[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

e-Insight
USING THE INTERNET TO ENHANCE PRICE
DISCRIMINATION
In 2000, the online retailer Amazon.com conducted a marketing
test that generated an immediate outcry of foul play from
consumer advocates. Amazon.com had offered different
customers different prices on DVDs; and when the pricing
strategy became public, it claimed that the prices were set
randomly in an attempt to determine how consumers would
respond to different prices. Analysts were skeptical, fearing
that Amazon.com was using information collected from the
previous purchases of individual consumers to fine-tune its
prices. Customers from wealthier neighborhoods with a record
of buying more expensive items might be receiving higher
price quotes. Newspaper commentators accused Amazon.com
of “unfair” pricing, and the marketing test was suspended.
Consumers have long accepted that airlines will offer different
fares to travelers on the same flight, according to when
tickets were purchased. Travelers who can plan in advance
receive discount fares, while business travelers who need to
get to a newly scheduled meeting pay much more. Because the
business traveler’s demand is highly inelastic, airlines can charge
her a higher price. People who can plan ahead and easily adjust
travel dates and times will be more price sensitive—their
demand curve is more elastic. By offering only price-sensitive
customers lower fares, airlines can sell more seats without
having to offer the same low price to everyone.
In imperfectly competitive markets, as we saw in Chapter
12, firms can try to boost profits through price discrimination—
charging different prices to different consumers. The Internet
is opening up new opportunities for this sales strategy. Here’s
an example of how it might work. Knowing that a blizzard is
predicted for the weekend, early in the week you log onto a
hardware site to order extra lanterns, batteries, and candles.
The Web site is programmed to check orders of emergency
supplies from your zip code against a national weather database.
Knowing that you are facing a blizzard, the hardware
online retailer decides that your demand is inelastic, and raises
the prices for the purchase and delivery of the items you need.
By providing firms with more detailed information about
their customers, the Internet may open new possibilities for
firms in imperfectly competitive markets to engage in price
discrimination.
Policies Toward Natural
Monopolies
If imperfect competition is as disadvantageous as the previous analysis has suggested,
why not simply require that competition be perfect? To answer this question,
we need to recall the reasons, discussed in Chapter 11, why competition
is imperfect.
One reason is that the cost of production may be lower if there is a single firm in
the industry, leading to a natural monopoly. In the case depicted in Figure 13.3, average
costs are declining throughout the relevant levels of output, though marginal
costs are constant; there are very large fixed costs. Natural monopolies present a difficult
policy problem. Like any other firm, a natural monopolist will produce at the
level where marginal revenue equals marginal cost—at Q m , in Figure 13.3. At this
level, it will charge a price of p m , which is higher than the marginal cost at that point.
Thus, it will produce less and charge more than it would if price were equal to
POLICIES TOWARD NATURAL MONOPOLIES ∂ 293