Price Discrimination and Information
By Arnold Kling
Andrew Odlyzko has an interesting article on price discrimination in the information age. He sees the databases that companies are gathering (from supermarket membership cards, for example) as tools for charging on the basis of price sensitivity.
price discrimination will grow, but in a concealed form. Stress will be on tactics such as bundling and loyalty programs, which tend to disguise the actual price that is charged. This means that auction mechanisms and micropayments are likely to be used in very limited situations. On the other hand, there will be continued pressure to erode privacy in order to find out just what the willingness to pay is, as well as to control how products and services are used. Thus privacy will continue to erode.
As an aside, he talks about price discrimination in higher education.
A very interesting example is that of U.S. private colleges…all these schools offer financial aid to students, and in some of them, the amount spent on aid (which is determined overwhelmingly on need) comes to about half of the tuition revenues. In essence these institutions are practicing price discrimination on a massive scale, charging according to their estimates of what the students’ parents can afford. Parents can preserve their full financial privacy, but at the cost of paying the full tuition.
I remember that when I first read Information Rules, by Hal Varian and Carl Shapiro, it sounded like a cookbook for price discrimination. They saw the information economy as requiring price discrimination because of the nature of information goods–high up-front costs and near-zero marginal costs. Odlyzko also locates a cost factor leading to more price discrimination–the reduced cost of gathering and storing customer data.
For Discussion. In economic models, price discrimination often increases social welfare. Odlyzko gives a theoretical example in which in the absence of price discrimination the good is not produced at all. Is price discrimination in the information economy a good thing or a bad thing?