Some economists see price discrimination everywhere. Others see it nowhere. Key point of contention: How do you know that alleged “price discrimination” does not in fact reflect cost differences? First-class airplane seats really are bigger, after all.
Logically speaking, though, mindfulness of cost differences can make you see more price discrimination rather than less. Why? Because businesses often charge the same price for manifestly different products – and it’s hard to imagine that the input costs of all so equi-priced products are identical. Some restaurants charge equal prices for chicken, beef, and pork dishes – or equal prices for fries, cole slaw, and apple slices – even though the prices of the ingredients and prep time vary notably. Looks like price discrimination to me, though admittedly they could vary the portion size to make total costs equal.
In any case, here in Austin I came across an especially undeniable instance of price discrimination. The parking garage across from campus posts the following prices:
The hitch: This garage also offers an early bird special. They charge only $8 ($7 online) if you are “in before 10:00 AM, and out after 2:00 PM & before 6:00 PM.” Hence, if you arrive at 7 AM but leave at 1:59 PM, you pay not $8, but $23! Your “reward” for freeing up garage space a minute early is -$15.
Note the perverse incentives. A person who values his time at $14 might intentionally waste an hour to save money on parking – and clog up the garage at the same time. Not the invisible hand I had in mind.
At the same time, however, remember that firms have to cover their fixed costs somehow – and price discrimination is one of the many businesses practices that make this possible. In economic jargon, though price discrimination often undermines first-best efficiency, it is a vital tool for the promotion of second-best efficiency.
P.S. Happy holidays!
READER COMMENTS
Andre
Dec 23 2020 at 12:02pm
Possible reasons for garage pricing include:
a) the need to compete with other garages offering early bird / out at the right time specials;
b) the need to generate volume; and/or
c) the relative ease of advertising “early bird $8” on a sign that knowing consumers can understand in a split second.
Also, it may well be the case that some hours are more costly than others, for some reason. Perhaps the lower-volume in-and-out parking in the middle hours come at a higher marginal cost, say staffing efficiency or the need to pay more between 10 and 2.
As for finding gender discrimination, how about Ladies’ Night? Seems like prima facie gender discrimination? We’re not talking pink bikes, here. Product’s the same, price is different.
Andre
Dec 23 2020 at 12:28pm
Though now that I think about it, it could be argued that women are the product so it makes sense to charge them less for business reasons.
Like they say about Facebook and Twitter, they’re free because the user is the product.
I’d like to see them do that in court, though.
Thomas Sewell
Dec 23 2020 at 4:00pm
They’re trying to attract a solid base of daily local workers who will be there all day, while continuing to be able to charge high rates to people for whom it’s a one-time luxury charge as they’re just visiting occasionally for an event or to shop.
Two very different sets of customers.
nobody.really
Dec 28 2020 at 8:03pm
You provide a very persuasive explanation for a phenomenon I have long pondered. Thanks!
Mark Brophy
Dec 23 2020 at 11:41pm
Austin is a kooky illogical place and they’re proud of it, referring to it as “weird” rather than stupid. You can get away with a lot when you’re the capital of a big state in a country that worships big government.
Brian Albrecht
Dec 24 2020 at 8:50am
Price discrimination gets an overly bad rap. Some price discrimination hurts efficiency, as you suggest. Some price discrimination helps efficiency, by lowering the price for marginal consumers. It can go both ways.
But, as you bring up, fixed costs change the calculus. Having “too little” price discrimination can eliminate all the gains from trade if the firm can’t cover fixed costs without price discrimination. I don’t see the same loss with “too much” price discrimination. With fixed costs, I think we should have a prior belief that price discrimination is more beneficial than harmful.
I wrote something on this in my newsletter, if anyone is interested. https://pricetheory.substack.com/p/monopolies-dont-make-enough-money
Jose Pablo
Dec 27 2020 at 10:49am
I don’t see how fixed cost came into the picture. You should never take them into account in your pricing.
Sure, you should reduce your fixed cost as much as you can and closely analyze them, to the extent that they almost never are “totally fixed”, but you should focus on maximizing your “contribution margin”(revenue-cogs with “cogs” including all your variable cost) and introduce price discrimination that maximize your contribution margin, no matter which your fixed costs are.
By doing this you will always be in the best available position. Either making more money or loosing less. If maximizing your contribution margin does not allow you to cover your fixed cost and earn a decent return on your investment, no other pricing strategy will do so.
With almost zero variable cost in the parking example (they should install a fully automated payment system), its pricing should focus on maximizing revenue. Assuming no alternatives and infinite space in the parking lot the monopoly price solution provided by the micro is the right one to apply. With competing parking lots in the area, collusion or repeating rounds of competition should make the players arrive to a similar solution (provided no one of the parking lots has a “convenience advantage”).
Space constraints will require a “dynamic pricing system” with price increasing with demand. Once the curve time-demand is well known the owner can stablish different prices for different hours charging more for peak hours and less for the trough ones.
An intelligent segmentation of your clients will help to extract as much consumer surplus as you can, but again, this has nothing to do with your fixed costs (you should do it for any level of fixed costs).
Don’t see why fixed cost should be taken into account when deciding your pricing.
nobody.really
Dec 28 2020 at 8:27pm
Thanks for the linked article!
I get the social advantages of price discrimination. See Baumol & Bradford’s Optimal Departures from Marginal Cost Pricing (1970), re-introducing the world to Ramsey pricing–stating that optimal results flow from allocating fixed costs to customers with lower elasticities of demand.
But under what circumstances does (effective) price discrimination harm efficiency? Is the idea that firms might invest too much in acquiring price discrimination data?
Lawrence Ator
Dec 28 2020 at 2:00am
I’ve always thought this type of thing was a crafty way of targeting certain markets. For most parkers in dense, downtown, or other busy and crowded places, parking is a logistic necessity that has to map to the rest of each one’s daily reality. You don’t want to think about it each day – you want to get to work in a routine way. The price discrimination here seems to prioritize a category of customer which regularly uses the service and has low tolerance for it being randomly not available, because the parking lot is full. So I infer that providing certainty of service to those regular customers is worth more to the business than providing convenience for the ad hoc customers who would pay more today, but then rarely, or never, come back.
This might be all wrong of course, but the people who set those prices have a whole lot more information about the reality of parking demand in wherever this was posted than I do or, I suspect, anyone who is reading this does.
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