First Degree Price Discrimination Goes to School

Personalized pricing is widely discussed but seldom observed, making studies of its efficacy rare. Yet, first degree price discrimination is common in the pricing of higher education, and I use data on prices and the characteristics of students admitted to a professional graduate program at a public university to estimate a matriculation demand function. I then derive linear pricing functions that maximize revenue for a target number of students. By allowing these functions to depend on progressively richer sets of observables, I explore the effect of personalization of pricing on profit. Tailoring prices to a one‐dimensional measure of student quality would raise revenue by 2.2 per cent above the revenue with uniform pricing. Pricing based on both student quality and state residency raises revenue by 8.4 per cent, and further tailoring based on available observables raises prices 9.0 per cent above the maximum revenue under uniform pricing. Pricing that obeys current statutory tuition limits raises revenue less but still by just over half as much. I also infer the welfare weights that the pricing process implicitly attaches to student characteristics.     

A Note on Third Degree Price Discrimination in Intermediate Good Markets

This note studies third degree price discrimination in intermediate good markets. I show that whether a more efficient downstream firm is charged a higher or lower price than a less efficient firm depends on the shape of the demand function. Different from the case in which final market demand is linear, the usual assumption in the literature, constant elasticity demand, for example, results in a more efficient firm's receiving a discount.     

Price Discrimination with Demarketing

We study how demarketing interacts with pricing decisions to explain why and when it can be employed as the seller's optimal strategy. In our model, a monopolistic seller offers different price‐quality bundles of the product. A consumer's preference is private information. With demarketing, consumers must make a costly effort to purchase and/or utilize the product, whereas with marketing, the seller instead makes the effort so that the consumer's purchasing decision is independent of the cost of effort. Our result suggests that, for small or large effort costs, it is optimal for the seller to engage in marketing. For intermediate effort costs, however, demarketing can be optimal. With demarketing, the seller induces only the consumers with high valuation to make transaction effort. By doing so, the seller can price discriminate more effectively, thus extracting more surplus. We extend our analysis to the case where the seller can offer special deals through exclusive sales channels along with demarketing. Then, demarketing can be optimal even for large costs of effort.     

Input Price Discrimination and Allocation Efficiency

This research examines the effects of input price discrimination on allocation efficiency and social welfare. Instead of assuming constant marginal costs, we allow downstream firms to produce under increasing marginal costs. When downstream firms operate in separate markets, even though total output remains unchanged, consumer surplus and social welfare could be greater under discriminatory pricing than under uniform pricing. Moreover, the social desirability of input price discrimination can still hold true when downstream firms compete either in Cournot or Bertrand fashion.

     

Payment Card Interchange Fees and Price Discrimination

We consider the implications of platform price discrimination in the context of card platforms. Despite the platform's ability to price discriminate, we show that it will set fees for card usage that are too low, resulting in excessive usage of cards. We show this bias remains even if card fees (or rewards) can be conditioned on each type of retailer that the cardholder transacts with. We use our model to consider the European Commission's objection to the rules card platforms have used to sustain differential interchange fees across European countries.     

Self‐Reflection and Articulated Consumer Preferences

Accurate measurement of consumer preferences reduces development costs and leads to successful products. Some product‐development teams use quantitative methods such as conjoint analysis or structured methods such as Casemap. Other product‐development teams rely on unstructured methods such as direct conversations with consumers, focus groups, or qualitative interviews. All methods assume that measured consumer preferences endure and are relevant for consumers' marketplace decisions. This article suggests that if consumers are not first given tasks to encourage preference self‐reflection, unstructured methods may not measure accurate and enduring preferences. This paper provides evidence that consumers learn their preferences as they make realistic decisions. Sufficiently challenging decision tasks encourage preference self‐reflection which, in turn, leads to more accurate and enduring measures. Evidence suggests further that if consumers are asked to articulate preferences before self‐reflection, then that articulation interferes with consumers' abilities to articulate preferences even after they have a chance to self‐reflect. The evidence that self‐reflection enhances accuracy is based on experiments in the automotive and mobile phone markets. Consumers completed three rotated incentive‐aligned preference measurement methods (revealed‐preference measures [as in conjoint analysis], a structured method [Casemap], and an unstructured preference‐articulation method). The stimuli were designed to be managerially relevant and realistic (53 aspects in automobiles, 22 aspects for mobile phones) so that consumers' decisions approximated in vivo decisions. One to three weeks later, consumers were asked which automobiles (or mobile phones) they would consider. Qualitative comments and response times are consistent with the implications of the measures of predictive ability.     

