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> This assumes it's not a zero sum market Economics in general is not a zero sum market. People trade because they see benefits to doing so. I buy something be

> This assumes it's not a zero sum market Economics in general is not a zero sum market. People trade because they see benefits to doing so. I buy something because the value I derive is more than the cost -- that's why economies and markets create value. We call that value 'surplus' (https://en.wikipedia.org/wiki/Economic_surplus https://en.wikipedia.org/wiki/Economic_surplus) > just because it's more profitable does not mean it's a net economic gain In the specific example you made, yes, the producer is just capturing more of the surplus, more hasn't been created. In general, price discrimination shifts surplus from consumers to producers. However, it also shifts surplus from richer buyers to poorer ones. So coupons are a benefit to the poor, and airline price discrimination benefits you if you buy 3rd class tickets. Unless you are very rich, price discrimination is generally a monetary benefit to you. Note that 3rd-degree price discrimination can increase or decrease total welfare depending on the specifics: http://www.econ.ucla.edu/hopen/econ171/monopoly2.ppt http://www.econ.ucla.edu/hopen/econ171/monopoly2.ppt (see slide 4)

AnthonyMouse 10y ago
> Unless you are very rich, price discrimination is generally a monetary benefit to you. You're not accounting for the deadweight loss from the crippled product. Suppose if there were no coupons the product would cost $20 to everyone, vs. when coupons are used it costs $15 with coupon or $30 without. But using the coupon requires an hour worth of labor on the part of the customer. So the rich customer pays the $30 and the poor customer pays the $15 + $10 worth of labor. Compared to the case with no price discrimination, the rich customer pays $10 more and the poor customer pays $5 more. Neither customer is ahead, only the seller is. Likewise with crippled products, if the full version of the product was available for $20 to everyone then the poor customer may get $25 worth of value from it and have a $5 surplus. Making the full version $30 and the crippled version $15 means the poor customer won't buy the full version, but the crippled version may only provide $16 worth of value, so now the poor customer's surplus is down to $1 from $5. You're also assuming price discrimination costs the rich more than the poor. But volume licensing and bulk discounts are a form of price discrimination. In the limit where the seller can engage in perfect price discrimination, the seller captures ~100% of the consumer surplus from all consumers, which is obviously worse for every consumer than any case where the consumer gets to keep any part of the surplus.
- smallnamespace 10y ago
  Sure, you can always find parameters where one party or another is hurt, because the parameter space is very large. For example, without the excess profits provided by price discrimination, a company may decide a market is simply too small to serve, in which case all surplus is lost. Also, the baseline for comparing a crippled product is not necessarily the same but uncrippled product. If a manufacturer knows crippling is unavailable, they may just develop the reduced feature set entirely, in which case rich consumers are hurt. Microeconomic theory can be subtle, and whether something is good or bad depends very much in the specific case.
  - AnthonyMouse 10y ago
    > Also, the baseline for comparing a crippled product is not necessarily the same but uncrippled product. Conversely, the baseline for the lower priced product is not necessarily lower than the existing product. If the full version is currently $50, the profit-maximizing strategy could be to sell a crippled version for $50 and the full version for $500, leading to more profit for the seller but less surplus overall. > Microeconomic theory can be subtle, and whether something is good or bad depends very much in the specific case. That's what I'm saying. Your argument was that price discrimination generally helps the poor. But it only does when the specific method of price discrimination happens to do that entirely by accident -- if it happens it's because the seller set the price of the lower cost version at less than they actually needed to, or didn't cripple it as much as they could have which would have increased sales of the more expensive version. The one thing price discrimination is designed to do is convert consumer surplus into producer surplus. Which in general is not good for the consumer.
    - smallnamespace 10y ago
      I think we're confounding a few different facts here: * Effect of 3rd-degree price discrimination on total surplus can be positive or negative, and that was the point I was trying to make * We both agree that price discrimination transfers surplus from consumers as a whole towards the producer * However, it's easy to show that at least in the simple case of perfect 3rd-degree price discrimination, the 'poor' consumer is either indifferent or is made better off when the producer can price discriminate Sketch of a proof: In a 3rd-degree price discriminated market, let P1 and P2 be the reserve prices of 'poor' and 'rich' consumers, respectively. Now let's get rid of price discrimination -- what's the new profit-maximizing price for the producer? It's easy to show that it cannot be less than P1 or more than P2, so the new price P* lies in [P1, P2]. In that case, all the 'poor' consumers that were paying P1 must now pay P* or not transact at all, so they are all now worse off. Note that you have been emphasizing the transfer of wealth from consumer to producer, but classical microeconomics focuses most of its attention towards total surplus, which includes producer profit. This is because you can always find ways to divvy up surplus once it's been created to make things more fair (e.g. by taxing the producer or by distributing equity around), but you can never recover deadweight losses.

