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Suppose the seller produces a good at a cost of $10, buyer A values the good at $13, and buyer B values the good at $16. That means that selling to both can ad

Suppose the seller produces a good at a cost of $10, buyer A values the good at $13, and buyer B values the good at $16. That means that selling to both can add $9 worth of value. Who should capture that new $9 of value? How should it be divided? If the price is $10 uniformly, then the seller gets no value from selling, A gets $3 of value, and B gets $6 of value. If the price is $12 uniformly, the seller gets $4 of value, A gets $1 of value and B gets $4 of value. If the price is $14 uniformly, A won't buy, the seller gets $4 of value, and B gets $2 of value. If the seller can divine the true value to A and B and set the price to $12.99 for A and $15.99 for B, then the seller can capture essentially ALL of the value available in the exchange. It definitely seems there are many cases where price discrimination creates more value. But who should capture that value? Sellers? Buyers? Shared somehow? How?

greenleafjacob 12y ago
You are using the term 'value' in a loaded sense. If you use the proper term "consumer surplus," your argument becomes very different. "Who should capture that consumer surplus? Sellers? Buyers? Shared somehow? How?" In my own mind, it's kind of irrelevant who gets it, because I don't recognize that buyer B has a right to pay only $10 or $13 or any other amount. I think it follows that if you allow sellers to discriminate among any classes of buyers, then there is no way to draw the line at how permissibly narrow those classes can be drawn.
- thaumasiotes 12y ago
  > You are using the term 'value' in a loaded sense. If you use the proper term "consumer surplus," And you think he's making loaded arguments? The value he's talking about is simply the sum of consumer surplus and producer surplus. They're both legitimate; a sale price of $10 allots $9 in gains from trade (or "value") entirely to consumer surplus, and perfect discriminatory pricing allots the same $9 of value to producer surplus, but the value is still produced despite the consumer surplus being $0. Compare the $14-uniform-price scenario, where the consumer surplus is $2, the producer surplus is $4, and the gains from trade are $6 when they could be $9. That's $3 of lost value, and I don't see why you think that's a biased or controversial way of putting it.
- ddlatham 12y ago
  Sorry if I've used the wrong term. I'm picking them from intuition, but I haven't studied the field. If the proper term is surplus, just use that instead. The question of how to divide that surplus is very interesting and especially relevant to judgement of price discrimination.
lorddoig 12y ago
They both do! Value != money. You don't need to subtract a penny to make it so. The value of the product for A must be greater than $13 or A won't buy it. The value of $13 cash must be greater than the value of not selling the product to the consumer or the seller won't sell. Everybody has more value than what they started with! The only way this can possibly be true for all cases is via per-consumer price discrimination, anything less will always leave someone out.
- michaelt 12y ago
  The value of the product for A must be greater than $13 or A won't buy it. If there's a price where I will buy (value to me > price), and a price a tiny bit higher where I won't buy (value to me < price), there must be a point in between, where I am indifferent to buying (value to me == price) For example, if I'm a trader and I know I can sell a widget on for $13 (after all costs are taken into account) and a supplier offers it to me for $13 I don't lose any money by taking the deal, but I don't make any money either. So I don't care if the transaction happens or not.
  - lorddoig 12y ago
    I'm of the opinion indifference is a temporary state of mind that, when encountered, forces one to decide one way or another. If it wasn't, the binary question "would you like to buy this" is unanswerable, as if in some perpetual superposition of yes/no. This, evidently, doesn't ever happen in the real world: in reality, you'd take into account whether you have time to buy it, whether you have the will to carry it around, etc., before arriving at a definite answer that implies (value - price) has collapsed to some non-zero value.
logfromblammo 12y ago
The total possible benefit to trade is fixed, at the area between the supply and demand curves wherever demand exceeds supply. This area is maximized, giving the greatest possible benefit to the economy, by setting the price where the curves intersect. Then the consumers take the area above that price, and the suppliers get the value below. These are not necessarily equal areas; they depend on the econometrics shaping the curves. In your example, the market-clearing price is $13. The consumer benefit is $3 to a and $0 to B, and the supplier benefit is $6. But no single party knows in advance what the market-clearing price is. The easiest way to find it is for all 3 to engage in a reverse Dutch auction. A writes down "buy 1 @ $16". B writes down "buy 1 @ $13". C writes down "sell 10 @ $10". The auctioneer looks at all the slips and announces that the price is $13 and that C is the first (and only) supplier. Everyone leaves happy.
- ddlatham 12y ago
  This analysis only works when all buyers get the same price. There are cases where more value is obtained by having each buyer get a different price.
  - logfromblammo 12y ago
    Describe one. Trade only occurs in regions above the supply curve and below the demand curve. There is no way to slice that area up such that the pieces have greater total area than the whole. Unless you get into odd situations like luxury goods or Geffen goods, the maximum benefit is always going to be obtained when the last good is sold at the market-clearing price. And the only way to really guarantee that--since consumers don't line up to buy in order of their positions on the demand curve--is to sell every good at that price. There are many ways to divvy up that area such that suppliers get more or less than they would at one fixed price, but those ways do not make the trade worth more in absolute terms. In order for the suppliers to get more, the consumers must get less. Price discrimination is absolutely a zero-sum game that benefits the suppliers exactly as much as it hurts the consumers. You are likely discounting the value of the consumer benefit as money not seen in the transaction. A dollar that a consumer would have spent on something, but didn't need to, can still be spent somewhere else.

