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Faculty Freebies and Price Discrimination April 3, 2017

Posted by tomflesher in Examples, Micro, Teaching.
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Despite its nasty-sounding name, price discrimination is interesting and beneficial to some consumers. (Of course, when we move away from equilibrium to make someone better off , we usually make some other consumers worse off.)

Textbook publishers face a classic case where price discrimination would be useful: they want to charge students high prices for their textbooks, but because professors have the power to require a textbook of their students, they want to get professors on board as easily as possible. That usually means lowering the price of the book for professors (to make it easy to get); I get tons of free books every semester.

Publishers don’t want those free books to get into students’ hands, though – that means either a student didn’t pay for a book because a virtuous professor gave a freebie away, or the student paid, but paid an unscrupulous professor for a book the professor got for free! If a student is going to pay for a book, the publisher would rather get a cut of it.

Goods that are difficult to resell are easiest to discriminate on. Publishers have, for a long time, printed “INSTRUCTOR’S REVIEW COPY – NOT FOR SALE” on books. That has some effect, but you still have the possibility of paying for a book on Amazon or AbeBooks.  One way to keep students from buying these books is to sink money into online resources, which are tied to students’ identities. That way, even if the student buys a used copy of the physical text, they still have to pay for access to the online resources. Still, not every instructor uses those, so this isn’t foolproof.

One publisher, Cengage, has taken an additional step with Greg Mankiw’s principles book: not only does it say “Compliments of N. Gregory Mankiw” on the front, along with the usual “Instructor’s Edition” language, it has my name embossed on the cover. “Specifically prepared for” is printed, and “Thomas Flesher” is stamped into the front cover. (Of course, I prefer Tom, but you can’t be too picky with freebies.) This is a pretty clever means to keep me from reselling the book, at least unless I have a high name value. I can easily imagine a student wanting to purchase a book specifically prepared for Dean Karlan or Paul Krugman, for example, if either of them still teaches Principles using Greg’s book. (I doubt it, since each of them has his own.)

Either way, Cengage is trying to protect what’s likely its largest profit-producer by minimizing the number of free copies students can use.

How do producers charge different consumers different prices? September 29, 2015

Posted by tomflesher in Micro, Teaching.
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Price discrimination is the act of charging different consumers different prices based on how much they’re willing to pay. There are a few different forms of price discrimination, and it can be achieved different ways depending on how much information a seller has.

Haggling, or negotiating to find an exact willingness to pay, is an effective form of price discrimination for large purchases. For example, a car salesman can often start with a high price, and when the customer refuses, he can incrementally lower the price (or otherwise adjust the offer) until he find a deal that the buyer is just barely willing to accept. This has one huge advantage – it gets the most that the customer is willing to give up (or, in other words, it extracts the customer’s maximum willingness to pay). It is, however, very costly for a salesman. Just imagine if the salesman were to spend a whole day negotiating only to realize the buyer wasn’t willing to pay enough to cover the cost of the car. Then, the salesman loses the chance to make a sale at all that day. Since it’s costly, this method is most useful for high-priced items like cars and houses.

If you ask a consumer what he’s willing to pay, he’ll lowball you; haggling helps force the price (and the profit) up.

Direct segmentation allows a market to be broken up based on some visible characteristic. In the previous post, I discussed my father-in-law’s senior citizen discount on haircuts and how he pays less than I do for the same cut. He does this by asking for a senior citizen discount, which I’m not eligible for.

Direct segmentation involves breaking the market up into different groups and intentionally charging different prices to those different kinds of people. It works best when one group has a higher willingness to pay – so, since I’m not a college student, and not a senior citizen, my (relatively) high income means I don’t ask for a discount. Similarly, I pay a lower price to have my blazers dry-cleaned than my department chair does, even though her blazers are made up of a smaller amount of fabric. Dry-cleaners just automatically charge a higher price for a woman’s garment than a man’s, even if the garment is similar.

This sometimes leads to unpleasant outcomes. NPR did a story on a 12-year-old girl who had to pay a premium to play Temple Run as a female character; non-white-male characters were all in-app purchases that cost money.

Indirect segmentation is like direct segmentation, but requires the consumer to do some work to get the lower price. A good example of this would be a volume discount. I have a strong preference for Crayola An Du Septic dustless chalk. (I like its weight and erasability.) When I purchase chalk to use in the classroom, my buying options include paying about $3.50 for a single box or about $12 for a 12-box package. No sane person who isn’t a teacher has any use for 12 boxes of blackboard chalk, so I signal my price sensitivity by buying a larger amount at once.

Another way people reveal their types is by clipping coupons. A coupon is like a little badge that says “I’m cheap! Give me a lower price!” By doing a bit of extra work to signal my cheapness, I qualify myself for a lower price just as much as if I’d haggled with the guy behind the counter.

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.