A monopolist does not maximize their profits by charging a uniform monopoly price. Provided they can segment a market and prevent arbitrage transactions the ideal price they can charge reflects each individual customer’s marginal willingness-to-pay. If you are wealthy and are lazy in terms of making efforts to search for the cheapest price you should expect to be hit with a high price. If you are less wealthy and search carefully for the best deal before you make a purchase the monopolist should charge a lower price. This is perfect price discrimination and is a rent extraction technique explained to all first-year economics students. It the ideal way of extracting profits for a monopolist since all consumer surplus gets transferred to the monopolist. But it is, however, very difficult to implement precisely because the information needed about a customer is considerable. Monopolists often try to only approximately discriminate based on a few characteristics of a consumer. If you live in a swanky suburb. have a new Mercedes parked in your driveway and you employ a plumber to fix a leaking roof in the middle of a severe storm you can expect to get slugged with a hefty charge.
I usually mention in class that, with online trading, perfect price discrimination can be practised more accurately. There is evidence it is already happening. Adaptive web pages can tell a vendor a lot about you – where you live, whether you use a Mac or a PC – Mac owners are more affluent – and how much search activity you have engaged in. If you have bought a lot from a vendor and are therefore a committed customer – you can also expect to be slugged relative to a new customer. Secondary data bases can presumably feed information about new customers to firms. Amazon.com have used this technique in the past and I’ll bet domestic airline businesses are leading experts. I’d be interested to know if readers have any practical experiences. The link cited suggests that some studies have been carried out which confirm the practise. I’d be interested to know of tricks to defeat the practise. There are, for example, several firms which provide opportunities for Australians to buy online from the United states using fake US addresses. This is one way of undoing attempts at outright bans on international transactions that essentially provide an extreme form of price discrimination. I am sure that enterprising entrepreneurs will come up with others that can be used in local markets. (2670)