Price Discrimination

Chapter 6

100

What is a winner's curse?

"if I win the auction, it's because my rival submitted a lower bid. If my rival submitted a low bid, it's because the value of the object is probably low; in sum, if I win the auction, it's probably because the value is lower than expected."

200

Explain the difference between Incentive constraint and Participation constraint

The incentive constraint ensures that consumers have a strong motivation to purchase a product or service at a given price relative to other available options.
The participation constraint ensures that the price offered to a consumer group is at least as high as the minimum price that consumers in that group are willing to pay, allowing them to participate in the market.

300

What are the four market frictions that allow price discrimination to occur and prevent resale?

• Physical impossibility of resale: Services like haircuts or streaming subscriptions can't be resold, so differing prices between consumer segments remain intact.
• Transaction costs: For some items, resale isn’t profitable due to high transaction costs, such as logistical hassles or transportation expenses.
• Imperfect information: Consumers may be unaware of all price variations, limiting opportunities for resale.
• Legal restrictions: Laws may prevent the resale of specific goods, like electricity or prescription drugs, allowing firms to enforce different prices without the risk of arbitrage.

400

Describe the different types of auctions?

Ascending price auction: starts at a low price, ask for higher bids and continue on until on 

bidder wants to outbid the highest bid.

Descending price auction: start at a high price and gradually decrease it until a bidder makes a sign, at which point such bidder is declared the winner and pays the price at the moment  the sign was made.

First-price auction: bidders submit a sealed bid, the highest bid is selected, and the bidder pays the amount specified in the bid.

Second-price auction: bidders submitted sealed bids, the highest bid won, but the price paid by the winning bidder was the second highest bid.

500

What is Coase conjecture?

The Coase Conjecture is an economic theory (proposed by Ronald Coase) in the context of durable goods markets. It suggests that if a firm sells a durable good (like cars or appliances) and sets a monopoly price, rational consumers will anticipate that the price will decrease over time. As a result, consumers may delay their purchases, expecting better prices in the future.

Report

100

True or false. Tailored advertising a form of personalised pricing

False, tailored advertising is not a form of personalized pricing. Tailored advertising refers to the practice of customizing marketing messages and advertisements based on consumer preferences, behaviors etc..

200

What are the 3 categories of price discrimination?

• First-degree price discrimination (perfect): Every consumer is charged exactly their willingness to pay, maximizing producer surplus but often viewed as unrealistic.
• Second-degree price discrimination (versioning): Companies offer versions of the same product at different prices, allowing consumers to self-select based on preference or willingness to pay.
• Third-degree price discrimination (group pricing): Prices vary by consumer groups with distinct, observable characteristics, such as age or geography.

300

What are the 3 categories of personal data collected (in order to personalise prices)?

Volunteered data (e.g., names, emails provided directly by consumers),

Observed data (e.g., purchase history, browsing behavior), and

Inferred data (e.g., estimated income, health profile).

400

What are the 3 necessary conditions for personalized pricing to be effectively implemented?

• Consumer valuation identification, achievable in data-rich environments where firms can easily profile consumers.
• Prevention of arbitrage, ensuring low-willingness consumers can’t resell goods to higher-willingness consumers, achievable with non-transferrable digital services or perishable goods.
• Market power, where firms have the ability to set prices above marginal costs.

500

What is the economic effect on personal pricing?

Impact on Static Efficiency

• Personalised pricing can improve static efficiency by serving low-paying consumers while maintaining high-paying ones' profits.

Impact on Distribution Outcomes

• Mixed effects: may benefit low-willingness consumers but extract surplus from high-paying ones.

Impact on Dynamic Efficiency

• Encourages innovation and differentiation by allowing higher profits on tailored products