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Also known as “price discrimination.” This is the situation when a seller gets to discriminate among purchasers and sets different prices for different purchasers, usually along with some profile information. A very simple example is student and senior prices at movie theaters. A concern that people have is that the profiling and discriminating could get much more detailed, and perhaps reach categories we do not think of being as deserving as students and seniors.

We recently went to see the release of a study by the Annenberg Public Policy Center. The study detailed how little consumers know about privacy online. It also asked consumers what they think about more extensive price discrimination. Consumers wanted disclosure and they were bothered that others paid less than they did. However, consumers did not mind being given incentives to be return or frequent costumers.

Who gets hit by this?

Clearly, consumers as a whole get hit by this. Think about your average supply and demand situation. The demand goes down as price goes up. People have what is called a “reservation price.” This is the maximum price they are willing to pay for a product. However, the market has only 1 price for everyone. For some people, this will be exactly their reservation price. For others, this will be less. The difference between reservation prices and the market price is added up and called the “consumer’s surplus.” Here is a picture:

With perfect price discrimination, a seller can charge each consumer their reservation price. People will still buy: the reservation price is by definition the price at which people are willing to buy. But there will be no more consumer’s surplus.

But what about class?

I was having a conversation a few days after the presentation of the study. They mentioned that we often think that the victims of these practices are the poor or lower classes, but in fact the people who have the most surplus taken from them are the rich. It is the rich that are likely to be consuming more. And it is the rich that are likely to have higher reservation prices.So the proper way to analyze the situation is not, at the first order, as something against the poor — it is a transfer from consumer to producer.

But there is a second order effect once we see it as a transfer to those who own the means of production. The victims are the lower classes because they are less likely to be on both sides — to be both consumers and owners of the means of production. The rich may be making transfer to themselves, but not the poor.

Another factor to consider is that the poor consume a greater proportion of their income. This is related to the dynamic in the previous paragraph. We can consider the non-consumption activities of the rich — savings and investments — as staking out their ownership on the means of prodution.