Price Discrimination is A Good Thing

Probably because the word “discrimination” has become so closely associated with practices such as racial discrimination or sexual discrimination, the word has insidious connotations regardless of the adjective attached to it. A case in point is price discrimination. Here’s a quote from a recent Kuro5hin article about recent changes in the pricing schemes of some scientific journals (specifically Nature),

Copyright holders on digital media demand new rights and privileges constantly. They push laws like DMCA through the United States Congress, and enforce their privileges worldwide through such treaties as the Berne Convention. Perhaps they want a pay-per-view society where every reading of a book or playing of a song costs a fee, payable to them. They want to control, not only the copying of a book, movie, or song, but the use thereof – where and how many times it may be viewed, what persons may use it. This would enable what economists call price discrimination – they could charge each customer as much as they’re willing to pay.

Almost all of the time price discrimination is referred to, as in this case, it is implied that it is a nefarious tool of blood sucking capitalists looking to ring the very last dollar out of anyone. But, in fact, the average American reaps a great deal of economic benefits from price discrimination which in practice typically involves charging wealthy individuals and corporations more for goods and services.

One of the most widespread price discrimination schemes is the way airline tickets are sold. Airlines sell seats on planes at different prices to different customers based on those customers’ ability to pay. Airlines charge business fliers far more to travel than they do non-business travelers. They also charge people willing to book their flights far in advance far more than people who decided they need to fly in just a few days. Finally, of course, airlines charge huge premiums for traveling in first class.

Those people who pay a large premium for their tickets in effect subsidize lower ticket prices for people whom are more price conscious.

Another area where price discrimination commonly occurs in the publishing industry. A hardcover book doesn’t cost all that much more to produce than a paperback book ($1 to $2 more), and yet hardcover books are generally 2 to 3 times as expensive as paperback books. This seems to be a way to discriminate based on time preferences. Those people who need to read the new Stephen King novel the moment it hits bookstores are subsidizing the lower cost of his novels for those of us who wait for the paperback version.

Does e-commerce promise a brave new world of price discrimination as the Kuro5hin article suggests? I doubt it. Amazon.Com recently experimented with using a price discrimination system and users hated it. Electronic systems are a double-edged sword for sellers because while they can more easily target individual consumers, the same systems allow consumers to quickly obtain more accurate information about pricing schemes and coordinate buying decisions. If a book chain store in a wealthy neighborhood decides to sell its books at a 5 percent markup over the prices it sets at a store in a less wealthy neighborhood, the cost for consumers of a) obtaining such information and b) coordinating their buying habits with other consumers to drive down the price is very high. On the other hand, Amazon’s experiment was quickly publicized on the Internet and choosing to go to any of Amazon’s competitor’s takes only a few seconds.

Price discrimination will likely remain a very important tool, but it is likely to remain a blunt instrument confined to services and goods where part of the market has a very strong preference not shared by the rest of the market for which they are willing to pay a price premium.

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