Comment by baddox | Hacker News Reader

Comment by baddox | Hacker News Reader

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I've always been a little unsure of the usage of "price discrimination." The basic economics glossary definition generally refers to price discrimination between identical or nearly-identical products. Yet I hear it used for things that have obvious significant functional differences, like the storage tiers of the iPhone. Surely many people are buying iPhones with upgraded storage not simply because they are willing to pay more, but because they really do value the increased storage. So is that called price discrimination simply because the marginal cost increase to Apple is probably very low (much lower than what they charge for the storage increase)? Is price discrimination just a continuum that is not very well-specified?

A much more textbook example would be the rumored practice of airlines' websites charging higher prices to people using more expensive computers. (I don't know if those stories were true, but that would certainly be an example of selling identical products to people at different prices, based on their willingness to pay.) Another example would be digital goods like movies and video games being sold at vastly different prices in different countries (hence DRM and region-locking).

Think about it the other way around: Apple could easily afford to put the largest amount of storage they offer in all their phones. From their perspective, it wouldn't be much of a cost difference in the BOM.

But, if they only had the one phone model, how would they decide what to charge for it?

If they charge a lower price, everyone buys the phone, but they're leaving money on the table because they know that some people would have paid more.

If they charge a higher price, some people don't buy the phone, and again, they leave money on the table, because their margin is large enough that they still could have made a reasonable profit off of these people selling them the same phone.

Price discrimination—a.k.a price discovery—is a way of taking one product, and selling it for two (or more) separate prices, by having people self-select into your lower or higher price "tiers" based on some feature that costs you essentially nothing—a feature which you probably could offer everybody, even for the base price—but which you intentionally remove from lower pricing tiers, so that only the people who value "a low price" more than that feature will select into that tier.

So, for Apple, price discrimination is them ordering NAND of smaller sizes—even though this isn't really saving them money, because it's bloating their manufacturing logistics matrix—just in order to make the experience of using their entry-level phone models worse, in such a way that they can specifically target price-sensitive customers with those worse phones. Then they can crank up the price for everyone else, because now they don't have to worry about scaring the price-sensitive away: they've already made a low-tier crippled offering to serve them.

Well, yeah, but there has to be a difference between price discrimination and simply charging more than the marginal cost. Of course anyone who would buy a product at above marginal cost would also buy it at the lower marginal cost (ignoring Veblen goods for the moment).

The other comment makes a lot of sense, which is to look at the difference in marginal cost of two product variants compared to the difference in market cost.

The economically most efficient pricing model is to install a brain scanner onto every single potential purchaser and then price the item at a penny below their maximum price or the marginal cost, whichever is greater.

Since this is impossible and consumers would revolt, the next best thing is to get consumers to self sort into buckets based on willingness to pay. This process is necessarily going to be imperfect and the tactics can vary but what unifies it is that the goal of designing your product offering is to elicit the revealed preference of the consumer with the goal of increasing profit.

Did Apple choose to offer different storage tiers to provide benefit to the customer or increase margins? Probably a little bit of both.

Dont worry, when we get remote brain scan technology, advertisers will attempt exactly what you are saying. This is a technology that may actually be possible, heck, it could be possible just by life monitoring at the scale FB and Google do these days.

I understand the fear of that, but isn’t it much simpler technologically to provide pricing information to consumers? If I’m offered a product for $100 and I check some website that shows the average price is $80, I doubt I would pay the $100.

> and I check some website that shows the average price is $80, I doubt I would pay the $100.

This is itself an indicator of your consumer profile. Many retailers that consider such consumers part of their target demographic handle it by listing the product at the higher price, but being liberal with discounts.

Those that aren't price conscious buy it at the listed price, and those that are price conscious shoppers will easily land upon a decent discount code. They even cycle through the promos in such a pattern that they hit most of the price conscious consumers with mediocre deals but still have reliably consistent fire-sale style discounts to draw in the super price sensitive.

It's such a tried and true strategy that even RetailMeNot, a site that's popular for price conscious shoppers, is actually owned by the advertising company Valassis (same company that sends out those weekly bundles of junk mail containing coupons and stuff, which most US readers should be familiar with receiving).

The greater the degree that the ratio of marginal cost to marginal revenue for the upgrade differs from the ratio of baseline cost to baseline revenue, the more you can call it price discrimination in a loose sense.

This would be typified by upgraded goods having higher margins than baseline goods.

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