This does fall under “price gouging” just as I suspected (though you use the more morally neutral term “price discrimination”, which I aught to have used but I didn’t know the term. Price discrimination is not unethical. However, I’m not certain that avoiding price discrimination is unethical either.
Price discrimination operates in coffee shops too—most of the cost is the building and the employee, and the actual drinks don’t really effect anything—the differential pricing of the drinks is price discrimination. Similarly at the grocery store, using coupons is price discrimination—only people who put in the time and effort to use coupons pay less, and people who don’t use coupons subsidize that. Would it be unethical to have a device that automatically generates coupons for everything? It certainly “defects” in that it raises prices for everyone and lowers prices for yourself.
...yet, it’s not the same thing, because you did sign a contract with the airline to take the entire flight, not to mention the empty seat. It is morally gray to break contract. I do find it … counter-intuitive … to morally chastise defection strategies fighting price gouging on the part of consumers, because of how incredibly often businesses defect against consumers. Businesses break unenforceable contracts constantly, so it’s hard to be persuasive when appealing to the “little guy” consumer’s honor against the airline industry as a whole.
Unenforceable contracts in general create an incentive structure (What Yvain describes as “Moloch”) where defection means winning and cooperation means losing. I haven’t yet determined my position on whether or not moral people aught to allow themselves to lose within incentive structures rewarding immorality… on one hand, morality means being willing to lose self-interest to win community interest, but on the other hand this stance naturally causes moral people to lose and immoral people to win, and that shifts the good-evil power balance in a dangerous way. (I realize that’s a really simplistic way to put it).
I’m curious as to whether you in-general support that “moral” people should allow themselves to lose and cede power to those who are willing to be “immoral” in these incentive structures, although I suppose you’ve tapped out on discussing the moral aspects on this.
In any case, I guess the upcoming court case will soon decide whether or not these contracts are enforceable, and that avoids the philosophical debate.
This does fall under “price gouging” just as I suspected (though you use the more morally neutral term “price discrimination”,
These aren’t synonyms. “Gouging” implies that somebody is raising prices in order to make extra profit than the usual. Price discrimination is generally someone lowering prices to a market segment in order to pick up extra business, without lowering all their prices, in order to get the advantages I described above. AFAIK, the airlines didn’t actually raise their rates when they were deregulated—they lowered some of them to get more business. (I could be wrong about that though.)
I do find it … counter-intuitive … to morally chastise defection strategies fighting price gouging on the part of consumers, because of how incredibly often businesses defect against consumers. Businesses break unenforceable contracts constantly, so it’s hard to be persuasive when appealing to the “little guy” consumer’s honor against the airline industry as a whole.
I think it’s a mistake to think this is a you-vs-the-airline scenario, precisely because the airline has more power than individuals. The airline can’t be forced to do business at a loss, which means that non-cheaters will—one way or another—be paying to subsidize the cheaters. (Whether it’s in higher cost or lower availability.)
Price discrimination is generally someone lowering prices to a market segment in order to pick up extra business, without lowering all their prices
That’s not the standard definition. Price discrimination is all about capturing consumer surplus as revenue. See e.g. Wikipedia:
The purpose of price discrimination is generally to capture the market’s consumer surplus. This surplus arises because, in a market with a single clearing price, some customers (the very low price elasticity segment) would have been prepared to pay more than the single market price. Price discrimination transfers some of this surplus from the consumer to the producer/marketer.
Those look equivalent; one is defined in terms of intention, and the other in terms of mechanism.
Pretty much. Except that the type of discrimination I’ve been discussing is capturing low end surplus, by making use of a seller’s excess supply that would go to waste unsold at a higher price. For example, if a factory can produce X many widgets a month, but the market will only support Y widget sales at their full price, then they can sell X-Y widgets at any price higher than the truly variable costs (i.e., consumables only) and receive the difference as pure profit. This is extremely lucrative for the company, and benefits consumers who would or could not have bought the widgets at the higher price. But it only works if the company can prevent its full-price buyers from getting them at the lower price.
