Clear-Cut Price Discrimination
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!