Nov 12 2007
Price Discrimination 101
Published by Jason Welker at 10:09 pm under
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The article above gives a great introduction to and several examples of price discrimination among firms with market power. Read the excerpt below then discuss the questions that follow in your comments:
For any product or service, different people have different prices they are willing to pay. If you ever took an Economics course you surely remember the downward sloping demand curve, which is a graphical way of saying that you’ll get more buyers at a low price and fewer buyers at a high price. For a business that cannot price discriminate, this poses a problem. What price to offer?
There might be some consumers willing to pay 80, but twice as many consumers willing to pay 50. If you set the price at 50, you get more revenue, but the people who are willing to pay 80 are happy that your offering was 30 less than they were willing to pay. (Economists call this consumer surplus.) The ideal situation for the business would be to sell to some consumers at 80 and others (the price sensitive ones) at 50. Price discrimination – charging each consumer close to what he or she is willing to pay – increases revenue for the business.
Business strategists are forever trying to figure out ways to price discriminate. For commodities it can be difficult, but some markets are conducive to price discrimination. The classic example is the airline industry. Travelers have different itineraries and routes, and the airlines purposely impose complex pricing rules (e.g. cheaper if you stay over a Saturday) in order to price discriminate. Business travelers typically end up paying more than leisure travelers, and if you fly into or out of a small city you pay more than between large cities. On a flight with 100 passengers, it is possible that everyone paid a different price for the seat – 100 different prices for the same product. Consumers often resent these schemes, but economists love them.
Movie theaters price discriminate by charging lower admission for kids and seniors. Everyone gets the same product – a seat in the theater – but consumers that are more price sensitive pay less. Car dealers discriminate based on how much the customer haggles. Sellers of new products, especially consumer electronics, often price discriminate over time. When the iPhone was first released, consumers willing to pay $600 got to buy it. A couple months later, Apple lowered the price and a larger segment of the public was willing to buy. Apple could have charged $400 from the beginning, but then they would have lost all that revenue from the people willing to pay $600.
Buyers often feel like they are being played for chumps when they learn about price discrimination, but many economists absolutely are crazy about it and wish we had more price discrimination. Businesses are encouraged to make prices secret – create a fog of uncertainty – to get customers to accept prices offered to them. Preston McAfee, an economics professor at the California Institute of Technology, gave a talk about prices. He raves about Dell selling the same computer at different prices based on how the consumer identifies themselves at the website (small business, large business, home users).
Discussion Questions:
- Who suffers as a result of price discrimination?
- Who benefits from price discrimination and how do they gain?
- Is society as a whole better or worse off when a monopolist is able to price discriminate? Explain…
About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
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Obviously the consumer suffers as a result of price discrimination.
The firm gains from price discrimination in that they increase revenues such that MR = MC again. They are able to maximize on how much any given person is willing to pay and thus pretty much maximize their profit.
Society as a whole is better off when a monopolist can price discriminate as what would have been a dead weight loss is converted into the “producer surplus” or economic profit. However, consumers do lose out on any consumer benefit and thats probably not good for society as a whole.
The consumer suffers with price discrimination as their consumer surplus is basically changed into revenue for the firms.
On the other hand, the firm gains from this as they make a lot more economic profit, as they “exploit” the consumer surplus, and by making consumers pay at 0 consumer plus, turns that into their own economic profit through maximizing their
However, it is a bit ironic that at the end, the society as a whole benefits from price discrimination, because now that MR=D=AR=P, deadweight losses are eliminated compared to a single-price monopolist, which as a whole results in allocative efficiency.
As a result of price discrimination, the people who are willing to pay are the biggest sufferer because they have to pay a lot more than the standardized price. It is usually the firms who gain from price discrimination, and they gain more revenue/profits from making people to pay close to their maximum willingness to pay. It is good for both the firms and the society to price discriminate because there is allocative efficiency and the firms can have more profits.
Who benefits from price discrimination and how do they gain?
Consumers suffer from price discrimination, as their surplus is basically turned into producer surplus. Consumer surplus and the area representing dead weight loss are both turned into revenue for the producer. Society as a whole is worse off. Taking a simpler view, this is because consumers (who are worse off) make up the bulk of society, so society as a whole is disadvantaged. Taking an economic view, price discrimination means that all firms that need to use the monopolist’s products that had any surplus before discrimination will now have none, and must raise their prices to cover the increased ATC. This will shift demand for said firm’s products to the left, and, society is worse off.
The sufferes of price discrimination are consumers as their consumer surplus is eliminated. As a result, the whole society is worse off as it is only the firms who gain benefits, not the consumers. However, I believe price discrimination is not as bad as most people say it is because it matches our needs. Looking at it from a naive perspective, isn’t it good to have special offers for students? (Apple and Mac computers at the beginning of the fall semester)
As other people have already mentioned, consumers suffer from price discrimination because they lose their consumer surplus. Since consumers are paying the maximum amount they are willing to pay, there is no consumer surplus. Moreover, the suppliers are acheving benefit because they are receiving the maximum revenue. The producer surplus gets larger while the consumer surplus gets elliminated. However, in overall, the society benefits from price discrimination. This is because deadweight loss is converted to producer surplus.
