3 ms·

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 pro

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
    > 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. Except that P1 and P2 cannot be different unless what you get for them is different, or else the rich customers would also choose P1. So the poor who pay P1 pay less money but in exchange for an inferior product, which is not guaranteed to yield a net positive outcome.
    - smallnamespace 10y ago
      You're right, but the irony here is that perfect price discrimination (where the producer can costlessly and effortlessly force rich customers to pay P2) is the best possible situation for the poor customers. This implies that relatively cheap ways of borking a product (make one chip, disable some features) can be better for low-end consumers than more expensive methods (such as actually running two production lines), even though it seems less fair.
      - AnthonyMouse 10y ago
        > You're right, but the irony here is that perfect price discrimination (where the producer can costlessly and effortlessly force rich customers to pay P2) is the best possible situation for the poor customers. The poor consumer is agnostic to how much of the surplus is captured by the rich consumer vs. the producer. It's possible for that transaction to affect the poor consumer, e.g. if the producer gets it and spends it on R&D or the rich consumer gets it and spends it on some other public good, either of which could benefit the poor consumer. But either of them could also use it for something adverse to the poor consumer's interests, or just put the money in their pocket and walk away. And just because the producer is extracting as much as possible from the rich consumer doesn't mean it isn't also extracting as much as possible from the poor consumer -- doing that is the definition of perfect price discrimination.
      - deleted 10y ago
        [deleted]

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
  > 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. Except that P1 and P2 cannot be different unless what you get for them is different, or else the rich customers would also choose P1. So the poor who pay P1 pay less money but in exchange for an inferior product, which is not guaranteed to yield a net positive outcome.
  - smallnamespace 10y ago
    You're right, but the irony here is that perfect price discrimination (where the producer can costlessly and effortlessly force rich customers to pay P2) is the best possible situation for the poor customers. This implies that relatively cheap ways of borking a product (make one chip, disable some features) can be better for low-end consumers than more expensive methods (such as actually running two production lines), even though it seems less fair.
    - AnthonyMouse 10y ago
      > You're right, but the irony here is that perfect price discrimination (where the producer can costlessly and effortlessly force rich customers to pay P2) is the best possible situation for the poor customers. The poor consumer is agnostic to how much of the surplus is captured by the rich consumer vs. the producer. It's possible for that transaction to affect the poor consumer, e.g. if the producer gets it and spends it on R&D or the rich consumer gets it and spends it on some other public good, either of which could benefit the poor consumer. But either of them could also use it for something adverse to the poor consumer's interests, or just put the money in their pocket and walk away. And just because the producer is extracting as much as possible from the rich consumer doesn't mean it isn't also extracting as much as possible from the poor consumer -- doing that is the definition of perfect price discrimination.
    - deleted 10y ago
      [deleted]