Reverse Price Discrimination with Bayesian Buyers

This paper studies price discrimination under the situation in which buyers' prior valuations are initially observable by a seller but buyers receive further information about a product or service which remains private thereafter. The buyers interpret new information via Bayes' rule. We show that, in this environment, prices are not monotone in buyers' prior valuations. Interestingly, this results in the possibility that a seller intentionally offers a higher price to a low valuation buyer rather than a high valuation buyer (Reverse Price Discrimination). We derive this result in both monopoly and duopoly markets.     

Spatial Price Discrimination with Heterogeneous Firms

In this paper we aim to explain intuitively heterogeneous firms’ optimal location decisions in a simple spatial market. To do so, we present and solve a four‐stage game of entry, location, pricing and consumption in a spatial price discrimination framework with arbitrarily many heterogeneous firms. We provide a unique equilibrium outcome without imposing restrictions on the distribution of marginal costs across firms.     

Third-Degree Price Discrimination With Interdependent Demands

This paper analyzes the price, output, and welfare effects of third-degree price discrimination for a monopolist who sells in two interdependent markets. The case where the two goods sold by the monopolist are complements is analyzed as well as the more typical case where the two goods are substitutes. The economic effects of price discrimination are shown to depend on the type and strength of demand interdependence, the curvature of the demands and the slope of marginal cost. The circumstances under which price discrimination causes both market prices to either rise or fall are also analyzed.     

Platform Price Parity Clauses and Consumer Obfuscation*

Several antitrust authorities have investigated platform price parity clauses around the world. I analyze the impact of these clauses when platforms design a search environment for sellers and buyers to interact. In a model where platforms choose the unit search cost faced by consumers, I show when platforms can profitably obfuscate consumers through high search costs. Then, I show that price parity clauses, when exogenously given, can increase or reduce obfuscation, prices, and consumer surplus. Finally, when price parity clauses are endogenous, they are only observed in equilibrium if they hurt consumers.     

Price Dispersion and Price Discrimination: Empirical Evidence from a Spot Market for Water

This note shows the existence of price dispersion and pricediscrimination in a spot market for water.Several behaviors contributing to this dispersion/discrimination arefound for both the seller and buyer in this relatively competitive market,and examples are given of each. Using some previous theoretical work,the common thread linking the differing behaviors is shown to bediffering levels of information and search costs.     

Intertemporal Price Discrimination in Frictionless Durable Goods Monopolies

I show that small differences in quality and production costs between durables and non-durables in a product line allow a durable goods monopolist to intertemporally price discriminate even with continuous trading. In particular, a monopolist would want to both sell and rent out a durable to achieve price discrimination. This incentive to price discriminate simultaneously creates inefficient delay in the sale of the durable good, a finite trading period and long run efficiency of the market. The Coase conjecture fails because the non-durable good acts as an outside option that guarantees a minimum profit in the market for durables.     

Competition and Price Discrimination: Evidence from the Parking Garage Industry

We study the relationship between competition and price discrimination through an empirical examination of hourly price schedules in the parking garage industry. We find that the degree of price schedule curvature decreases with competition, implying a greater proportionate drop in low‐end prices than in high‐end prices when competition intensifies. Our findings suggest that competition constrains a firm's capacity to exercise price discrimination, confirming the classic textbook theory. We also offer possible explanations for our findings, including a search cost explanation, for which we find some support in the data.     

