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Quality Contributions to the Main Motte
Contributions for the week of April 3, 2023
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Contributions for the week of April 10, 2023
Transitive Reasoning
Contributions for the week of April 17, 2023
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Contributions for the week of April 24, 2023
- "What is going in Sudan is a practical demonstration that being a global power does not mean that everything going on in the world is secretly about you."
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No, the entire point is that they don't. They benefit a tiny tiny bit from price discrimination. If the maximum someone is willing to pay for a product is $10, and it costs $9.99, then they benefit by $0.01. That is, they are barely coming off ahead at all, almost all of the benefit from that product they gain was lost to them in the $9.99 they spent and given to the producer. You can sell five times as much product to five times as many poor people and create five times as much benefit, but none of them are gaining much benefit at all because the products are just barely worth it.
If you have a crippling leg injury, and a doctor cures it but charges so much money that the debt cripples your life 99% as much as the leg injury did, you have benefited... but just barely.
From the producer's standpoint, this is great. Tons of value is being created by the increased number of exchanges. Lots of people are incentivized to become producers... which benefits the people who are in a position to become producers and able to (assuming the market isn't an oligopoly that crushes small competitors). And the increased trade does benefit customers... by like 1% because that's how much of this increased surplus they get to keep.
If the only two options are perfect price discrimination or unserved customers, then the price discrimination scenario is technically better for those particular customers. But my goal is to find a third option that's better, because the price discrimination scenario isn't very good for anyone except producers.
In a medical context, price discrimination means the difference between getting medical treatment and not getting medical treatment. If I can only afford to pay $1,000 at most for medical treatment, and I'm in serious pain or dying, and treatment costs $50,000 for everybody then I'm going to go without treatment, or go for treatment and be saddled with medical debt. If the doctor price discriminates, then I can get treatment for $1,000 which is better than going without and better than being saddled with $49,000 worth of debt.
Most doctors do this de-facto anyway, if someone owes a clinic $10,000 and they say they can't pay they'll usually cut a deal where they pay $500 and the doc writes off the rest. Very common. Because money in hand is worth more than money owed that you'll never collect on. Those who can afford to pay their bills pay them, those who can't pay what they can.
You say that you can only afford $1k, but your parents are awfully rich, and you have an up-and-coming career, and isn't that some savings there? That'll be $5k up front and a payment plan for an additional $30k, please. Aren't you so grateful for the discount from $50k? Never mind that the procedure would've been <$20k if they had to set it by cost+ or by profit-maximizing single price, or some other system.
It's a two step process: the base price is raised (but almost nobody pays it), then the cost is selectively lowered to near-zero-utility based on a lot of private information. It would be great for the consumer if it wasn't for that first step, though.
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Now do food.
Suppose there is a food cartel that has gained sufficient market power that they could restrict output, raise prices, and profit according to standard monopoly theory. If you are in a position where you can't afford food, you're going to go without food or you're going to be saddled with food debt. If the food cartel perfectly price discriminates, then you can get food for exactly your willingness-to-pay (i.e., you have basically nothing left for any other aspect of the Good Life).
This is the threat that the cartel issues in order to get you to be willing to have the government come in and hand them the tools to price discriminate perfectly. But that's all it is. It's a threat. Blackmail. From their position of market power.
You're right that once we've gotten ourselves into such an abhorrent situation with the food cartel, maybe it's an appealing trade-off. But hot damn is the vastly better deal to break the food cartel, create a competitive market, watch the price of food fall to the marginal rate of production, and see everyone eat plenty of cheap food and have money left over for, like, flatscreen TVs or whatever.
This is sort of the point of my OP. We see this progression of reasoning happening over and over again in all these domains where the gov't comes in; they subsidize demand, restrict supply, create a de facto cartel, completely destroying the competitive market. Then, when your back is against the wall and all seems lost, they issue the threat. "Just let us take all the surplus now; it'll be epsilon better for the poorer part of the population." And they're right! It is epsilon better for the poorer population (and significantly worse for the richer part of the population).
The real problem is that you put yourself in such a vulnerable position to such a threat. That you let the gov't subsidize demand, restrict supply, and set up a de facto cartel. The first best solution is to undo all of that shit. The second best solution is to observe on the internet how the same dynamic that results in this threat seems to keep materializing over and over again. A distant third is to just give in to the threat, trading what's left of consumer surplus for the richer part of the population in exchange for an epsilon improvement for the poorer part of the population.
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I don't think you're using my premises.
Let's set aside life threatening scenarios, because I'm not entirely sure how my argument interfaces with them, and trying to assign personal valuations to them probably ends up with infinity dollars or something silly. Similarly, let's set aside issues of bankruptcy, and issues of involuntary treatment. And assume we're dealing with amounts of money which a person either can afford, or can afford by going into debt that they eventually mostly pay off. The clinic will treat its sale price as the amount of money they actually expect to receive from someone.