And every real-world example of price discrimination I know of works like this. Coupons, loss-leaders, rebates, special fares, sales, closeouts, last-minute vs. advance prices, factory outlets/seconds… heck, I just saw a real estate agent’s ad offering to sell your house at no commission… if you use him to buy your next house. Granted, that’s not exactly a tiny market segment, and is probably a bit more like a specialization than it is true price discrimination.
Anyway, the idea that a business raises prices to squeeze more money out of a select group is mostly silly; only a poorly managed business would establish its going rate any lower than what the top end of the market can bear in the first place! Ergo, any other prices offered for the “same” widgets are going to be lower, and any new higher prices will be justified by added value in the new offering, or else the market won’t pay the higher price.
(Absent monopoly power, of course. Comcast keeps raising the rental rate for its modems, for example, without providing any new benefits. And that is price gouging, not price discrimination. In a market with real competition, you can’t price discriminate by raising prices for a select group without some sort of justification, if you want to keep making sales to that group.)
And every real-world example of price discrimination I know of works like this.
That might be availability bias, though. If you deliberately try to not waste money, you’re probably avoiding many of the ways that you can price discriminate up. Software as a service has many examples of price discrimination the other direction; here’s Patrick MacKenzieon the subject. (It’s a recurring subject, there might be a better place to jump in, but that’ll get the idea across.) Many people in companies are willing to pay 10X in order to say they’re getting the Enterprise version of software instead of the Hobby version of that software, even if the hobby version covers their use case entirely, for signalling reasons.
Software as a service has many examples of price discrimination the other direction
As I said, if you charge somebody more for something, there has to be some added value. Making a deluxe or enterprise version of something where the customer freely chooses to pay more for the extra goodies isn’t price discrimination, as I understand the term. That’s just “having a range of products”.
To be price discrimination, you need to be offering something that’s substantially the same, but you want to get more business by not selling it at just one price. Airlines, coupons, etc., as I mentioned above.
You can quibble whether this is the “true” definition of price discrimination, but at that point we’re arguing the meaning of words. This is what I mean by price discrimination in this discussion. I consider raising prices without adding extra value to be either “monopoly price gouging” or “correcting your dumb mistake of not charging enough in the first place”. ;-)
Many people in companies are willing to pay 10X in order to say they’re getting the Enterprise version of software instead of the Hobby version of that software, even if the hobby version covers their use case entirely, for signalling reasons.
Enterprise versions of software generally come with support contracts or SLAs, not to mention features that require more support (such as API access, single sign-on, integrations, etc.) that justify the higher price because they come with higher ongoing costs for the service provider.
Even if the software itself is otherwise identical, an enterprise offering is different, speaking from having personally been on both sides of that particular business. Even if most of the “enterprise” users don’t actually end up needing that extra support on a regular basis, it’s a legitimate added value to have the protection of choosing the more expensive plan that comes with those guarantees. They’re basically paying more for the option to get more help when they need it, or to sue you if something goes wrong.
But even if it were entirely for signaling reasons, that still wouldn’t make it price discrimination. It’s the buyer’s choice whether to take a lower-priced offering, and if the seller adds an enterprise package, it’s usually not because they’re trying to squeeze more money out of customers they already have. They’re doing it because they wouldn’t get the enterprise customers at all with their existing offer. (It’d be price discrimination if they needed some way to prevent the enterprise customers from buying the hobby offering.)
While SaaS and PaaS vendors may also have price-discrimination offerings in their lineups (closeouts, old servers, “free” tiers, etc.), their mainline plans are usually priced so that the vendor is indifferent to which pricing plan you buy: they’re making a decent living even if everybody picks just one plan, whether it’s the lowest or highest priced one.
Again, “price discrimination” as I’m using the term is something used to eke additional revenue out of excess supply without destroying your ability to get your regular price for your regular supply. Merely having a range of products isn’t. Even Wikipedia says:
Price differentiation is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy
This is a bit tricky, because as I explained earlier, “production cost” is a bit of a chimera, due to the question of allocating fixed costs and semi-variable costs. But if you offer an enterprise package with support, you have to pay for some extra support staff capacity just to have them available in the event that this is the month the customer decides to use it. Few of a business’s production costs are truly variable, unless you’re somebody like Uber, who can instantly hire/fire their drivers. (And they still have lots of fixed and semi-variable costs.)
