences of this sort of price discrimination? Do firms appropriately take into account the computational externality imposed on their customers? Even in more prosaic case of public utilities, pricing schedules have become so complex that households often make the “wrong” choice of telephone service or electricity use. Questions of simplicity and ease-of-use have not hitherto played a role in the positive and normative analysis of price discrimination. Perhaps this will serve as a fruitful area of investigation in future studies of price discrimination.
205 citations
30 Sep 2003
TL;DR: In this article, the authors argue that what really motivates commercial organizations (even though they often do not realize it clearly themselves) is the growing incentive to price discriminate, coupled with the increasing ability to price discriminating.
Abstract: The rapid erosion of privacy poses numerous puzzles. Why is it occurring, and why do people care about it? This paper proposes an explanation for many of these puzzles in terms of the increasing importance of price discrimination. Privacy appears to be declining largely in order to facilitate difierential pricing, which ofiers greater social and economic gains than auctions or shopping agents. The thesis of this paper is that what really motivates commercial organizations (even though they often do not realize it clearly themselves) is the growing incentive to price discriminate, coupled with the increasing ability to price discriminate. It is the same incentive that has led to the airline yield management system, with a complex and constantly changing array of prices. It is also the same incentive that led railroads to invent a variety of price and quality difierentiation schemes in the 19th century. Privacy intrusions serve to provide the information that allows sellers to determine buyers' willingness to pay. They also allow monitoring of usage, to ensure that arbitrage is not used to bypass discriminatory pricing.Economically, price discrimination is usually regarded as desirable, since it often increases the efficiency of the economy. That is why it is frequently promoted by governments, either through explicit mandates or through indirect means. On the other hand, price discrimination often arouses strong opposition from the public.There is no easy resolution to the conflict between sellers; incentives to price discriminate and buyers' resistance to such measures. The continuing tension between these two factors will have important consequences for the nature of the economy. It will also determine which technologies will be adopted widely. Governments will likely play an increasing role in controlling pricing, although their roles will continue to be ambiguous. Sellers are likely to rely to an even greater extent on techniques such as bundling that will allow them to extract more consumer surplus and also to conceal the extent of price discrimination. Micropayments and auctions are likely to play a smaller role than is often expected. In general, because of strong conflicting pressures, privacy is likely to prove an intractable problem that will be prominent on the the public agenda for the foreseeable future.
203 citations