greenleafjacob 12y ago

You are using the term 'value' in a loaded sense. If you use the proper term "consumer surplus," your argument becomes very different. "Who should capture that consumer surplus? Sellers? Buyers? Shared somehow? How?" In my own mind, it's kind of irrelevant who gets it, because I don't recognize that buyer B has a right to pay only $10 or $13 or any other amount. I think it follows that if you allow sellers to discriminate among any classes of buyers, then there is no way to draw the line at how permissibly narrow those classes can be drawn.

thaumasiotes 12y ago
> You are using the term 'value' in a loaded sense. If you use the proper term "consumer surplus," And you think he's making loaded arguments? The value he's talking about is simply the sum of consumer surplus and producer surplus. They're both legitimate; a sale price of $10 allots $9 in gains from trade (or "value") entirely to consumer surplus, and perfect discriminatory pricing allots the same $9 of value to producer surplus, but the value is still produced despite the consumer surplus being $0. Compare the $14-uniform-price scenario, where the consumer surplus is $2, the producer surplus is $4, and the gains from trade are $6 when they could be $9. That's $3 of lost value, and I don't see why you think that's a biased or controversial way of putting it.
ddlatham 12y ago
Sorry if I've used the wrong term. I'm picking them from intuition, but I haven't studied the field. If the proper term is surplus, just use that instead. The question of how to divide that surplus is very interesting and especially relevant to judgement of price discrimination.

lorddoig 12y ago

They both do! Value != money. You don't need to subtract a penny to make it so. The value of the product for A must be greater than $13 or A won't buy it. The value of $13 cash must be greater than the value of not selling the product to the consumer or the seller won't sell. Everybody has more value than what they started with! The only way this can possibly be true for all cases is via per-consumer price discrimination, anything less will always leave someone out.

michaelt 12y ago
The value of the product for A must be greater than $13 or A won't buy it. If there's a price where I will buy (value to me > price), and a price a tiny bit higher where I won't buy (value to me < price), there must be a point in between, where I am indifferent to buying (value to me == price) For example, if I'm a trader and I know I can sell a widget on for $13 (after all costs are taken into account) and a supplier offers it to me for $13 I don't lose any money by taking the deal, but I don't make any money either. So I don't care if the transaction happens or not.
- lorddoig 12y ago
  I'm of the opinion indifference is a temporary state of mind that, when encountered, forces one to decide one way or another. If it wasn't, the binary question "would you like to buy this" is unanswerable, as if in some perpetual superposition of yes/no. This, evidently, doesn't ever happen in the real world: in reality, you'd take into account whether you have time to buy it, whether you have the will to carry it around, etc., before arriving at a definite answer that implies (value - price) has collapsed to some non-zero value.

logfromblammo 12y ago

The total possible benefit to trade is fixed, at the area between the supply and demand curves wherever demand exceeds supply. This area is maximized, giving the greatest possible benefit to the economy, by setting the price where the curves intersect. Then the consumers take the area above that price, and the suppliers get the value below. These are not necessarily equal areas; they depend on the econometrics shaping the curves. In your example, the market-clearing price is $13. The consumer benefit is $3 to a and $0 to B, and the supplier benefit is $6. But no single party knows in advance what the market-clearing price is. The easiest way to find it is for all 3 to engage in a reverse Dutch auction. A writes down "buy 1 @ $16". B writes down "buy 1 @ $13". C writes down "sell 10 @ $10". The auctioneer looks at all the slips and announces that the price is $13 and that C is the first (and only) supplier. Everyone leaves happy.

ddlatham 12y ago
This analysis only works when all buyers get the same price. There are cases where more value is obtained by having each buyer get a different price.
- logfromblammo 12y ago
  Describe one. Trade only occurs in regions above the supply curve and below the demand curve. There is no way to slice that area up such that the pieces have greater total area than the whole. Unless you get into odd situations like luxury goods or Geffen goods, the maximum benefit is always going to be obtained when the last good is sold at the market-clearing price. And the only way to really guarantee that--since consumers don't line up to buy in order of their positions on the demand curve--is to sell every good at that price. There are many ways to divvy up that area such that suppliers get more or less than they would at one fixed price, but those ways do not make the trade worth more in absolute terms. In order for the suppliers to get more, the consumers must get less. Price discrimination is absolutely a zero-sum game that benefits the suppliers exactly as much as it hurts the consumers. You are likely discounting the value of the consumer benefit as money not seen in the transaction. A dollar that a consumer would have spent on something, but didn't need to, can still be spent somewhere else.