AnthonyMouse 10y ago

> Unless you are very rich, price discrimination is generally a monetary benefit to you. You're not accounting for the deadweight loss from the crippled product. Suppose if there were no coupons the product would cost $20 to everyone, vs. when coupons are used it costs $15 with coupon or $30 without. But using the coupon requires an hour worth of labor on the part of the customer. So the rich customer pays the $30 and the poor customer pays the $15 + $10 worth of labor. Compared to the case with no price discrimination, the rich customer pays $10 more and the poor customer pays $5 more. Neither customer is ahead, only the seller is. Likewise with crippled products, if the full version of the product was available for $20 to everyone then the poor customer may get $25 worth of value from it and have a $5 surplus. Making the full version $30 and the crippled version $15 means the poor customer won't buy the full version, but the crippled version may only provide $16 worth of value, so now the poor customer's surplus is down to $1 from $5. You're also assuming price discrimination costs the rich more than the poor. But volume licensing and bulk discounts are a form of price discrimination. In the limit where the seller can engage in perfect price discrimination, the seller captures ~100% of the consumer surplus from all consumers, which is obviously worse for every consumer than any case where the consumer gets to keep any part of the surplus.

smallnamespace 10y ago
Sure, you can always find parameters where one party or another is hurt, because the parameter space is very large. For example, without the excess profits provided by price discrimination, a company may decide a market is simply too small to serve, in which case all surplus is lost. Also, the baseline for comparing a crippled product is not necessarily the same but uncrippled product. If a manufacturer knows crippling is unavailable, they may just develop the reduced feature set entirely, in which case rich consumers are hurt. Microeconomic theory can be subtle, and whether something is good or bad depends very much in the specific case.
- AnthonyMouse 10y ago
  > Also, the baseline for comparing a crippled product is not necessarily the same but uncrippled product. Conversely, the baseline for the lower priced product is not necessarily lower than the existing product. If the full version is currently $50, the profit-maximizing strategy could be to sell a crippled version for $50 and the full version for $500, leading to more profit for the seller but less surplus overall. > Microeconomic theory can be subtle, and whether something is good or bad depends very much in the specific case. That's what I'm saying. Your argument was that price discrimination generally helps the poor. But it only does when the specific method of price discrimination happens to do that entirely by accident -- if it happens it's because the seller set the price of the lower cost version at less than they actually needed to, or didn't cripple it as much as they could have which would have increased sales of the more expensive version. The one thing price discrimination is designed to do is convert consumer surplus into producer surplus. Which in general is not good for the consumer.
  - smallnamespace 10y ago
    I think we're confounding a few different facts here: * Effect of 3rd-degree price discrimination on total surplus can be positive or negative, and that was the point I was trying to make * We both agree that price discrimination transfers surplus from consumers as a whole towards the producer * However, it's easy to show that at least in the simple case of perfect 3rd-degree price discrimination, the 'poor' consumer is either indifferent or is made better off when the producer can price discriminate Sketch of a proof: In a 3rd-degree price discriminated market, let P1 and P2 be the reserve prices of 'poor' and 'rich' consumers, respectively. Now let's get rid of price discrimination -- what's the new profit-maximizing price for the producer? It's easy to show that it cannot be less than P1 or more than P2, so the new price P* lies in [P1, P2]. In that case, all the 'poor' consumers that were paying P1 must now pay P* or not transact at all, so they are all now worse off. Note that you have been emphasizing the transfer of wealth from consumer to producer, but classical microeconomics focuses most of its attention towards total surplus, which includes producer profit. This is because you can always find ways to divvy up surplus once it's been created to make things more fair (e.g. by taxing the producer or by distributing equity around), but you can never recover deadweight losses.