With price discrimination, the consumer suffers because they have to pay more than others for the same product. Companies who price discriminate benefit from it because they are able to make consumers pay the amount that they’re WILLING to pay, or at least close to it, using different strategies as explained in the article. Price discrimination benefits society because now, dead weight loss is eliminated. Also, as a student, i certainly can’t complain about paying less than the average working adult.
Price discrimination causes the consumer to suffer because their consumer surplus is eliminated. Those who benefit are the companies who price discriminate because they gain the amount that should have been consumer surplus when there was no price discrimination. This benefits society because dead weight loss is eliminated. I agree with Jeff that for a student, I don’t mind having the benefit of paying less than a full price adult for a movie ticket.
I think although consumers suffers, i don’t think they really suffer because at any kinds of way, themselves will discriminate their prduct or any sort of things to sell to others. Therefore, although in one specific market where they are consumers, they will lost the consumer surplus, but in combination of markets where they are consumer and producer, I think they will gain producer surplus as much as they lost as consumer surplus.
In my opinion, the consumers who cannot afford the product or service benefit as well as the firm, however, those at the top of the income charts suffer since consumer surplus is turned into firm profits.
Society is both worse and better off. Better because now more people can afford the prices and while it is the people who are willing to pay more who suffer the most (no consumer surplus), they are also the wealthier and therefore probably have shares in the company. If not, then they’re already rich anyway. Society is worse off because now more people can consume the good and more consumption, most times UNNECESSARY consumption, will lead to more waste and speed the apocalypse of our existence.
1. It’s clear that the consumers suffer from the price discrimination, because now that all the original consumer surplus are all gone.
2. The monopoly firm benefits from the price discrimination, now that they are able to sell the products at different prices so it converts all the consumer surplus to producer surplus. 3. I think it’s better to the society as a whole even when the consumer surplus are being taken away, because now that the lower income families will be able to get the things they need at the price they are able to offer, and as for the richer ones, it doesn’t really matter to them, because they have the ability to pay at a higher prices than others.
No doubt the consumer suffers from price discrimination, or at least relatively, especially those who is willing to pay higher than the list price in a single price economy, now they have to pay more than those who isn’t willing to pay as much for the same product, and of course those who tries to cheat will be shock and may paralyze under the rule Welker the evil monopolist. The monopolist benefits from price discrimination as turn consumer surplus into economic profit, thus the monopolist end up earning more money. But the society as a whole benefits from price discrimination as all resource are efficiently allocated, eliminating dead weight lost in a single priced monopoly.
Cosumers suffer from price discrimination, because what they pay becomes producer surplus. The firms benefit from it though, as they are able to charge different prices for different consumers according to how much each are willing to pay, eventually yielding greater economic profits and producer surplus. I think price discrimination is good for the society, because it takes people with less income into consideration. Everyone is being charged the right price that suits their ability, and this also maximizes the producer surplus.
Charging the price on each consumer’s maximum willingness to pay price, consumers suffer a lost because they no longer can obtain consumer surplus. In other words, the consumer surplus of every consumer is lowered to 0. Consumers who originally can not afford the product however benefits because they can now purchase the product.
Society also benefit from price discrimination because the deadweight lost is eliminated when D=P=MR=AR.
Producers benefit because they are charging digging into consumer surplus for additional economic profit
Consumers suffer as a result of price discrimination because it turns out that they don’t have any consumer surplus anymore. Producers benefits form price discrimination because now they have more total profits sacrifice consumer surplus. The society is better of when a monopolist is able to price discriminate because now MR=D=AR=P, therefore, there’s no deadweight loss, and achieve allocative efficiency where P= MC
The firms are the ones who are supposed to get benefits from the price discriminations, while the consumers sufferes from the price discriminations since they lose the consumer surplus because they get to pay the highest payments they are willing to pay. This is better for society because now MR=D=AR=P and that means there is no deadweight loss, and instead there is allocative efficiency.
For some reason, I always seem to support producer surplus over consumer surplus. That’s probably because I think of myself more as a firm than a household. Weird.
Anyways, I find price discrimination to be a clever idea, because this is still not really into the long run. In the long run, demand more easily changes. In the short run, demand is pretty fixed. This allows companies like Apple to engage in price discrimination.
Price discrimination is a very ingeneous idea. It allows companies that otherwise could not make much economic, the ability to make economic profits. It also eliminates deadweight loss which is better for the society.
Consumers suffer from price discrimination. They suffer from price discrimination because they do not get their consumer surplus, they pay exactly how much they’re willing to pay for whatever they’re getting.
The suppliers benefit from price discrimination because they are charging as much as they can for each consumer.
Society is better off with price discrimination. This way the suppliers are making more money and they can do new things with that money. Or when the shareholders see that they’re making a lot of money, they would want more of the same projects, giving society more of the product.
Just as long as consumers don’t know they are being price discriminated, they wouldn’t complain too much. Price discrimination takes away the consumer surplus and turns it into producer profit. I think extra satisfaction should be shared equally between producers and consumers.