Anyway, the point is that most SaaS/PaaS companies’ pricing tiers are based on varying costs between the tiers, which makes them product differentiation, not price discrimination per Wikipedia.
That being said, the Wikipedia article is actually pretty vague about the distinction at times and notes that only “some” economists argue that signaling premiums make something price discrimination rather than product differentiation. My personal opinion is that perceived value, not “production cost” forms a relatively bright line between price discrimination and product differentiation. If the buyer considers the higher-priced product more valuable, IMO that’s product differentiation. If they consider it the “same thing” (e.g. DVDs, airline flights), it’s price discrimination.
As I said, if you charge somebody more for something, there has to be some added value.
I think this is symmetric, though. The ‘added value’ of paying the non-coupon price is that you get the time you would have spent managing coupons and to conspicuously consume non-coupons; the ‘added value’ of paying the enterprise price is often just the conspicuous consumption of non-hobbyism. But if I want coupons to represent price discrimination, then it makes sense to see the enterprise tier as also price discrimination.
And if we use the ‘capture as much consumer surplus as possible’ definition, both of those are clearly serving the same general function.
Anyway, the point is that most SaaS/PaaS companies’ pricing tiers are based on varying costs between the tiers, which makes them product differentiation, not price discrimination per Wikipedia.
The Kalzumeus response to this is that it leaves immense amounts of money on the table to sell software based on varying cost rather than capturing consumer surplus by price discrimination. When he sells Appointment Reminder, he encourages people to pick a tier based on the cost of one missed appointment rather than based on their particular needs (i.e. the cost of serving them).
When he sells Appointment Reminder, he encourages people to pick a tier based on the cost of one missed appointment rather than based on their particular needs (i.e. the cost of serving them).
It’s insanity to ever ask a buyer to value a product based on your cost; that’s like an elementary principle of business. But there is a difference in cost, in that in the article you linked, the author talked about 25 extra hours of work he put in just to land that enterprise deal. That is a different cost of the offering, and has to be priced in.
if we use the ‘capture as much consumer surplus as possible’ definition, both of those are clearly serving the same general function.
There are LOTS of ways to “capture as much consumer surplus as possible”. Marketing and sales, for example, are the process of communicating the benefits of your product to a customer in such a way as to make them willing to pay more—thereby capturing more of their surplus.
Well-run business are always trying to capture as much consumer surplus as possible, so that’s not a differentiating factor for what makes something price discrimination, IMO. The portion of consumer surplus a business captures is called profit, so if you’re not trying to capture as much of it as you can, you’re probably doing something wrong. ;-)
I think this is symmetric, though. The ‘added value’ of paying the non-coupon price is that you get the time you would have spent managing coupons and to conspicuously consume non-coupons; the ‘added value’ of paying the enterprise price is often just the conspicuous consumption of non-hobbyism. But if I want coupons to represent price discrimination, then it makes sense to see the enterprise tier as also price discrimination.
The difference is that in the case of the coupons and most other discounted offers, the differentiation is acheived by making a worse product: a factory second, something you have to take more time for, stay over Saturday for, etc.
I think what I’m trying to say is that if your higher-priced customers are trying to bypass your tiering to pay a lower price, then you have price discrimination. If your higher-priced customers are happy to pay more, you have product differentiation. This isn’t a perfect bright line, because some customers will always want the better deal. But a good question to differentiate is whether you created your new product by tacking conditions, restrictions, and other annoyances onto a perfectly good product to keep your higher-end people from wanting it, or whether you added premium features onto an existing product to capture people with lower price sensitivity or greater desire to signal their consumption. The latter IMO is product differentiation, the former price discrimination.
There’s also an important point you’re missing about “enterprise” deals. Yes, enterprises do engage in a certain amount of conspicuous consumption… though it’s usually at the multi-milion dollar level. (As the linked article points out, $5K is just a rounding error for an enterprise.) And yes, enterprises can overspend due to it not being the decision maker’s money.
BUT… there is a good reason for that. An enterprise values stability over optimum performance, because it relies on lots and lots of mediocre people rather than a few talented ones. The public enterprise’s “real” product in some sense is an attractive investment for institutional investors, and that requires actions and systems that look stupid on the surface to people who don’t have their money invested in the business (as opposed to say, their time).
