This article will argue that price discrimination is efficient for society, not just producers.
Price discrimination is the practice of firms charging different prices for different consumers. In theory this allows producers to obtain the full amount of social surplus. The following graph compares a monopoly which can price discriminate to a monopoly which cannot price discriminate. It does not show the competitive outcome:
In practice firms are not usually able to perfectly price discriminate because they don’t have enough information to perfectly identify the amount any given consumer is willing to pay. However, they can often conduct some price discrimination. Consumer protection policies and advocates think that allowing firms rather than consumers to obtain the full social surplus is a bad thing. I think it’s a good thing for 4 reasons:
- Firms are people too! When firms are better off, individuals are better off. It’s true that consumers are worse off and firms are better off, but it’s not true that these two cancel out because the total social utility under price discrimination is larger. This is because price discrimination prevents the existence of deadweight loss in certain cases. Look at the chart above. Notice that monopolies cause deadweight loss, except when they can price discriminate. If a monopoly can price discriminate it actually generates a larger social surplus than a regulated monopoly, although the full social surplus is a producer surplus.
Price discrimination allows higher firm profitability which increases quantities produced. This reduces prices. Price discrimination also allows higher employment and income per employee. This money is then saved or spent, resulting in a multiplier effect. In short, the overall economy greatly expands in a number of ways under price discrimination.The state problem. If we prohibit or limit price discrimination we must employ a state or a market agent to enforce the prohibition or limit. The state is exposed to problems of calculation and cronyism except when it occurs on the free market. The market agent is addressed in the next point.The non-problem of market enforcement. The market agent for disincentivizing price discrimination already exists! It exists inside of the individual preferences of individual consumers. Examples of this action being manifest include boycott, reputation value, private contracts for standards, and more.
In fact, combining monopoly and price discrimination is doubly good, not doubly bad as many modern economists insist.