Tyler Cowen (reference below, video on right) defines price discrimination as selling the same product at different prices.
Cowen sets out two principles of price discrimination:
- If demand curves are different, it is more profitable to set different prices in different markets – the price should be higher in the market with then more inelastic demand
- Arbitrage makes it more difficult to price discriminate. Cowen notes that smuggling is an illegal form of arbitrage and that in order to prevent illegal arbitrage in ethanol the government requires that producers of ethanol add poison to make it unsuitable for use in alcoholic beverages.
Cowen works through a number of common examples of price discrimination, and the strategies that the providers uses to distinguish among those classes of buyers who are likely to have different elasticities of demand.
The social welfare of price discrimination
In a second video (right) Cowen examines the social welfare of price discrimination and offers the following rules of thumb:
- If price discrimination increases output, it is likely to be beneficial
- If price discrimination does not increase output, social welfare is reduced
He illustrates this with a number of examples, including that of university net tuition, which allows close to Perfect Price Discrimination.
- True or False? A business that price discriminates will generally charge some customers more than marginal cost, and it will generally charge other customers less than marginal cost.
- When arbitrage is easy in a market of would-be price discriminators, who is more likely to get priced out of the market: those with elastic demand or those with inelastic demand?
Atlas topic, subject, and course
Tyler Cowen, Introduction to Price Discrimination (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-discrimination-examples-airlines-arbitrage, accessed 8 May 2016.
Tyler Cowen, The Social Welfare of Price Discrimination (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-discrimination-social-welfare, accessed 8 May 2016.
Page created by: Ian Clark, last modified 8 May 2016.
Image: Tyler Cowen, minute 0.14 of Introduction to Price Discrimination (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-discrimination-examples-airlines-arbitrage, accessed 8 May 2016.