[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).

[AnIrishDuck]

I didn't understand your argument at first; after you clarified I believe you are correct (with the corrections mentioned). My comment was intended to fix some flaws in your argument that rendered it incomplete, not incorrect.

I believe the constant MC assumption is dangerous though. MC is rarely fixed in microeconomics. It is almost always assumed to be an approximately linear function of quantity. Thus, increasing production will always increase MC. You'll need to hire more workers, pay more overtime, buy more expensive supplies, whatever (in the short run; in the long run firms expand production and the supply curve shifts). The assumption that MC won't change is almost always incorrect, and the MC changes affects whether the argument is valid or not.

Sorry if I'm sounding pedantic, just pointing out what my econ prof would've said to me about this argument.

EDIT: and I'm not trying to imply that you don't know any of this, just that it may benefit readers who have less economics exposure.

[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.