A Spatiotemporal Solution for the Simultaneous Sale Price and Time‐on‐the‐Market Problem

There exists an important methodological challenge when dealing with sale price and time‐on‐the‐market variables because both variables are simultaneously determined and related to the motivation of the sellers and buyers. Exploiting the fact that transactions occur over space and time, we propose a two‐stage approach based on instrumental variables (IV) built from information collected from previous transactions. The unidirectional temporal property and the fact that other transactions are exogenous from the perspective of a single buyer or seller are exploited to evaluate the effect of the sale price on time‐on‐the‐market, and the effect of time‐on‐the‐market on the sale price. Based on 29,471 transactions occurring in the suburban neighborhood of Montréal (1992‐2000), the results suggest that, everything else being equal, houses staying longer on the market provide negative information to the market, which results in a lower final sale price, while the final sale price is negatively related to time‐on‐the‐market, indicating that houses of better quality (better amenities) stay less time on the market.     

Quantifying the Effects of Price Discrimination Under Imperfect Competition*

This article analyzes the effects of broadband carriers switching from price discrimination to uniform pricing. Broadband carriers often use third-degree price discrimination. In Colombia, broadband carriers rely on government-issued socio-economic information to segment markets. I use demand and marginal cost estimates to quantify the effects of switching from price discrimination to uniform pricing in an environment of high income disparity. The results provide direct evidence of large consumer surplus transfers from poorer to wealthier households. Poorer households respond by subscribing to slower Internet plans, which may undermine prior efforts to increase download speeds in this demographic.     

Third-Degree Price Discrimination in Oligopoly when Markets are Covered*

We analyze oligopolistic third-degree price discrimination relative to uniform pricing when markets are covered. Pricing equilibria are critically determined by supply-side features such as the number of firms and their marginal cost differences. It follows that each firm's Lerner index under uniform pricing is equal to the weighted harmonic mean of the firm's relative margins under discriminatory pricing. Uniform pricing then lowers average prices and raises consumer surplus. We can calculate the gain in consumer surplus and loss in firms' profits from uniform pricing based only on the market data of the discriminatory equilibrium (i.e., prices and quantities).     

Contracts Versus Price Discrimination: Evidence From the SONJ Case

A feature of the Standard Oil antitrust case is that much of the case revolves around Standard’s selling lubricating oils to railroads. This paper explores the government’s theory that Standard’s rebates to the Pennsylvania RR represented price discrimination. Standard’s defense was an assertion that the lubrication contracts were relational contracts involving a service and that the behavior which the government labeled discriminatory represented persistent inefficient behavior on the part of the Pennsylvania system. Data from the trial and other sources are used to attempt to determine if the evidence presented at trial favors price discrimination or Standard’s inefficiency defense. This is done using data envelopment analysis to determine the inefficiency the Pennsylvania RR. However, in the end, most aspects of the case must be considered “not proven.”     

Consumer Response to Product Form in Technology‐Based Industries

Product design is a key driver of competitive advantage and new product success. Relative to its importance, product design remains an underresearched area. The authors address this issue by examining the moderating effects of consumer innovativeness and design acumen on consumer response to product form—i.e., the product's visual appearance. Using subjects from the United Kingdom, these effects were tested with a technology‐based product that is expected to be introduced to market in the near future. A technological innovation was chosen because such products are often characterized by an accelerating pace of innovation and shortening life cycles. In such contexts, the product's visual appearance is often critical to success because it drives inferences about the technical capabilities and functional novelty. Our findings indicate that for more innovative consumers, an innovative product form can further enhance perceived value, product liking, and purchase intention. Furthermore, for consumers who possess more design acumen, an innovative product form can increase perceived value and product liking. An innovative product form was not found to enhance purchase intention for consumers with higher levels of design acumen. A primary implication of the study is to consider target market characteristics such as consumer innovativeness and design acumen when selecting a product form strategy. Additional implications include involving consumer innovators in the development and evaluation of product forms and involving consumers with greater design acumen early in the product's introduction so that they may influence other buyers.