It helps to realize that an enterprise is not about making the most money, but making its bosses happy… and the real bosses are the investors, who want their investment to be safe as much as they want it to perform. The downside risk of a bad purchasing choice for a large organization can be immense compared to the upside benefit of the best possible choice. That’s why they do what they do, and it’s ultimately the investors who are paying for that extra insurance.
Is there waste? Sure. But it’s a form of insurance, which is also waste if you never actually need it. The thing is, you don’t know (institutionally) whether you’re gong to need it, so it’s a bad idea to take the risk. Especially since none of the people actually working in the organization get to partake of the upside of a good decision, but will personally be penalized for the bad decision. These factors have zip-all to do with conspicuous consumption. Plenty of employees within a company will happily pay the hobbyist price, but are bound by policies that e.g. require support or SLAs for all software purchases, etc. Or else they have requirements like auditing or whatever it is that trips the “enterprise” flag.
IME, you have to get up to a somewhat higher level of management to have conspicuous consumption as part of turf wars or signaling personal importance, and you’re talking six/seven/eight figure deals there, not four or five. The closer you get to the trenches, the less people care about signaling to other managers vs. getting something to help get themselves through the day.
No, I don’t think so. For one thing, pjeby thinks that price discrimination “is generally someone lowering prices” and I don’t think this is true. Price discrimination involves charging different amounts to different people, depending on their reserve price, and the seller, of course, tries to make the total/average amount as high as he can, to the best of his ability. Even if you take the seller out of the equation and look only at the buyers, price discrimination amounts to a wealth transfer from the high-reserve-price people (the wealthy and the desperate) to the low-reserve-price people (the poor and the meh, whatevs).
Price discrimination involves charging different amounts to different people, depending on their reserve price, and the seller, of course, tries to make the total/average amount as high as he can, to the best of his ability.
Agreed, but pjeby’s already established that he’s making the comparison to a state where price discrimination is impossible, and relative to that it does seem reasonable to expect that the mean price under discrimination will be lower, often significantly so, and especially in the context of airlines.
Only under particular certain conditions. Under other conditions this is not so.
For example in businesses where variable costs dominate the cost of the product and the economies of scale have already been realized, price discrimination will not lower average prices. Ditto for supply-constrained products.
In real life the situation is complicated because most price discrimination involves slightly different products so deconstructing the demand curves is not trivial. As an example consider deluxe game editions. You get a bit of added value (a soundtrack, maybe a printed booklet or a figurine), but the price premium is typically much larger than the value of the add-ons. What’s happening? Price discrimination.
Only under particular certain conditions. Under other conditions this is not so.
I edited my post before I checked to see if you had commented—remember that this is in the context of airlines, in which case it is absolutely true. We only have the modern air industry at the size and level of connections that it is because of the sophisticated price discrimination.
We only have the modern air industry at the size and level of connections that it is because of the sophisticated price discrimination.
That’s not self-evident to me, but we are venturing into counterfactuals by now.
In any case, I have no objection to companies trying to engage in price discrimination—they have full rights to attempt to do so. What I object to is the idea that I, as a consumer, cannot try to game their price discrimination schemes. The suggestion that I am morally obligated to meekly go along with whatever techniques companies devise to maximize their revenues is… strange to me :-D
That’s not self-evident to me, but we are venturing into counterfactuals by now.
Only tautological propositions are truly self-evident; the rest are evident only if you look for the evidence. (Specifically, consider the profit margin of the airline industry. If we believe that price discrimination raises their revenue, a world without that would imply less revenue and thus less profit, which would put it well into the negatives, forcing cutbacks on marginal routes until we have a significantly constrained industry and customers paying much higher prices on the margin.)
The suggestion that I am morally obligated to meekly go along with whatever techniques companies devise to maximize their revenues is… strange to me :-D
It’s standard reputational logic, or what people here are fond of calling “Newcomb-like” problems: only if enough people behave well enough will counterparties treat the public like they will behave. Trust is valuable, and social trust especially useful.
Only tautological propositions are truly self-evident; the rest are evident only if you look for the evidence.
