Is price discrimination as good an idea in practice as it is in theory?

 Let's consider a real-life example of how a business might price discriminate between clients. According to an article in Mother Jones, a real-world example is the 'club cards' that are offered by many of the major grocery chains, and many non-grocery chains. These allow a retailer to track every purchase that is made, targeting coupons and specials to your specific spending habits. According to the article, the author speculates that the data is collected from those who sign up for a card, thus granting them the right to your information, that retailers can then do whatever they would like with. One flaw of this method of price discrimination, at least from a consumer standpoint, is that those items that are less price elastic then have the prices raised to offset the cost of the reductions and discounts offered, thus hurting the elderly, the less informed, and those not willing to sign up for the card and allow access to their information. As the information age continues to advance, and these 'club cards' gain popularity, this ability to price discriminate will expand to include nearly every industry, thus reducing the consumer surplus and increasing the producer surplus.
The targets of this type of price discrimination, at least for now, include the middle-class, educated, and computer-savvy people, who are willing to sign up to save money, share their spending habits, and carry new smartphones with apps that also can track spending habits. As technology advances, this target market will continue to expand until it includes virtually everyone within the modern society. While this is a good thing from a business owners standpoint, it is not all good news. Is it a good thing to allow retailers to have access to such personal information? Who is potentially hurt by this type of marketing? As mentioned earlier, the elderly, the uneducated and the unwilling must pay higher prices for the same items, but those who participate in this type of marketing can also open themselves up to having this information sold to anyone with money, to be used for whatever purposes they see fit, whether you as the consumer agree with them or not.
In the information age in which we live, there are countless ways for the government, corporations, and even your neighbor, to gather information about you. While the benefits and the liabilities are just being discovered, it is the way that the world is going. It is becoming a world in which price discrimination is becoming a way of life, and producers are devising methods to catch as much of the consumer surplus as they can in the form of producer surplus. Welcome to the next generation!


Alexa said...

People have always bartered since the beginning of time. The Egyptians, the Romans, the Vikings all benefited from trade. The traders of the past would have used their intuition and personal experience of who would pay the most for a product or when to offer a product. For example, I believe the early traders would find a way to price discrimination to get the most for wine, whether it was to a peasant or to a king. The peasant’s wine would have been watered down a little. The main difference is the speed, accuracy, and ability to keep the personal information attached to the product and the purchaser. Let us hope that privacy laws are able to carefully balance the need for personal privacy rights and the need for good marketing.

Dave Tufte said...

Da Boy: 94/100 for a possessive error.
Alexa: 47/50 for a wording error.

I think the post and comment have done a good job of handling one side of the issue.

Let me mention the part we forget about too easily. Price discrimination is an application of monopoly power to a localized group. But, monopolies are a lot more common than people think. Every unique or differentiated product is a monopoly. For example, I'd have a monopoly on my own hip hop music and accessories. The thing is, no one would buy them, and with free entry and exit it never sees the light of day (and that's a good thing, right?). So, here's the cool part. What if price discrimination allows some of those products that might not be sold at all without price discrimination to be sold profitably because the seller can identify someone who'd pay for it. If you can do that, you've created both consumer and producer surplus, making the world a better place.

John Smith said...
This comment has been removed by the author.
John Smith said...

I find the amount of information that companies can discover from simple shopping club cards to be both amazing and disturbing. I remember reading an article a couple of years ago about Target. A father went into a Target store, furious that his teenage daughter had received coupons for diapers, formula, cribs, and other items for preparing to have a baby. After making a stink in the store and with corporate headquarters, it came to light that the man’s teenage daughter was pregnant, and she didn’t even know it. Target’s data analytic software tracked the purchases the daughter had made and was able to determine, from those purchases, that she would be having a baby in a few months. “Big Data” begins to get a little frightening when it can predict behavior that well.

My question is: “If companies can offer coupons for things they know you are running out of and/or need to buy, what stops them from charging a premium on items you need when you need them?” With the aforementioned methods of information tracking, first-degree price discrimination could be made a lot easier in the near future.

Dr. Tufte said...

John Smith: 50/50

Someone else mentioned this story about Target too.

In response to your question, I think there is nothing preventing companies from doing this. In fact, I think they already do. But I don't think they need all that big data to do so: aren't title loan places doing this already?

And as to first degree price discrimination, isn't that called eBay these days?

What protects us from this is competition, and our willingness to switch between competitors. Yes, this sort of means that all the improvements we've seen in shopping since the advent of the Internet are going to now make shopping more difficult too. You really didn't think you were going to be able to keep all that consumer surplus forever, did you?