Comment by noleary | Hacker News Reader

Comment by noleary | Hacker News Reader

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I can identify basically three criticisms of my argument in your post.

(1) That I assume companies never have market power.

(2) That I suppose "market power" implies monopoly

(3) That my example was cherry-picked.

1. I did no such thing. I explicitly acknowledged market power several times.

2. Again, not correct. I explicitly mentioned oligopoly (assuming that 'imperfect competition' wouldn't land).

3. Of course it was. I acknowledged as much! I quite literally said the example doesn't generalize. The example serves to illustrate a 'there exists' claim. I felt a concrete example would be easier to follow than some kind of generalized model.

Your own comment claims that "actually competitive" markets can't have price discrimination. Sure, we can suppose the law of one price applies to perfectly competitive markets, but there's no sense in which a perfectly competitive markets "actually" exist at all! The obvious observation we can make is that such competitive dynamics imply that no one would make any profit!

My appeal to the airline industry as an example was not an accident. There's a very well-established literature on the relationship between competition and discrimination in the airline business. It's *certainly* not a settled question that discrimination decreases as competition intensifies. I included a classic from Stavins below that finds precisely the opposite of your claim.

My argument here isn't perfect. I can think of many flaws, many reasonable objections. But I don't think you're using any of them here.

---- Referenced paper from Stavins: https://www.bostonfed.org/publications/research-department-w...

> I did no such thing. I explicitly acknowledged market power several times.

Your premise is that if market power exists then market power is the problem rather than price discrimination. The issue is that price discrimination isn't possible without market power. Its presence implies that the company both is capable of and is overcharging the people coerced into the higher price tier.

> That I suppose "market power" implies monopoly

This is not an argument you make explicitly, but it's something readers commonly assume and my point is to highlight that companies successfully engaged in price discrimination can and do have market power even if they don't have a full monopoly.

> Of course it was. I acknowledged as much! I quite literally said the example doesn't generalize. The example serves to illustrate a 'there exists' claim. I felt a concrete example would be easier to follow than some kind of generalized model.

And I'm providing the 'there exists' claim for the alternative, to demonstrate that price discrimination can be (and often is) detrimental to customers without providing any countervailing benefit to any of them.

> The obvious observation we can make is that such competitive dynamics imply that no one would make any profit!

Profit doesn't really work that way. For example, if a company takes investment and uses it to buy a building to operate out of, the money not paid as rent to a landlord is added to the investor's profit, but if the company takes less investment and instead pays rent, the same money is counted as operating costs. Likewise, if you develop software needed before you can start operating and you take investment to pay for it, the net returns are called profit, but if you take a bank loan to pay for it then the interest on the loan is counted as operating costs again. The interest rate you'd pay the bank would even be proportional to the risk you'd fail, unless you post collateral, for which you'd need an investor.

So a company that didn't take any investment and operated entirely by renting everything, taking loans and using off-the-shelf software instead of developing anything in-house wouldn't be expected to make any profits in a perfectly competitive market -- and there would also be no investors to pay any profits to. Profit in companies that take investment would still be present and equal the cost (time value) of the assets bought with the money, but in a perfectly competitive market this would exactly equal the risk-adjusted market rate of return in the overall capital markets.

The distinction in uncompetitive markets is that profit exceeds that amount. (Or at least can; a market can be uncompetitive and then the companies become inefficient from lack of competitive pressure and waste the money they extract from customers instead of returning it to investors.)

It's true that "perfectly" competitive markets don't exist in the same sense that perfect anything doesn't exist, but this is splitting hairs. A gold coin might be .999 gold and you can say that it isn't perfect but you can still distinguish it from a wooden nickel.

Its presence implies that the company both is capable of and is overcharging the people coerced into the higher price tier.

"Overcharging" is a concept without a precise meaning. The SSO-capable version has a feature that cost money to build and support. That it is sold at a higher price (often alongside other enterprise features that cost money to build and support) is not proof that they are overcharging.

Any company that is tying to recoup the costs of building those features will charge the customers that use those features. The existence of a price differential between the 2 editions does not tell you whether they are overcharging.

> The SSO-capable version has a feature that cost money to build and support. That it is sold at a higher price (often alongside other enterprise features that cost money to build and support) is not proof that they are overcharging.

"Price discrimination" is charging a higher price to one set of customers than another. The premise is that they're really getting the same thing but one of them has to pay more in exchange for either nothing or for something whose incremental underlying cost is far less than the incremental price increase, because the company devised a way to artificially segment the market.

If your argument is that the extra feature would actually cost that much even in a highly competitive market because it costs that much more to provide it, what you're really arguing is that they're not engaged in price discrimination.

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