...he said, before proceeding to give an a priori argument.
If anyone has any data about what the airline industry would look like without price discrimination I would be very interested to see it! Before this (fascinating) thread I had never thought about the issue. It’s really counterintutive, and I would be curious to know what the magnitude of the effect is.
...he said, before proceeding to give an a priori argument.
What? If the airline industry had, say, Intel’s or Apple’s profit margins, then the argument that I gave would not hold. I left out what their profit margins were because I figured everyone in the conversation would either know already or look them up.
If anyone has any data about what the airline industry would look like without price discrimination I would be very interested to see it!
Check out, say, section 3 of this paper. (In general, “revenue management” is the term of art.) This article claims it adds 4-8% in revenue.
It’s standard reputational logic, or what people here are fond of calling “Newcomb-like” problems: only if enough people behave well enough will counterparties treat the public like they will behave. Trust is valuable, and social trust especially useful.
I don’t see the relevancy to this subthread. You are not trying to say that if only everyone trusted large, not particularly high-functioning corporations everything would be just peachy—are you? X-/
Besides, trust them to do what exactly? I trust the airline to not deliberately overcharge my credit card and to not sell the information that I will be out of town to some burglars. I do not trust it to the extent of “Eh, just charge me whatever price you think is fair”, I am not going to trust it to that extent, and I think it’s a good thing, too.
Thanks for answering!
This does fall under “price gouging” just as I suspected (though you use the more morally neutral term “price discrimination”, which I aught to have used but I didn’t know the term. Price discrimination is not unethical. However, I’m not certain that avoiding price discrimination is unethical either.
Price discrimination operates in coffee shops too—most of the cost is the building and the employee, and the actual drinks don’t really effect anything—the differential pricing of the drinks is price discrimination. Similarly at the grocery store, using coupons is price discrimination—only people who put in the time and effort to use coupons pay less, and people who don’t use coupons subsidize that. Would it be unethical to have a device that automatically generates coupons for everything? It certainly “defects” in that it raises prices for everyone and lowers prices for yourself.
...yet, it’s not the same thing, because you did sign a contract with the airline to take the entire flight, not to mention the empty seat. It is morally gray to break contract. I do find it … counter-intuitive … to morally chastise defection strategies fighting price gouging on the part of consumers, because of how incredibly often businesses defect against consumers. Businesses break unenforceable contracts constantly, so it’s hard to be persuasive when appealing to the “little guy” consumer’s honor against the airline industry as a whole.
Unenforceable contracts in general create an incentive structure (What Yvain describes as “Moloch”) where defection means winning and cooperation means losing. I haven’t yet determined my position on whether or not moral people aught to allow themselves to lose within incentive structures rewarding immorality… on one hand, morality means being willing to lose self-interest to win community interest, but on the other hand this stance naturally causes moral people to lose and immoral people to win, and that shifts the good-evil power balance in a dangerous way. (I realize that’s a really simplistic way to put it).
I’m curious as to whether you in-general support that “moral” people should allow themselves to lose and cede power to those who are willing to be “immoral” in these incentive structures, although I suppose you’ve tapped out on discussing the moral aspects on this.
In any case, I guess the upcoming court case will soon decide whether or not these contracts are enforceable, and that avoids the philosophical debate.
These aren’t synonyms. “Gouging” implies that somebody is raising prices in order to make extra profit than the usual. Price discrimination is generally someone lowering prices to a market segment in order to pick up extra business, without lowering all their prices, in order to get the advantages I described above. AFAIK, the airlines didn’t actually raise their rates when they were deregulated—they lowered some of them to get more business. (I could be wrong about that though.)
I think it’s a mistake to think this is a you-vs-the-airline scenario, precisely because the airline has more power than individuals. The airline can’t be forced to do business at a loss, which means that non-cheaters will—one way or another—be paying to subsidize the cheaters. (Whether it’s in higher cost or lower availability.)
That’s not the standard definition. Price discrimination is all about capturing consumer surplus as revenue. See e.g. Wikipedia:
Those look equivalent; one is defined in terms of intention, and the other in terms of mechanism.
