CLASIFICACIÓN DE LOS MÉTODOS DE INTERPOLACIÓN

SHOULD IT BE?

As was mentioned in section10.1, the extreme case of perfect price discrimination provides a useful framework for the welfare analysis of price discrimination. Figure 10.1, previously introduced in this chapter, represents the monopoly equilibrium with and

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without perfect discrimination, assuming linear demand, D, and linear costs (constant marginal cost c). A monopolist that cannot price-discriminate sets price p^M, thus selling output q^M. Under this solution, profits are given by A and consumer’s surplus by B; total surplus is thus A+ B. Consider now the case when the seller can discriminate between different buyers. The price charged to each buyer is given by the latter’s willingness to pay. The monopolist thus will sell to all buyers whose willingness to pay exceeds marginal cost, that is, to all buyers from 0 to q^D. The monopolist’s profit is now given by A+ B + C, whereas consumer’s surplus is zero; total surplus is therefore A + B + C.

There are several relevant points in the comparison between the solutions, both with and without price discrimination:

. Total welfare is greater under price discrimination (A+ B + C as opposed to A + B).

. Consumer welfare is lower under price discrimination (zero as opposed to B).

. Different consumers pay different prices under price discrimination.

. More consumers are served under price discrimination. (Specifically, all consumers between q^M and q^Dare served under price discrimination but not under uniform price.)

Although this is a simple, extreme example, it serves to illustrate the main trade-offs implied by price discrimination: (1) the trade-off between efficiency (which favors price discrimination) and consumer welfare (which favors uniform pricing) and (2) the trade-off between “fairness” (which favors uniform pricing) and the objective of making the good accessible to as many consumers as possible (which favors price discrimination).^hIf distribution concerns are not very important, then a case can be made

hThere is no good simple term to designate this. In telecommuni-cations, the expression universal service is used.

in favor of price discrimination, for it increases total efficiency. However, if distribution between firms and consumers, as well as across consumers, is an important issue, then a case can be made for disallowing price discrimination.

This analysis is a bit simplistic, and several qualifications are in order. First, it may happen that total efficiency decreases as a result of price discrimination. For example, if perfect price discrimination is costly, it may be that the gains for the seller do not compensate the losses imposed on consumers (see exercise10.15). Likewise, it can be shown that spatial price discrimination decreases efficiency when demand curves are linear, for example.

Second, there are cases when price discrimination implies a strict Pareto improve-ment, whereby both the seller and consumers are made better off (more specifically, some are equally well off and some are strictly better off as a result of price discrimina-tion). The examples of damaged goods and bundling, presented in section 10.4, prove this point.

The analysis is further complicated by the fact that, both in the United States and Europe, public policy toward price discrimination has been driven by considerations that differ from the principles of economic efficiency outlined earlier.

In the United States the main concern has been to prevent price discrimination from injuring competition. In particular, the Robinson-Patman Act states that

It shall be unlawful for any person engaged in commerce . . . to discriminate in price between different purchasers of commodities of like grade and quality . . . where the effect of such discrimination may be substantially to lessen competition or to tend to create a monopoly in any line of commerce.

In the 1950s, Anheuser-Busch lowered the price of its Budweiser beer in the St. Louis market with respect to the price that it charged elsewhere in the United States. The Supreme Court determined that such practice violated the Robinson-Patman Act by injuring local competitors. In fact, Budweiser’s market share rose from 12.5% to 39.3%

as a result of the price cut. The case was remanded to the Appeals Court for further consideration. Here, the decision was made to dismiss the case on the basis that no injury to competition was made and that the primary beneficiaries of the price cut were St. Louis customers. This case illustrates one of the central dilemmas for public policy toward pricing strategies, namely, how to balance the anti-competitive effects (injury to competition, which in the limit, may lead to exit and a more concentrated industry) and the pro-competitive effects (lower prices). Chapter15 develops this theme further.

A more recent case, which illustrates a similar trade-off, is that of the pharmaceu-tical industry:

Four major pharmaceutical companies have agreed to pay about $350 million to settle class-action price-fixing litigation brought against them . . . by independent U.S. phar-macies and drugstore chains. . . . The suits generally allege that a dual system of drug pricing had improperly arisen in the United States during the first half of the 1990s, with a discounted pricing system that pharmaceutical companies offered to big managed-care companies and health maintenance organizations, while a range of higher prices were offered to drugstores and big pharmacy chains.

At issue was whether the two-tiered pricing system stemmed from normal market forces, as the pharmaceutical industry has contended, or from a price-fixing conspiracy, as the plaintiffs maintain.¹²¹

In the European Union, a classic case of price discrimination is that of United Brands, who sold bananas in different European countries. Although the transportation costs to each country differed by very little, the wholesale prices charged in each country differed a great deal. At one point, the price in Denmark was more than two times the price in Ireland. United Brands argued that it only adapted its prices to what each market

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could bear—the essence of third-degree price discrimination. The European Commission decided that such practice was in breach of Article 86 of the Treaty of Rome, which forbids the abuse of dominant position.ⁱGenerally, it stated that

iThis ruling was important, among other reasons, because “abuse of dominant position” is a rather vague concept for which no clear definition has been given.

