Released: July 06, 2006

Price discrimination metes out rough justice

Source: By Robert H. Frank, New York Times (Free Registration)

If I fly to Chicago from Ithaca, N.Y., later this month, Northwest Airlines will charge me $565 if my trip does not include a Saturday night stopover, but only $410 if it does. Similarly, if I order Apple’s new MacBook laptop, the company will charge me $1,499 for a machine in black, but only $1,349 for an identically configured one in white.

As economists use the term, price discrimination means charging some buyers more than others for essentially the same product or service. Is it a bad thing? Buyers paying the higher prices understandably resent the practice. They might thus be surprised to learn that it often enables them to enjoy both lower prices and higher quality than would be possible if sellers charged the same price to everyone. Even more surprising, price discrimination often metes out rough justice among buyers, requiring those who are responsible for a greater share of sellers’ costs to shoulder a greater share of the burden.

For these claims to hold, sellers’ costs per unit must decline with the number of units sold. This test is met in many markets. According to Sandy Angers, a spokeswoman for Boeing, for example, the average cost per seat for a typical domestic flight is 25 percent lower for the company’s 180-seat 737-900ER than for its 110-seat 737-600.

Similarly, the average cost of laptop computers declines sharply with the number produced — largely because research and development costs are essentially fixed. When the company produces more units, each buyer’s share of these costs declines.

Read Full Article: Price discrimination metes out rough justice