Now that we’ve learned a little about price discrimination, we can begin to think about whether or not price discrimination is bad for society. How does price
Now that we’ve learned a little about price discrimination, we can begin to think about whether or not price discrimination is bad for society. How does price discrimination affect output, and what is this effect on social welfare? If price discrimination increases output, it is likely beneficial for society. If output isn’t increased, social welfare is reduced. What are some examples of perfect price discrimination? Universities practice perfect price discrimination all the time. Students pay different amounts for their education based on many different factors surrounding each student’s ability to pay. This practice increases profits and also increases the number of students able to attend college. For this reason, price discrimination by universities likely increases social welfare.
Contributed Content (0)
Ask a Question
As the world is moving towards a point where all informations are getting readily available, can there be a time when perfect price discrimination can happen in other industries such as Hotel booking, airline/train ticket purchase, room booking in hospital or in fact in all types of purchase?
I believe you are right about the industries you mention. However, technology sometimes evolves in both directions. People might become able to find ways of hiding information about their transactions and purchase histories (David Friedman in his book Future Imperfect speaks about how public key encryption might help with that). It's interesting to observe how fixed cost industries are able to price discriminate, and take care of low income groups but also make everyone better off, including the rich. This is one of the ways the market mechanism takes care of the poor, without taxing the rich for it.
I could not understand the statement " If the students wouldn't buy the software at all at the higher price, well then the price discrimination is a net benefit to pretty much everyone.". Does it have to be "would buy" instead of "wouldn't buy" ?
The idea is that price discrimination is a benefit to pretty much everyone, including the University, low income students and high income students. This is because the University has fixed costs. Once the high fixed costs are paid, the University sells its products to high income students who are willing to pay more, and, since the marginal costs are low, the University is also selling the product to low income students. (Marginal costs are the additional costs, or costs of offering the service to low income students who can come and join the class at low extra expense for the University.) If the University was not allowed to price discriminate, in other words, if it was forced to provide the service only at one price for all customers, given that its fixed costs are high, the University would only be able to offer the service at the high price. Which means, only to high income students. Low students would not buy the software at all. The University would not make extra cash from low income students, and so it would have less for developing new software and other such Research and Development products. And because there would be less high quality software, high income students would be worse off too.