Written by: Stephanie Varin
Price discrimination, when firms charge different prices to different consumers, has been largely debated based on social utility and efficiency. As a whole, price discrimination reduces consumer surplus and increases company revenue, usually by using personal information or information about your purchase to deduce the elasticity of your demand. For example, airlines will usually charge more for flights on the weekends because the demand for these flights are more inelastic vs. red eye flights on weekdays.Price discrimination is apparent in several degrees: the most severe, first degree, exists in perfect discrimination in which each consumer pays their equilibrium price. This completely eliminates any consumer surplus in the market, but is usually impossible.
The second degree exists in discrimination through quantity or quality. For example, a firm may charge more for a product with a perceived higher quality or charge less for a larger quantity in order to encourage the purchase of more product.
The first degree exists in discrimination of location, age, income, or frequency of purchase. A senior citizen may be offered an early bird discount, or a child may be able to get into a theme park free because their elasticity of demand is much more elastic than those with a higher income.
Price discrimination, though, as the internet and IT technology has become more and more advanced, has become much more pervasive into the social benefit of society and our personal privacy. Retail and travel websites use cookies to track which websites have been visited recently and frequency of visit to websites to gauge elasticity of demand in consumers, and have recently developed “fingerprinting” technology to track users across browsers and databases. For example, Orbitz Travel, a travel website comparable to Booking.com or Trivago, has been price discrimination against Mac users since 2012. Even more pervasive, EpiPen, the auto-injecting pen used to treat anaphylaxis, has risen its prices 500% in the past decade. Although the pens are extremely cheap to produce, averaging around $1 per pen, they have massive margins due to price gouging an inelastic market. This reduces consumer access to these life-saving devices, and thus social cost outweighs social benefit.There’s no doubt that price discrimination can be effective. In cases of monopolies, price discrimination can eliminate deadweight loss and generate a larger social surplus than a regulated monopoly. It also increases profitability which in turn results in larger supply, and thus lower prices, unless the market is functioning with inelastic demand as it does with pharmaceuticals. However, price discrimination is not moral, and, in inelastic markets such as pharmaceuticals or healthcare, it can be dangerous and life threatening to those that cannot afford the high prices.
Works Cited
By. “Price Discrimination Is Efficient.” After Economics, 21 Apr. 2015, www.afterecon.com/economics-and-finance/price-discrimination-is-efficient/.Garyleff. “Why Hotel Price Discrimination Is Good for You.” View from the Wing, 24 Oct. 2014, viewfromthewing.boardingarea.com/2014/10/24/charging-different-prices-different-people-good/.
Howe, Neil. “A Special Price Just for You.” Forbes, Forbes Magazine, 17 Nov. 2017, www.forbes.com/sites/neilhowe/2017/11/17/a-special-price-just-for-you/#3e99a2eb90b3.
Nutting, Rex. “What's Wrong with Price Gouging for EpiPens? Nothing, and Everything.” MarketWatch, MarketWatch, 2 Sept. 2016, www.marketwatch.com/story/whats-wrong-with-price-gouging-for-epipens-nothing-and-everything-2016-09-02.
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Price Discrimination.” Intelligent Economist, Intelligent Economist, 27 Dec. 2017, www.intelligenteconomist.com/price-discrimination/.
I was interested in why there was no price regulation stipulating that EpiPens become less expensive, so I looked it up online and it turns out that EpiPens became more expensive after a lawsuit in 2012 that ended in the company settling to allow a generic competitor enter the market in 2015. The problem is that no generic version was available by 2015, so EpiPens faced a large price increase in the years after the settlement. This is why the company faced largely inelastic demand (due to the lack of substitutes) without having to obey any legal price regulation. It's interesting to see how some loopholes allow monopolies to raise prices so quickly without facing a large reduction in quantity demanded.
ReplyDeleteIt's also interesting how the demand for EpiPens has not diminished very much due to the perceived quality associated with the brand, as opposed to the fear of "generic" that seemingly results in off-brand products being inferior products even though the product itself is essentially identical.
DeleteIn my opinion, price descrimination is not neccesarily a bad thing. Airline tickets are a great example of price discrimination. Without that price discrimination, flights on the weekend would be more popular but becuase of the difference price, it causes some consumers to travel during the week. It increases the producer's revenue and is smart from a business standpoint. I do think there is a fine line between airline tickets and epipens where there is a point that price descrimination should be regulated. Just because epi pens are an inelastic good doesn't mean the company can charge a super high price for the good.
