Evidence Card # 003

From Tom Meyer for use at Bainbridge College

After paired reading and sharing be sure to fill out  What do you think?  at the bottom of this webpage.

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 Four Main Theses About Price Discrimination

-1-  There is erosion of privacy and disappointingly slow development of the new economy.  These are largely caused by incentives to discriminate.

-2-  Price discrimination offers far greater gains in social and economic welfare, than do auctions.

-3-  Intense public opposition will force price discrimination to be practiced in hidden forms.

-4-  Price discrimination will be a major and contentious public policy issue.

Thoughts from Andrew Odlyzko, cited above.
 

(Price discrimination means charging different prices to customers who don't know one another, and who therefore will not object too loudly.)

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The demands that brought the first permanent regulation to the United States resulted directly from the railroads' discriminatory pricing policies.

Small Businessmen Oppose Price Discrimination

But the fact that the charges are so low does not make differences in charges there any less severe on business.  A difference of five cents per bushel in the charge for transporting wheat 1000 miles is a small matter, taken by itself.  It would be weeks before it would make a difference of one cent to the individual consumer of bread.  But if a railroad makes this reduction for one Miller, and not another, it will be enough to drive the latter out of business.

From Arthur T. Hadley: Railroad transportation, 1885.

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Origins of Government Intrusion into US Business

"The drama was over.  The fight of ranch and railroad had been wrought out to its final close... yes, the railroad had prevailed.  The ranchers had been seized in the tentacles of the octopus; the addict with his burden of extortionate freight rates had been imposed like a yoke of iron."

From Alfred Chandler Jr. -- The railroads: The nation's first big business, 1965.

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Railroads in the 19th century: Extremely important, widely hated.

"But perhaps the most baffling aspect of British rail travel is the price... fare structures have become a tangle of elusive discounts and incentives for early booking that have widened the gap between standard and first-class passengers -- but probably united them in complaining about poor service."

From Frank Morris, The Octopus.

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Write your congressman, there are some underlying trends:

-- incentives to price discriminate are increasing.

-- technology to price discriminate is improving.

-- privacy will become a victim

 Andrew draws the following conclusion: Price discrimination is likely to be a most notable feature of our new economy.

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Railroads and the New Economy

-- railroads - they have high fixed costs and low marginal costs.  These properties provide an incentive to price discriminate, if possible.

-- airlines and railroads: they face the same incentives.

-- price discrimination tools: crude for the railroads, but sophisticated for airlines.

-- public reaction to modern price discrimination: it's likely to be similar to 19th-century reaction to railroad pricing.

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Price Discrimination in Laptops

Dell latitude L400 ultralight laptop, was listed at $2072.04, $2228, and $2307 on Dell web pages. 

Designed for state governments & local governments, small businesses, and health-care companies, respectively.

- An example of price discrimination from the Wall Street Journal, June 8, 2001.

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Is price discrimination good or bad?

Here's an example of price discrimination that benefits both buyers and sellers.

-- Charlie: is willing to sell his prepared report on digital cash and will charge $1500.

-- Alice: is willing to pay $700, and Bob is willing to pay $1000.

-- note that uniform pricing makes the transaction impossible, and that neither the seller of the report nor the buyers of the report will derive the benefit of the information it contains.

Charging LS $650, and Bob $950 makes everybody better off.  Seemingly, price discrimination has benefited both seller and the two buyers!

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Dangers in High Fixed Costs, Low Marginal Revenue Industries

There are more industries, which contained high fixed costs and low marginal costs, thus having an incentive to price discriminate.  The cost of designing and tooling a new model of an automobile is $2-$3000000000, (billion) much greater than the $20 to 25,000,  each car may fetch in the marketplace.

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Where Games Cost Less (and More)

The New York Times reported on Thursday, October 31, 2002 in its section called world business that Europe fined Nintendo's $147 million for price-fixing in 1996, the article said.  Nintendo game consoles cost about three times as much in Spain as they did in Britain and Germany or the Netherlands.

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Taking Advantage of Those Who Don't Know About Lower Prices Elsewhere

Price discrimination occurs in widely distributed situations,

is often concealed, and often disputed.  Consider these examples:

-- there are student discounts, and senior citizen discounts.  For many items, but not for shoppers who do not think about these categories.

-- medical fees may be quite different for the uninsured, and for the insured persons in any society.

