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Comment by zwaps | Hacker News Reader

He is assuming you set individual prices per customer or basically that each customer has his or her own demand elasticity.

What you are thinking of is a market demand, which is a useful approximation when the market is large and anonymous. Instead, he gets at the idea that each customer has an individual reservation price, upon which he will still buy your service or good. If you manage to ask exactly this price, you can extract the maximum profit from each customer.

Edit: I could do a write-up of the details. I don't have a blog or something like that tho.

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Isn't it common for people to have a gut reaction that price discrimination is wrong or unfair? People are generally unhappy, for instance, if they find out another person paid 1/3 the price for an airline seat. If I find out that I'm being charged multiples of what another customer is, I'm going to have an intense desire to punish and/or boycott that vendor. Failing that, I'm going to look for a way to be anonymous, such as paying cash to a middleman.

Besides the risk of spreading ill-will, it also seems to me that price discrimination can be risky because there is no way to firewall it against a correlation with some legally protected class.

Edit: Also something that occurred to me just now - price discrimination seems to me to lead to a reductio ad absurdam - suppose that it was absolutely perfect and captured all the consumer surplus; then doesn't that destroy the rationale for the transaction in the first place and make it purely exploitative? If it is not desirable to get to that place, then maybe splitting the surplus at least evenly between producer and consumer is the way free markets should work?

Whether people are upset by price discrimination or not depends on how it is perceived. For example, no one seems upset at discounts for seniors, students, or military, despite this being a form of price discrimination.

To your second point, customers often do try to fool vendors into thinking they are in the consumer group that is offered lower prices. As an example, non-students use their old student IDs all the time.

Re: correlation with a legally protected class, this can be solved with marketing. Price discrimination based directly on gender would be illegal. But if you put one product in a blue box in the "men's" section and one in a pink box in the "women's" section, consumers will self-select. This is very common with razors, soap, and other such products.

Lastly regarding your edit, if a consumer pays his or her reservation price they are left with zero surplus. But that doesn't mean the transaction was pointless. The consumer gets the consumption value of the product. I'm willing to pay at most $2 for a bottle of Coke. That's my reservation price. If I'm offered a Coke for $2, and no vendor offering a lower price is available, I will pay that price and enjoy the Coke.

In order to make a trade, what you are getting must be more valuable to you than what you pay - isn't that axiomatic? If you are willing to trade $2 for a Coke, then the Coke must be worth more to you, and therefore it follows $2 is not your maximum price. Your maximum price is at least $2 + epsilon.

Since it is impossible to make a completely one-sided trade, one may ask how one-sided is acceptable, and if perhaps the optimal situation is where it is balanced in favor of the consumer...

Yes and no.

1. If you sell a good where you can not sell different qualities at all, customers get angry. This happened on the internet for example, when there is geo-targeting and other things.

2. In most cases, customers do not notice non-linear pricing. Bonuses, packages, bundles, feature choices, customize, build-your-own, editions, - all just names for nonlinear pricing schemes.

3. You do not actually get to extract all surplus. You have to pay an information rent to the consumer, which comes from not actually knowing his reservation price. If you set only one price, then it depends on many fundamentals who gets how much. With nonlinear pricing, you can approximate the actual demand better by making consumers choose their own poison. But it is still a "second best".

4. "Perfect" markets in any case guarantee only efficiency in terms of allocation. Fairness and distribution are another matter entirely. A market in which I, the monopolist, use a two-part price to extract 100% of the consumer surplus is in fact welfare maximizing. All surplus is there, and the company is owned by someone. Classical free market econ theory literally does not concern itself with how the ownership is distributed. That's why we need taxes and redistribution.

Edit: to be fair to econ, the classical should really be underlined thrice

I don't understand how a trade with no consumer surplus benefits a consumer. If it benefits the consumer, then they would be willing to pay some of the value of the benefit and hence their surplus value is not zero, which is a contradiction. If it does not benefit the consumer, they will not make the trade.

You get some surplus, because it is not possible to write a non-linear pricing scheme that extracts everything from all customers. That is basically, depending on your willingness to pay, you may get a pretty good deal.

The underlying reason for this is that the producer basically has to pay you a bit of surplus to reveal your willingness to pay.

So, there is consumer surplus.

Money paid for information seems like it would be part of the transaction costs.

Not sure... transactions costs could be defined as costs that need to be payed by either side to complete the transaction.

In this case, we are talking about a shift of surplus towards the consumer. If you have a high willingness to pay, it is beneficial for you to signal that your willingness to pay is actually low. If there was only one price, this would incentivize the firm to give you (and everyone else) a lower price. Instead, to get you to pay more, the contract proposed to you must be relatively more beneficial to you than just choosing a simpler service plan or a lower value good and bagging the surplus for later. This "relative benefit" is the information rent you will earn.

>Isn't it common for people to have a gut reaction that price discrimination is wrong or unfair?

I have been thinking that why is it like this.

My current hypothesis is that it demonstrates hostility. Someone who actively tries to extract the last penny out of you does not work for your interests.

I thought about helping you set a github/gitlab pages and writing the code in case you didn't know how, but you could set up a wordpress site using the free tier, which would end up being easier in the long run.

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