Pretty much. Except that the type of discrimination I’ve been discussing is capturing low end surplus, by making use of a seller’s excess supply that would go to waste unsold at a higher price. For example, if a factory can produce X many widgets a month, but the market will only support Y widget sales at their full price, then they can sell X-Y widgets at any price higher than the truly variable costs (i.e., consumables only) and receive the difference as pure profit. This is extremely lucrative for the company, and benefits consumers who would or could not have bought the widgets at the higher price. But it only works if the company can prevent its full-price buyers from getting them at the lower price.
And every real-world example of price discrimination I know of works like this. Coupons, loss-leaders, rebates, special fares, sales, closeouts, last-minute vs. advance prices, factory outlets/seconds… heck, I just saw a real estate agent’s ad offering to sell your house at no commission… if you use him to buy your next house. Granted, that’s not exactly a tiny market segment, and is probably a bit more like a specialization than it is true price discrimination.
Anyway, the idea that a business raises prices to squeeze more money out of a select group is mostly silly; only a poorly managed business would establish its going rate any lower than what the top end of the market can bear in the first place! Ergo, any other prices offered for the “same” widgets are going to be lower, and any new higher prices will be justified by added value in the new offering, or else the market won’t pay the higher price.
(Absent monopoly power, of course. Comcast keeps raising the rental rate for its modems, for example, without providing any new benefits. And that is price gouging, not price discrimination. In a market with real competition, you can’t price discriminate by raising prices for a select group without some sort of justification, if you want to keep making sales to that group.)
That might be availability bias, though. If you deliberately try to not waste money, you’re probably avoiding many of the ways that you can price discriminate up. Software as a service has many examples of price discrimination the other direction; here’s Patrick MacKenzie on the subject. (It’s a recurring subject, there might be a better place to jump in, but that’ll get the idea across.) Many people in companies are willing to pay 10X in order to say they’re getting the Enterprise version of software instead of the Hobby version of that software, even if the hobby version covers their use case entirely, for signalling reasons.
As I said, if you charge somebody more for something, there has to be some added value. Making a deluxe or enterprise version of something where the customer freely chooses to pay more for the extra goodies isn’t price discrimination, as I understand the term. That’s just “having a range of products”.
To be price discrimination, you need to be offering something that’s substantially the same, but you want to get more business by not selling it at just one price. Airlines, coupons, etc., as I mentioned above.
You can quibble whether this is the “true” definition of price discrimination, but at that point we’re arguing the meaning of words. This is what I mean by price discrimination in this discussion. I consider raising prices without adding extra value to be either “monopoly price gouging” or “correcting your dumb mistake of not charging enough in the first place”. ;-)
Enterprise versions of software generally come with support contracts or SLAs, not to mention features that require more support (such as API access, single sign-on, integrations, etc.) that justify the higher price because they come with higher ongoing costs for the service provider.
Even if the software itself is otherwise identical, an enterprise offering is different, speaking from having personally been on both sides of that particular business. Even if most of the “enterprise” users don’t actually end up needing that extra support on a regular basis, it’s a legitimate added value to have the protection of choosing the more expensive plan that comes with those guarantees. They’re basically paying more for the option to get more help when they need it, or to sue you if something goes wrong.
But even if it were entirely for signaling reasons, that still wouldn’t make it price discrimination. It’s the buyer’s choice whether to take a lower-priced offering, and if the seller adds an enterprise package, it’s usually not because they’re trying to squeeze more money out of customers they already have. They’re doing it because they wouldn’t get the enterprise customers at all with their existing offer. (It’d be price discrimination if they needed some way to prevent the enterprise customers from buying the hobby offering.)
While SaaS and PaaS vendors may also have price-discrimination offerings in their lineups (closeouts, old servers, “free” tiers, etc.), their mainline plans are usually priced so that the vendor is indifferent to which pricing plan you buy: they’re making a decent living even if everybody picks just one plan, whether it’s the lowest or highest priced one.