The Commission has the firm intention of systematically applying Article 86 against undertakings in a dominant position which directly or indirectly impose discriminatory or unfair prices, . . . [on account of] the injury which these practices can cause to the user and the consumer.

The economic analysis in this chapter suggests that the grounds for the preceding justification are, at least, dubious.

A decision by the European Court of Justice seems to confirm this view. Silhouette, an Austrian maker of eyeglass frames, refused to sell its glasses to Hartlauer, a discount store chain. Hartlauer bought 21,000 Silhouette eyeglass frames in Bulgaria at a low price and announced its sale in Austria. The European Court judged that Silhouette’s trademark rights extend to the point of limiting the import of its products from other countries (also known as buying in the grey market).

This decision will have important consequences. U.K. supermarket chains, for example, have sold Levi’s, Adidas, and Nike products imported from countries where prices are lower.¹²²This is one instance of the point made at the beginning of the chapter:

If resale is easy, then price discrimination is difficult. By allowing manufacturers to limit the imports of their products into the European Union, the recent court decision essentially allows the manufacturers to price-discriminate between the European Union and the rest of the world.

In summary, it would appear that the European Union is very concerned with price discrimination within Europe but less so between Europe and the rest of the world. In fact, E.U. law dictates that a manufacturer has no right to restrict the subsequent sale of trademarked goods within the E.U. after their initial sale.

By contrast to the European Union, the U.S. Supreme Court has taken the view that, once a company sells a product, it has no right to restrict its subsequent resale unless the product is altered in a way that may mislead consumers. In other words, parallel imports are allowed. Price discrimination between the United States and the rest of the world is therefore difficult.¹²³

Summary

. Price discrimination, the practice of setting different prices for the same good, requires the absence of resale opportunities.

. Sellers can price-discriminate either based on observable buyer characteristics (third-degree price discrimination) or by inducing buyers to self-select among different product offerings (second-degree price discrimination).

. Under third-degree price discrimination, a seller should charge a lower price in the market segments with greater price elasticity.

. Second-degree price discrimination is achieved by offering different versions of the same product, or different packages of related products.

. When selling a durable good, sellers may want to commit to not price-discriminate over time. In fact, because of “strategic” purchase delays, profits may be lower under price discrimination.

Key Concepts

. price discrimination

. arbitrage and resale

. first-, second-, and third-degree price discrimination

. selection by indicators and self-selection

. two-part tariffs and nonlinear pricing

. versioning

. bundling

. durable goods

Review and Practice Exercises

10.1 First-time subscribers to the Economist pay a lower rate than repeat subscribers.

Is this price discrimination? Of what type?

10.2 Many firms set a price for the export market that is lower than the price for the domestic market. How can you explain this policy?

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10.3 Cement in Belgium is sold at a uniform delivered price throughout the country, that is, the same price is set for each customer, including transportation costs, regard-less of where the customer is located. The same practice is also found in the sale of plasterboard in the United Kingdom.¹²⁴Are these cases of price discrimination?

10.4 A restaurant in London has removed prices from its menu: Each consumer is asked to pay what he or she thinks the meal was worth. Is this a case of price discrimination?

10.5 In the New York Fulton fish market, the average price paid for whiting by Asian buyers is significantly lower than the price paid by white buyers.¹²⁵What (if any) type of price discrimination does this correspond to? What additional information would you need to answer the question?

10.6 Supermarkets frequently issue coupons that entitle consumers to a discount in selected products. Is this a promotional strategy, or simply a form of price discrimina-tion? Empirical evidence suggests that paper towels are significantly more expensive in markets offering coupons than in markets without coupons.¹²⁶ Is this consistent with your interpretation?

10.7^∗∗ A market consists of two population segments, A and B. An individual in segment A has demand for your product q= 50 − p. An individual in segment B has demand for your product q= 120 − 2p. Segment A has 1000 people in it. Segment B has 1200 people in it. Total cost of producing q units is C= 5000 + 20q.

a. What is total market demand for your product?

b. Assume that you must charge the same price to both segments. What is the profit-maximizing price? What are your profits?

c. Imagine now that members of segment A all wear a scarlet “A” on their shirts or blouses and that you can legally charge different prices to these people. What price do you change to the scarlet “A” people? What price do you charge to those without the scarlet “A”? What are your profits now?¹²⁷

10.8^∗ Coca-Cola announced that it is developing a “smart” vending machine. Such machines are able to change prices according to the outside temperature.¹²⁸

Suppose for the purposes of this problem that the temperature can be either “High”

or “Low.” On days of “High” temperature, demand is given by Q= 280 − 2p, where Q is number of cans of Coke sold during the day and p is the price per can measured in cents. On days of “Low” temperature, demand is only Q= 160 − 2p. There is an equal