It does, and I think the reason is that we evolved in bands of 40 that shared and have those preferences in us. If somebody got fat then it was evidence of cheating! We get fat now, but we're still on the lookout for cheaters.
In public, and that includes AI and the government, I'm afraid that a completely different phenomenon is subsumed under price discrimination, and that is peak load pricing, or dynamic pricing in the argot du jour. And that is completely efficient. It lands the cost of capacity with those who use capacity!
I teach economics and finance at a college. We pay for parking on this campus. Thing is, we pay different amounts as faculty, depending on how much we get paid in salary. Am I able to pay more than someone who makes half my salary? Am I willing to pay more? Yes, I am able. Am I willing? Not really, but they kinda have me over a barrel, don't they?
I teach my students that a demand curve is a wiling and ability to pay curve. And it is, so long as the exchange is entirely voluntary. Back to my parking fee. What happens if I don't buy a parking sticker? I'm not really sure, since I've never done it. Do I feel coerced? Yep.
So where is my thinking going off the rails, John?
Nice post, John! Question, though: do you believe price discrimination (and/or monopoly quantity restrictions, with either a single price or price discrimination, a la the monopolistic competition case) is the only way to pay for fixed costs? I'm sort of wondering about a repeated reputational game in which a limited number of firms price to cover fixed costs, despite the prisoner's dilemma problem--the latter being perhaps the source of "price wars." Every player knows that price cutting as long as price is greater than MC is profitable, but they also know that their cuts will be quickly matched and everyone loses...implicit collusion (particularly of course in the small numbers case) might develop spontaneously (or at least over beers at a party or via an association like the American Dairy Association)?
I don't find this pill hard to swallow. When substitutes are present (as they are for almost every consumer product) the total utility is >= the sum of utility from each market. The important part is that this is an inequality.
This is, of course, correct as far as it goes. But there is a huge information asymmetry. The vendors know about us in great detail. But we don’t know much about what other sellers might be willing to sell for. That is why it feels unfair. We can’t find a market price, and we often have to just be price takers at prices that are most likely above market. At least, those are the ones that make people angry.
I take very different views. First, two stores can have different prices for the exact same product; only idiots think that is unfair. Second, if I don't like a store charging different prices to the people ahead of me and to me, I am free to leave, hurl a few choice words at them on my way out, and leave a bad Yelp review.
I'm also the kind who thinks stores can be as bigoted as they want, refuse service to anybody they want for any reason they want, and I am just as free to walk in, ask if I violate their policies, pester them until they tell me to leave, and leave bad Yelp reviews and picket them.
Is it really true that perfect price discrimination is allocatively efficient? Consider this: the income effect tells us that the perfect price discriminator must charge higher income consumers more. This imposes a tax on income, which is certainly not allocatively efficient.
"It seems massively unfair, doesn’t it?"
It does, and I think the reason is that we evolved in bands of 40 that shared and have those preferences in us. If somebody got fat then it was evidence of cheating! We get fat now, but we're still on the lookout for cheaters.
In public, and that includes AI and the government, I'm afraid that a completely different phenomenon is subsumed under price discrimination, and that is peak load pricing, or dynamic pricing in the argot du jour. And that is completely efficient. It lands the cost of capacity with those who use capacity!
I teach economics and finance at a college. We pay for parking on this campus. Thing is, we pay different amounts as faculty, depending on how much we get paid in salary. Am I able to pay more than someone who makes half my salary? Am I willing to pay more? Yes, I am able. Am I willing? Not really, but they kinda have me over a barrel, don't they?
I teach my students that a demand curve is a wiling and ability to pay curve. And it is, so long as the exchange is entirely voluntary. Back to my parking fee. What happens if I don't buy a parking sticker? I'm not really sure, since I've never done it. Do I feel coerced? Yep.
So where is my thinking going off the rails, John?
Nice post, John! Question, though: do you believe price discrimination (and/or monopoly quantity restrictions, with either a single price or price discrimination, a la the monopolistic competition case) is the only way to pay for fixed costs? I'm sort of wondering about a repeated reputational game in which a limited number of firms price to cover fixed costs, despite the prisoner's dilemma problem--the latter being perhaps the source of "price wars." Every player knows that price cutting as long as price is greater than MC is profitable, but they also know that their cuts will be quickly matched and everyone loses...implicit collusion (particularly of course in the small numbers case) might develop spontaneously (or at least over beers at a party or via an association like the American Dairy Association)?
I don't find this pill hard to swallow. When substitutes are present (as they are for almost every consumer product) the total utility is >= the sum of utility from each market. The important part is that this is an inequality.
This is, of course, correct as far as it goes. But there is a huge information asymmetry. The vendors know about us in great detail. But we don’t know much about what other sellers might be willing to sell for. That is why it feels unfair. We can’t find a market price, and we often have to just be price takers at prices that are most likely above market. At least, those are the ones that make people angry.
I take very different views. First, two stores can have different prices for the exact same product; only idiots think that is unfair. Second, if I don't like a store charging different prices to the people ahead of me and to me, I am free to leave, hurl a few choice words at them on my way out, and leave a bad Yelp review.
I'm also the kind who thinks stores can be as bigoted as they want, refuse service to anybody they want for any reason they want, and I am just as free to walk in, ask if I violate their policies, pester them until they tell me to leave, and leave bad Yelp reviews and picket them.
Hi John,
Is it really true that perfect price discrimination is allocatively efficient? Consider this: the income effect tells us that the perfect price discriminator must charge higher income consumers more. This imposes a tax on income, which is certainly not allocatively efficient.