[starship]

Regardless, it never ceases to amaze me how controversial pricing discrimination is. Especially since most people have taken Econ 101: pricing discrimination eliminates dead-weight loss, which should be a good thing right? Nope, instant controversy.

[gjm11]

> most people have taken Econ 101

Er. Um. No, most people have not taken Econ 101. Most graduates have not taken Econ 101. Most graduates in quantitative disciplines have not taken Econ 101.

Most people with economics degrees have taken Econ 101. A modest number of other people have. Some more have learned the basic concepts by means other than taking Econ 101. These are probably not the people complaining about price discrimination.

In any case, being surprised when people are upset because they think they're getting inferior treatment and saying "oh, but they should think of the gain in overall economic efficiency" seems like a sign of, well, not having taken Psych 101.

[pavel_lishin]

I took Econ 101 - but the only reason I did so was because it was one of the only two classes available in high school that offered college credit.

If it didn't give me three hours of credit, I probably would have ended up with Texas History, or something similar.

[yo-mf]

And everyone has taken Psych 101...

[glesica]

Guy who has taken Econ 101 here.

Price discrimination doesn't eliminate dead-weight loss (it really has nothing to do with dead-weight loss), it just converts consumer surplus into producer surplus.

https://en.wikipedia.org/wiki/Price_discrimination#Types_of_...

[starship]

Did you read the article you just linked to? Here's a direct quote "From a social welfare perspective though, first degree [perfect] price discrimination is not necessarily undesirable. That is, the market is entirely efficient and there is no deadweight loss to society."

Without price discrimination, unless you're operating tax-free and subsidy-free there is always a dead-weight loss. Perfect price discrimination eliminates it. It is literally right there in the article you just linked to.

[czr80]

Actually, it does both - capturing consumer surplus for buyers who pay more than the average and eliminating deadweight loss for buyers who pay less than the average.

[Technical note: By "average" I really mean the optimal price if the producer is only allowed to set a single price point. But let's not quibble.]

[AnIrishDuck]

"buyers who pay less than the average" (which I'm assuming means buyers whose reservation price is below the market equilibrium) do not qualify as a deadweight loss. Deadweight loss refers specifically to:

a) buyers who cannot buy something which causes an economic benefit (they gain more than it costs to produce). Examples: shortages, monopoly pricing.

b) buyers who buy something that does not cause a net economic benefit (it costs more to produce than they gain). Examples: gov't subsidies artificially reduce price, negative externalities not factored into price.

See http://en.wikipedia.org/wiki/Deadweight_loss.

[czr80]

Okay, let's take the monopoly example from wikipedia. Firm prices at monopoly price (60 cents), deadweight loss because all transactions for buyers with marginal benefit between 10 and 60 cents do not occur. Assume some identifiable group of people exists with marginal benefit < 60 cents (e.g., students). Firm introduces student discount => deadweight loss is smaller. Therefore, price discrimination can reduce deadweight losses.

[AnIrishDuck]

Close, but your example is missing a crucial piece. Specifically, the marginal cost of producing the product.

Let's say the MC is 20 cents at the scale produced (Q1). The second group (students) get a MB of let's say 30 cents. They will not buy at a price of 60 cents, therefore there is a deadweight loss (MC < MB to students, but they do not have the good). If the monopolist can expand their output to Q1 + Q2 (where Q2 is the student sales) while keeping their MC under 30 cents, they can reduce the DWL.

[czr80]

Umm... so you agree? Price discrimination can reduce DWL?

By the way, there's no need to assume MC is a function of Q since that just complicates the example for no benefit (in the wiki article notice that MC is just a constant 10 cents). And yes, though I didn't stress it, of course the discount price must still be greater than the MC (and so in the range of 10 - 60 cents).

[glesica]

Where did the dead-weight loss come from? It's just consumer and producer surplus. There is no dead-weight loss in this situation as we've been discussing it.

https://en.wikipedia.org/wiki/Economic_surplus

[czr80]

From the trades that don't happen because the producer can't sell to certain segments at a lower price (for fear of reducing his profit on other segments). I suppose it's worth noting that this isn't an issue in perfectly competitive markets (since there price = marginal cost). But, outside econ-101, there aren't really many perfectly competitive markets.

By the way, as I mentioned in my first post, I definitely agree this is about capturing consumer surplus too.

[vitobcn]

In my opinion this is not about econ 101.

It seems obvious why two people getting the exact same product / service but paying a different amount is a controversial matter. Especially, since the discriminating factor is the fact that you are willing to pay more!

If a vendor wants to price discriminate, there are ways of doing it, such as loyalty programs or rewards, which do not 'offend' the consumer and still manage to capture (most of) the consumer surplus.

In this case though, this is not what Orbitz is doing, they keep the prices constant but show different default options.

Isn't that the right way to do it? If Mac users choose options (a, b, c) the most often then these are the ones that you should default to. And the same for non-Mac users but with frequent options (d, e, f).

And in this case it happens to be that, on average, (a, b, c) have higher prices than (d, e, f).

[joezydeco]

Let's say Best Buy could magically learn your income and checking account balance when you walked in the door. And just before you walked in, employees rushed and hid all of the lower-priced TVs and computers. How would you feel about that?

[thefever]

Pricing discrimination is controversial because it shifts most of the surplus away from consumers. A lot of people come out of econ 101 thinking any more efficient solution is inherently better, but efficiency is only one factor to consider.

[Spooky23]

People don't like being ripped off.

Price discrimination is revenue optimization for the vendor, it's not eliminating some efficiency -- it's steering me to part with more of my economic resources.

I expect the kind of behavior from a salesperson with whom I am negotiating -- that's a customary way to do business in that model.

In the United States, we learn about fixed-cost in the grocery store -- an apple cost $1 whether I have $0.50 or $5,000 in my wallet. When I'm buying a product or service on what appears to be a fixed-cost basis, I perceive your "pricing discrimination" as taking advantage of me.

[starship]

Let me clarify my point. Our economy is based on the notion that things are worth what people are willing to pay for them. What if some people are willing to pay more than others? Then businesses have to choose: either they practice price discrimination, i.e. try to sell each and every unit for exactly what that person was willing to pay, or they set one price that will attempt to maximize their profit.

You can find many examples of each. Anyone who auctions off their goods practices price discrimination. i.e. 3 identical baseball cards auctioned separately on Ebay fetch 3 separate prices. Same thing with a seller in a street market who gives different prices to different buyers (tourists vs. locals) and then haggles with each and every buyer.

My point is, people seem fine with this kind of price discrimination in a lot of settings, but not all settings. For some reason, there are certain settings and triggers that change their view from "hey this is how things are supposed to work, this thing is worth what I'm willing to pay" to "hey I'm getting ripped off!" Why is that? And what are the triggers?

Businesses put a lot of work into finding pricing discrimination "tricks", including discounts and premium upgrades, and that on the whole is a fascinating topic to me.