David Stevens has the answer I was looking for to my question: how can price discrimination exist if everyone pays the same price? He writes
The market segmentation comes from Philips Intl charging the same price to all markets despite different distribution costs. Consumers in a distant country essentially get a discount because normally higher transport costs are not reflected in the price. Consumers in a neighboring country to Philips Intl end up paying a relatively higher price when their transport costs are lower, but not reflected by a lower price.
The short answer I was looking for is “free shipping”. The story need not be international shipping either, as long as shipping costs are increasing (or decreasing!) with distance.
Phlips comes from Louis Phlips, who wrote a classic book called “The economics of price discrimination”, where I first read about this counterintuitive kind of price discrimination.
Good work David. There were other good guesses as well.
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Monday ~ December 21st, 2009 at 12:55 am
RickRussellTX
This one left me scratching my head a bit. Do we need to go back to Marshall to understand that price is unrelated to cost? Price discrimination has nothing to do with an internally computed margin; it has everything to do with the price quoted to the customer (and in a more traditional sense, quoting different prices to different customers in an attempt to maximize profit in that partitioned market).
Seems to me there are lots of things — geography, season, variation in materials costs — that could affect the cost of producing a product. Is a company practicing implicit “price discrimination” if they charge the same price for a product in winter and summer, but it’s slight cheaper to produce in summer? That’s seems like an equally silly definition of price discrimination.
Monday ~ December 21st, 2009 at 9:44 am
Adam Ozimek
The traditional definition of price discrimination says that it is only price discrimination of prices differences do not reflect cost differences. So if it’s cheaper in the summer, and that makes prices lower in the summer, than it’s not price discrimination.
If you want to understand price discrimination, the book by Phlips is good. So is Non-linear Pricing, by Wilson.
Wednesday ~ December 23rd, 2009 at 12:12 am
RickRussellTX
I understand the concept. I don’t understand the terminology — I’ve never heard it used in this way before, and the two words combined (“price” and “discrimination”) imply that price is different.
And the reason I speak out against the idea is that I dislike conflating price and cost. Price is what the buyer pays me, cost is what I pay my suppliers/workers/etc. Beginning business and economics students already have a hard time using the two words correctly, and this seems to conflate them needlessly.
If I choose to pay more for access to a particular market, then I’m certainly discriminating cost, or discriminating expenses. But if the price is the same I’m not discriminating price.
Just IMO.
Monday ~ April 26th, 2010 at 11:11 pm
shfu
This is not PD because the pricing arrangement is open to all. People are not discriminated because they can choose their distance.