Price Discrimination

Abstract

Price discrimination is as common in the market place as it is rare in economics textbooks. It appears under many disguises and explains a large number of business practices which are difficult to rationalize otherwise. Its ubiquity results from the fact that there is price discrimination whenever two varieties of a commodity are sold (by the same seller) to two buyers at different net prices, the net price being the price (charged to the buyer) corrected for the cost associated with what differentiates one variety from another. Transportation and storage costs are examples that readily come to mind. Costs of product design and of services offered by distributors are less obvious examples (as is the cost associated with demand uncertainty). Given such costs, there is no price discrimination when these costs are fully reflected in the prices. Price discrimination typically implies that part of these costs is ‘absorbed’: delivered or future prices increase by less than the cost of carrying the good over space or time; models of better quality are sold at a better price–quality ratio; better service is not fully charged. Alternatively, a product or service produced at the same cost is offered at a price that decreases as the quantity bought increases.