-- gasoline wholesalers are said to engage in zone pricing, which I presume means charging different rates in different areas for a gallon of gas.

-- sometimes on the days we visit stores, we find that there are sales.  You need 2 pounds, or there is price matching being practiced as one store promises to meet the price offered by another.

-- movie tickets and popcorn pricing may be sold at different rates to senior citizens.

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Do the Airlines Give You A "Fare" Ride?

-- on February 27, 2002: the following was observed at www.continental.com.

Minneapolis to Newark, New Jersey on Wednesday, March 20, returning Friday, March 22: $772.50.

Minneapolis to Newark, New Jersey, on March 20, returning March 27: $226.50.

Newark, New Jersey to Minneapolis on March 22 returning March 27: $246.50.

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Business Prices Versus Personal Prices

The Bell telephone Association published the following terms for leasing to telephones for social purposes in 1877.

-- connecting a dwelling house with any other building, will be $20 a year;

-- for business purposes, $40 a year is to be payable semiannually and in advance.

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There is price discrimination in prescription drugs.  
According to Congressman Bernie Sanders in a letter to barons:

quote, on average, for each dollar American consumers pay for prescription drugs, the Germans are paying $.71; the Swedes, $.68; the British, $.65; the French, $.57, and the Italians, $.51.  Unfortunately, US policy allows pharmaceutical industries to maintain that disparity... it's a moral outrage that Congress continues to allow millions of elderly and chronically ill Americans to suffer and die because they cannot afford the inflated prices charged for pharmaceuticals.

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Carriage Woes

Jules Dupuit, 1849.
It is not because of the few thousand francs which would have to be spent to put a roof over the third class carriages or to a pollster.  The third class seats that some company or other has open carriages with wooden benches.  What the company is trying to do is to prevent the passengers who pay the second-class fare from traveling third class; if it's the poor, not because it wants to hurt them, but to frighten the rich.

And he is again for the same reason that the companies, having proven almost cruel to the third class passengers and mean to the second-class wands, the cub lavishing dealing with first-class passengers.  Having a fuse that for what is necessary, they give the Richwood is superfluous.

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A Discriminating Moment

From: Telephony, 1909

Do people really care about their privacy, given their present use of frequent shopper cards have set, as well as the once common use of telephone party lines?

Answer: Henry Winston, a prosperous young farmer living near Fairfax, Missouri, did not wreck and with the rural party line, to which his telephone was connected, when he called a Miss Lorena Simpson and asked her to share his joys and sorrows of life, and for that reason is in quite a predicament.  Before Miss Lorena could answer the question, the 11th they are damsels, who had heard, at their respective homes, the rain for the Simpson home, quickly stepped to the telephone.  Each, knowing full well that quote something would be doing, quote, and quickly answered quote.  Yes, quote, adding, quote.  You set the date and I'll be on hand.  Quote, although Henry knows he is engaged, and that it is not Ms. Simpson who accepted, he is a little doubt as to which one of the 11 answered his question first.

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Dealing with Perverse Incentives

"Although about three million computers get sold every year in China, people don't pay for the software.  Someday they will, though.  And as long as they're going to steal it, we want them to steal ours.  They'll get sort of addicted, and that will somehow figure out how to collect sometime in the next decade."

Bill Gates, 1998

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The Corporations Turned to Government

By 1903, it had become apparent that the law relating to personal discrimination and rebating needed strengthening.  The carriers themselves sponsored legislation of this sort, because they were losing revenue as a result of the widespread discrimination and departure from published rates.  Yet they were unable to stop the practice without the aid of the government.

Locklin, The Economics of Transportation

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The Importance of a Stable Price

When the rate went down to $.10 a hundred from Chicago to New York, or 15 Cents From St. Louis to New York, the rate was to some few 15, to some few others 10, but the main body of the commercial community were compelled to pay 25 and $.30 a hundred, and the standard rate was 40 and 45; thus inaugurating a widespread system of uncertainty, chiccanery, fraud and personal favoritism, demoralizing trade and commerce even worse than the demoralization's due to an uncertain currency, because the freight charge fluctuated more frequently, even from hour to hour and day today.  Consequently, the combination which brought the rate of $.70 a hundred, and maintains it there, is considered a godsend and a blessing, compared with the 15 or $.10 oxalate rates before, simply because the $.70 is an equally distributed calculable element.

Simon Sterne, New York Board of Trade and Transportation, 1879

Important Questions