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Price Discrimination September 28, 2015

Posted by tomflesher in Micro, Teaching.
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I wear my hair short. Like, really short – it’s buzzed on the sides and scissor-cut on top, so that it’s low-maintenance, and I trim my own beard using a storebought clipper. My father-in-law does the same thing – except he pays a little bit less than I do, because he tells the barber he’s old and cheap. Why does that work?

A business, we assume, wants to make money. As such, it wants to sell its good at the highest price possible to each consumer. Consumers, though, want to spend as little as possible, to maximize the difference between their willingness to pay and the actual price they pay. (Economists call that difference consumer surplus.) Most of the time, it’s difficult to charge people different prices based on their willingness to pay. To do so requires three big elements.

First, the market has to be segmented. This means that consumers have to have different willingnesses to pay. Think about  a price-sensitive consumer like my father-in-law – he’s getting ready to retire. His wife is already retired. He needs to adjust to spending less money than he’s used to. A lot of his fellow senior citizens feel his pain. Meanwhile, I’m a young(ish) guy. I teach at a community college, I have no kids, and I have a long time before I retire (so my money has a lot of time to grow). I’m willing to pay a little bit more for a haircut than he is. In addition to senior citizens, college students are often given discounts just for being students.

Second, there needs to be some element of monopoly power. My barber isn’t a monopolist, because pure monopoly is rare, but I do go out of my way to go to a place where I have a good rapport with the barber. I have a guy who cuts my hair the way I like it, and I like the atmosphere at his shop. Plus, even though I could probably shop around to find a cheaper price if I went somewhere else, I couldn’t find a price that much cheaper. Haircuts have pretty standard prices around here. That’s what the monopoly power condition is intended to enforce – if I get angsty about not getting a cheap haircut, I don’t really have other options.

Finally, the good needs to be difficult to resell. If we were talking about an oil change on my car, I might send my father-in-law into the mechanic’s shop with my car to get the senior citizen discount on an oil change. When we have a family event planned, he buys the bagels because the local place gives him a deal just for being older. Or if my mother is looking to redo the bathroom, or kitchen – my father has friends at http://www.restorationusa.com/west-palm-beach/ who’ll give them a great discount on that as well. It’s impossible, though, to resell a haircut, so I can’t use his senior citizen discount to my advantage here. Baseball and hockey tickets often offer student rush specials where you have to (theoretically) show a student ID to get the discount. Enforcing that would ensure that people with high willingness to pay didn’t buy the cheap tickets in the nosebleed section, but the open secret is that the Mets don’t really care if you buy cheap tickets, as long as you buy tickets.

If those three conditions exist, then it’s possible for a seller to charge different people different prices. Economists call that price discrimination. It’s not necessarily a bad thing, though – it means if you’re cheap, you can get a pretty good deal on some goods.

Shockingly, Economists Price Things Intelligently May 27, 2013

Posted by tomflesher in Uncategorized.
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I was excited to see that there’s a new edition of Recursive Macroeconomic Theory by Lars Ljungqvist and the Nobel Prize winning Tom Sargent. I was even more excited to see prices starting to fall into place with respect to the Kindle edition.

Textbooks are a special product because demand for them has historically been inelastic: if you need the book, you need it. You won’t have any choice as far as whether to buy it. That’s led price-sensitive consumers to buy used textbooks, but there’s a limited supply. (Of course, even more price-sensitive consumers download the books illegally.) There’s also a pretty big market in old editions, even though there are usually slight differences between editions.

Recursive macro is a pretty standard subject, and although the third edition of Ljungqvist and Sargent includes new material, it probably won’t appreciably change the experience for a first-year grad student taking grad macro. There’s some benefit to the new edition, sure, but many students will be faced with the following choice: Pay $82.44 (as of today) for a new third edition, or pay $49.99 for a second edition. That’s a significant savings. However, second-edition sales aren’t beneficial to the publisher, so how can they create an incentive for price-sensitive buyers to give money to the publishers rather than to the secondary market?

Well, a Kindle version of the third edition is $51.29. Even price-sensitive students would probably find $1.30 a fair price to pay for an up-to-date edition, assuming they already had a Kindle-equipped device like an iPad. As used copies of the third edition accumulate, the prices of those will probably collect around the $50 mark as well, and if they don’t, I’d expect the price of the Kindle version to float along with that. Make it easy on price-sensitive consumers to give you money instead of giving it to the secondary market, and some of them will.