Price discrimination

Negative effects on consumer welfare:

1. Higher prices for many people reduces their consumer surplus – an
example is ‘dual pricing’ in insurance where loyal customers were charged
more then new customers. This form pricing exploits imperfect information
in the market and consumer inertia.

2. Price discrimination reinforces monopoly power of firms which can then

lead to higher prices in the long run and a loss of allocative efficiency.

3. Algorithms increase the potential to discriminate between consumers –

there is now widespread use of artificial intelligence driven price
discrimination leading to certain groups in society consistently paying more
(such as online hotel bookings).

4. Multi-purchase or volume discount purchasing favours higher-income,

larger families at expense of single people. It can encourage food waste
which creates external costs.

Arguments supporting price discrimination:

1. It makes fuller use of spare capacity leading to less waste. There are
potential environmental benefits from this – an example, less food waste.

2. Helps generate extra cash flow for businesses which can ensure survival
during a recession – this supports jobs and maintains choice for consumers.

3. Can fund cross-subsidy of goods and services – premium prices for some
can fund discounts for other groups living on lower incomes. (consider
means-tested college fees). It can allow continuation of loss-making services
such as rural bus and train routes.

4. Higher monopoly profits can finance research and development spending

which then drives dynamic efficiency in the long run.

5. Can be seen as progressive policy – an example, charging different prices

for drugs such as vaccines between advanced and developing nations.