Again, “price discrimination” as I’m using the term is something used to eke additional revenue out of excess supply without destroying your ability to get your regular price for your regular supply. Merely having a range of products isn’t. Even Wikipedia says:
This is a bit tricky, because as I explained earlier, “production cost” is a bit of a chimera, due to the question of allocating fixed costs and semi-variable costs. But if you offer an enterprise package with support, you have to pay for some extra support staff capacity just to have them available in the event that this is the month the customer decides to use it. Few of a business’s production costs are truly variable, unless you’re somebody like Uber, who can instantly hire/fire their drivers. (And they still have lots of fixed and semi-variable costs.)
Anyway, the point is that most SaaS/PaaS companies’ pricing tiers are based on varying costs between the tiers, which makes them product differentiation, not price discrimination per Wikipedia.
That being said, the Wikipedia article is actually pretty vague about the distinction at times and notes that only “some” economists argue that signaling premiums make something price discrimination rather than product differentiation. My personal opinion is that perceived value, not “production cost” forms a relatively bright line between price discrimination and product differentiation. If the buyer considers the higher-priced product more valuable, IMO that’s product differentiation. If they consider it the “same thing” (e.g. DVDs, airline flights), it’s price discrimination.
I think this is symmetric, though. The ‘added value’ of paying the non-coupon price is that you get the time you would have spent managing coupons and to conspicuously consume non-coupons; the ‘added value’ of paying the enterprise price is often just the conspicuous consumption of non-hobbyism. But if I want coupons to represent price discrimination, then it makes sense to see the enterprise tier as also price discrimination.
And if we use the ‘capture as much consumer surplus as possible’ definition, both of those are clearly serving the same general function.
The Kalzumeus response to this is that it leaves immense amounts of money on the table to sell software based on varying cost rather than capturing consumer surplus by price discrimination. When he sells Appointment Reminder, he encourages people to pick a tier based on the cost of one missed appointment rather than based on their particular needs (i.e. the cost of serving them).
It’s insanity to ever ask a buyer to value a product based on your cost; that’s like an elementary principle of business. But there is a difference in cost, in that in the article you linked, the author talked about 25 extra hours of work he put in just to land that enterprise deal. That is a different cost of the offering, and has to be priced in.
There are LOTS of ways to “capture as much consumer surplus as possible”. Marketing and sales, for example, are the process of communicating the benefits of your product to a customer in such a way as to make them willing to pay more—thereby capturing more of their surplus.
Well-run business are always trying to capture as much consumer surplus as possible, so that’s not a differentiating factor for what makes something price discrimination, IMO. The portion of consumer surplus a business captures is called profit, so if you’re not trying to capture as much of it as you can, you’re probably doing something wrong. ;-)
The difference is that in the case of the coupons and most other discounted offers, the differentiation is acheived by making a worse product: a factory second, something you have to take more time for, stay over Saturday for, etc.
I think what I’m trying to say is that if your higher-priced customers are trying to bypass your tiering to pay a lower price, then you have price discrimination. If your higher-priced customers are happy to pay more, you have product differentiation. This isn’t a perfect bright line, because some customers will always want the better deal. But a good question to differentiate is whether you created your new product by tacking conditions, restrictions, and other annoyances onto a perfectly good product to keep your higher-end people from wanting it, or whether you added premium features onto an existing product to capture people with lower price sensitivity or greater desire to signal their consumption. The latter IMO is product differentiation, the former price discrimination.
There’s also an important point you’re missing about “enterprise” deals. Yes, enterprises do engage in a certain amount of conspicuous consumption… though it’s usually at the multi-milion dollar level. (As the linked article points out, $5K is just a rounding error for an enterprise.) And yes, enterprises can overspend due to it not being the decision maker’s money.
BUT… there is a good reason for that. An enterprise values stability over optimum performance, because it relies on lots and lots of mediocre people rather than a few talented ones. The public enterprise’s “real” product in some sense is an attractive investment for institutional investors, and that requires actions and systems that look stupid on the surface to people who don’t have their money invested in the business (as opposed to say, their time).
It helps to realize that an enterprise is not about making the most money, but making its bosses happy… and the real bosses are the investors, who want their investment to be safe as much as they want it to perform. The downside risk of a bad purchasing choice for a large organization can be immense compared to the upside benefit of the best possible choice. That’s why they do what they do, and it’s ultimately the investors who are paying for that extra insurance.
