The Technology of Price Discrimination

Price Discrimination has been a practice of business owners for a long time. Jane Black in “Sharper Tools for Discriminatory Pricing” talks about the use of price discrimination as early as the late 19th century, particularly in the railroad industry. She explains that railroads used a type of price discrimination known as “versioning” in which they would offer lower prices for carriages that were less nice, sometimes so bad that someone would feel it was worthwhile to pay more. Price discrimination is a very appealing strategy for firms who look to be able to attract customers depending on their willingness to pay. Capturing consumer surplus, Jane Black points out, makes trade more efficient.

Today, technology is making it easier to use differential pricing. Black notes that in the past, first-degree price discrimination had always been regarded as the ideal because it induces maximum production. This ideal, however, has always been unattainable. Now, technology is making it seem like more of a possibility, by making it easier for firms to track information about their customers. Technology has also increased the sophistication of price discrimination when selling products. Coca-cola for example, tested a vending machine that would raise prices on a hot day, and lower them when it was cooler. Amazon has also experimented with using the data it collects on customers to create “personalized bundles…to induce people to buy more.”

While price discrimination is a technique firms will continue to use in the future, consumers have long been bothered by the idea of differential pricing. Black states that people are concentrated on the issue of fairness, and paying more for a product than others makes people feel cheated. Despite these concerns, Andre Odlyzko, the director of the University of Minnesota’s Digital Technology center, explains that price discrimination will continue to grow over the next decade “due to continued ability to find out just how much people are willing to pay and the desire to control how products and services are used.”

by Christopher Hildner, Bradley Fromm, and Carter Mann
http://www.businessweek.com/technology/content/jul2003/tc20030731_6139_tc073.htm