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Adaptive web pages

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. (2688)

5 comments to Adaptive web pages

  • Peter Ferguson

    I upgrade my Adobe Acrobat Pro via the Adobe website and use the USA website and save about $50 on each upgrade c.f. Adobe AU website. I had to use a USA Street address to enable this. The latest upgrade has just been released (Acrobat Pro XI) but the US website shifts me to the Australian Website at each attempt. The difference in price including a black Friday 15% discount is $117 ($282 in Australia – $165 in USA). I had to start a VPN to a USA server to get the US deal which took a little effort. The point is that I was going to be charged over 70% more just because my IP address was AU instead of US.

  • Jim Rose

    No one complains when they get the student discount on software?! Australia gets new drugs cheaper for a variety of reasons, but should this price discrimination stop?

    I thought price discrimination was efficiency enhancing because it opened new markets.

    The rents from price discrimination increase the rewards for discovering new goods. That is welfare enhancing because more new goods are worth discovering and developing in the first place.

    Creative destruction where there are a succession of temporary monopolies is the driving force of progress.

  • Jim Rose

    amazon is now offering cyber monday discounts. digital publishers have sales on e-books despite their zero marginal cost and zero inventory costs. digital pricing is hard to understand – remember coase:

    “if an economist finds something – a business practice of one sort or another – that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on monopoly explanation frequent”

  • hc

    I really have no idea what you are saying Jim. Monopoly produces deadweight losses unless there is perfect price discrimination. Then firms get all surplus and there is efficiency. Yes dynamic stories about innovation offset this argument.

    Are you somehow suggesting Australia is better off because it pays huge prices for software because vendors are opening up new markets?

    I am not looking for a monopoly explanation. Price discrimination is only possible under monopoly – with competition consumers buy from the cheapest supplier.

  • derrida derider

    One of the things you quickly realise in looking at real-life markets is that local monopoly (and monopsony) are absolutely pervasive because changing market partners is always costly and often risky. So there are usually some extractable rents, and hence value in looking for various forms of price discrimination.

    The point Coase originally made with his eponymous theorem for example is that, while initial allocation of resources doesn’t matter for efficiency if and only if transaction costs are negligible, in fact large transaction costs are usual so initial allocation does matter in the real world. Large transaction costs = local monopoly by resource holders, so Coase’s statement is a bit bizarre.

    I believe banking service in the US has long been adaptive. Banks know whether they’re making a buck out of you or not pretty accurately. If you ring up many US bank call centres the obsequiousness of the operator is likely to vary accordingly. It would be fun to be the person dealing with the people the bank are making a loss on; think of the creative ways you could devise to motivate them to take their business elsewhere while minimising collateral damage to the bank’s reputation.

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