Is there waste? Sure. But it’s a form of insurance, which is also waste if you never actually need it. The thing is, you don’t know (institutionally) whether you’re gong to need it, so it’s a bad idea to take the risk. Especially since none of the people actually working in the organization get to partake of the upside of a good decision, but will personally be penalized for the bad decision. These factors have zip-all to do with conspicuous consumption. Plenty of employees within a company will happily pay the hobbyist price, but are bound by policies that e.g. require support or SLAs for all software purchases, etc. Or else they have requirements like auditing or whatever it is that trips the “enterprise” flag.
IME, you have to get up to a somewhat higher level of management to have conspicuous consumption as part of turf wars or signaling personal importance, and you’re talking six/seven/eight figure deals there, not four or five. The closer you get to the trenches, the less people care about signaling to other managers vs. getting something to help get themselves through the day.
No, I don’t think so. For one thing, pjeby thinks that price discrimination “is generally someone lowering prices” and I don’t think this is true. Price discrimination involves charging different amounts to different people, depending on their reserve price, and the seller, of course, tries to make the total/average amount as high as he can, to the best of his ability. Even if you take the seller out of the equation and look only at the buyers, price discrimination amounts to a wealth transfer from the high-reserve-price people (the wealthy and the desperate) to the low-reserve-price people (the poor and the meh, whatevs).
Agreed, but pjeby’s already established that he’s making the comparison to a state where price discrimination is impossible, and relative to that it does seem reasonable to expect that the mean price under discrimination will be lower, often significantly so, and especially in the context of airlines.
Only under particular certain conditions. Under other conditions this is not so.
For example in businesses where variable costs dominate the cost of the product and the economies of scale have already been realized, price discrimination will not lower average prices. Ditto for supply-constrained products.
In real life the situation is complicated because most price discrimination involves slightly different products so deconstructing the demand curves is not trivial. As an example consider deluxe game editions. You get a bit of added value (a soundtrack, maybe a printed booklet or a figurine), but the price premium is typically much larger than the value of the add-ons. What’s happening? Price discrimination.
I edited my post before I checked to see if you had commented—remember that this is in the context of airlines, in which case it is absolutely true. We only have the modern air industry at the size and level of connections that it is because of the sophisticated price discrimination.
That’s not self-evident to me, but we are venturing into counterfactuals by now.
In any case, I have no objection to companies trying to engage in price discrimination—they have full rights to attempt to do so. What I object to is the idea that I, as a consumer, cannot try to game their price discrimination schemes. The suggestion that I am morally obligated to meekly go along with whatever techniques companies devise to maximize their revenues is… strange to me :-D
Only tautological propositions are truly self-evident; the rest are evident only if you look for the evidence. (Specifically, consider the profit margin of the airline industry. If we believe that price discrimination raises their revenue, a world without that would imply less revenue and thus less profit, which would put it well into the negatives, forcing cutbacks on marginal routes until we have a significantly constrained industry and customers paying much higher prices on the margin.)
It’s standard reputational logic, or what people here are fond of calling “Newcomb-like” problems: only if enough people behave well enough will counterparties treat the public like they will behave. Trust is valuable, and social trust especially useful.
...he said, before proceeding to give an a priori argument.
If anyone has any data about what the airline industry would look like without price discrimination I would be very interested to see it! Before this (fascinating) thread I had never thought about the issue. It’s really counterintutive, and I would be curious to know what the magnitude of the effect is.
What? If the airline industry had, say, Intel’s or Apple’s profit margins, then the argument that I gave would not hold. I left out what their profit margins were because I figured everyone in the conversation would either know already or look them up.
Check out, say, section 3 of this paper. (In general, “revenue management” is the term of art.) This article claims it adds 4-8% in revenue.
I don’t see the relevancy to this subthread. You are not trying to say that if only everyone trusted large, not particularly high-functioning corporations everything would be just peachy—are you? X-/
Besides, trust them to do what exactly? I trust the airline to not deliberately overcharge my credit card and to not sell the information that I will be out of town to some burglars. I do not trust it to the extent of “Eh, just charge me whatever price you think is fair”, I am not going to trust it to that extent, and I think it’s a good thing, too.
P.S. I two-box :-P