ReplyDeleteWhile price discrimination could be effective, I think that taking user information such as the type of computer they are using, is a complete invasion of privacy, especially when it is used to price discriminate. In the form of EpiPens it is not only unethical but dangerous. Life saving medicine shouldn't have a main goal of making a profit.
ReplyDeleteOn your point about airplanes, oftentimes the reason it is cheaper to book in advance is because of price discrimination. Tourists with little money to spare plan their trips weeks or months ahead of time so in order to draw them in airlines charge lower prices. Meanwhile, same day trips and those needing to travel same day are often business travelers whose companies oftentimes cover the expenses of travelling so they are willing and able to pay a higher price than tourists. What this means is that airlines can charge more competitive rates to tourists while still making money from business travelers, more than discounting the tickets to fill the plane completely would.
ReplyDeleteGood column, Steph. I agree and think this is pretty interesting because I actually have a peanut allergy and have Epipens. They cost a ton of money and really they don't actually cost much to produce. It really affects families that have trouble with the prices of the Epipen, but families like mine can't just not buy it, because it's the only thing that can help me out. Price discrimination when biased against people with medical issues is ridiculous because they are literally making money off of people who can't even help it. Overall I would agree that some of this price discrimination is bad, but other parts are fine. For example, travel and amusement parks' price discrimination isn't really immoral, they're just playing to the people who have the most money to spend.
ReplyDeleteTo add another angle on companies charging less if you buy more product, i.e. buying for less when you buy in bulk, this has a negative impact on the competitiveness of small and start-up business. Larger producing firms can vie for larger contracts with factor producing firms, screws for example, in order to buy more screws at a lower cost per screw. Smaller start-ups on the other hand don't have the monetary capital necessarily to buy in bulk and thus it is more expensive for them to buy screws as the price per screw is higher, increasing costs.
ReplyDeleteEven though price discrimination can be effective, I agree that it’s immoral, especially when it takes advantage of goods, like the Epipen, that are a necessity to some people. Also, one website that I’ve noticed that frequently tracks the amount of people who visit certain pages is Amazon. Prices constantly fluctuate based on the traffic that a certain product is receiving. The prices may be based on popularity instead of demographics, but I believe this could still be considered a form of price discrimination. However, one important aspect of price discrimination is eliminating the possibility of resale, which isn’t quite as easy with goods that you can purchase on Amazon in comparison to a plane ticket per say.
ReplyDeleteAs you mentioned, price discrimination can do great things for a business, such as increasing profits and decreasing deadweight loss. But how they're doing this is actually kind of creepy and an invasion of privacy. For example, a Kwik Trip card that gives you coupons based on previous purchases is reasonable and acceptable. However, when your computer or phone is tracking what you search and what pages you open, that is an invasion of privacy - much like how Alexa is "always listening". On another note, it's sad that more life requiring goods are so expensive. I understand the pricing decision in regards to maximizing profits, however if a business is going to make a product intended to help someone, shouldn't they make it accessible/affordable in the first place? So while yes, price discrimination can do wonders for business, it is more so (as you said) immoral, because it cheats people on prices and makes necessities unaffordable.
ReplyDeleteWhile price discrimination can be beneficial to the economy, you raise an interesting point on all of its harms. Websites that are now using these cookies and fingerprinting tracking technology pose many threats to individuals' privacy, as some companies base their pricing methods off of information they should not even posses. Your example of Orbitz Travel utilizing price discrimination with power they should not have is a scary and eye opening instance where a company can use their own technological tracking against consumers with certain products (in this case). Overall, if more and more companies continue to price discriminate in this way, the once effective tool of price discrimination within an economy may start to hold more negatives than positives.
ReplyDeleteI never thought about the price discrimination we see every day such as young children or senior citizens, but others might look at these discrimination and force people to be dishonest about ages. I'm sure many people can think of a time in their childhood where their parents instructed them to lie about their age.
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ReplyDeleteWhile price discrimination could be effective, I think that taking user information such as the type of computer they are using, is a complete invasion of privacy, especially when it is used to price discriminate. In the form of EpiPens it is not only unethical but dangerous. Life saving medicine shouldn't have a main goal of making a profit.