I'm fine with conceding that limited price discrimination can have positive effects, as you point out. But I'm specifically referring to perfect or near perfect price discrimination. That is, there is some level X, such that you are perfectly indifferent between receiving no treatment, and receiving treatment that costs $X. If it cost $10 million dollars and put you in debt for the rest of your life, you'd be better off untreated and saving your money, so X is less than 10 million. If it cost $1 you'd be better off with treatment, so X is greater than $1. Intermediate value theorem, or iterate, or whatever, we find some finite value, which differs from person to person based on some combination of their finances, how bad the injury i, how much they hate being in debt, how much social support they have, etc, at which they are perfectly indifferent, the scenario in which they go untreated is exactly the same value as the scenario in which they pay X and get treated. The treatment increases their utility by the exact same amount that losing $X decreases their utility, so if they paid $X for treatment they have gained nothing on net. If the clinic has some cost C for the procedure, then they are willing to charge any amount P > C. The client is willing to pay any amount P < X. Therefore any price P with the property C < P < X is mutually acceptable to both parties. The clinic profits P - C, the client "profits" X - P, and both are greater than zero. A normal sane version of price discrimination would pick some value near the middle of the interval (C,X), such that both have nontrivial profit.
However, if the clinic has perfect knowledge of X, and is selfish, they will pick some amount trivially less than X. The doctor is only going to charge you $1000 if their costs are less than $1000 and that is every last cent you have to your name or can scrounge up by going into debt. Take whatever money is the most you could possibly be willing to part with to undergo the procedure, such that if it cost a single dollar more you'd be better off untreated, and the doctor charges you exactly that much, such that the monetary cost to you is so painful it's only a tiny bit. By definition, if the person is benefiting a nontrivial amount from the transaction, we are not in this scenario. I am defining "perfect price discrimination" to be this, this is not itself an argument.
My argument can be broken down as:
1: Perfect Price Discrimination as defined is as coherent concept and isn't some contradiction of terms.
2: Perfect Price Discrimination would follow from a perfectly rational/selfish producer with perfect knowledge of their client's utility function.
3: Perfect Price Discrimination is a tiny bit better for each clients than a scenario in which they are not served at all, but worse than any other pricing mechanism in which they are served (because it gives them the least possible nonzero surplus), including imperfect price discrimination.
4: Price Discrimination scenarios increasingly approach Perfect Price Discrimination as a price discriminating producer gains more knowledge.
On this last point, if the client has some imperfect knowledge of clients, like maybe it bins them into "poor" "average" and "rich" then maybe it sets up three prices, like $1k, $10k, $100k. Then all the poor people who value the treatment at $3k can benefit because they're only paying $1k for a treatment that improves their lives by $3k, but they couldn't afford the $10k cost, so they're genuinely better off by not having to reject treatment. Average people who value it $15k will benefit by $5k, because the price is lower than their valuation. Someone who by sheer coincidence values the treatment at $10,001 is screwed, because they'll be charged $10k and receive a trivial benefit, but if the prices are spaced out enough such people will be rare.
But if the producer gains enough data to accurately bin people by thousand dollars, ie it can detect and set prices at $1k, 2k, $3k..., then we're in worse shape. Now if someone has, say $3500 valuation, they pay $3k and only get $500 benefit. If someone has $23232 valuation, they pay $23k and get $232 benefit.
If the producer gains enough data to accurately bin people by tens of dollars, then nobody can benefit by more than ten dollars.
I'm not so much arguing that such extremes are realistic, I don't think a person themselves could accurately assign a monetary value to how much they would benefit from an action X even after having already received it, since they would have to compare to a counterfactual scenario in which they hadn't received it and had kept their money. But more information allowing for more accurate price discrimination can, in many cases, lead to lower consumer benefits. If you were previously in a scenario where you "couldn't afford" something (in the sense of it not being worth the money, not whether you literally have enough money), and the price discrimination puts it into an acceptable price then you're some amount better off. But if you were previously in a scenario where it was worth it, the price discrimination raises prices on you, squeezing out your value and making you worse off. And this happens incrementally, such that one supper accurate price discrimination is comparable to an initial discrimination that makes everyone be able to afford it, followed by a bunch of subsequent discrimination that squeeze all the value out. You seem to be under the impression that price discrimination = lowered prices, but it also means raised prices. You might consider it an incremental raising and lowering of prices on every single person until as much value as possible is squeezed out while still giving them barely enough to keep them consenting to the transaction.
At the extremes. I'm not attempting to apply my argument to all possible scenarios of price discrimination or suggest that it's always bad. Just that it can be bad when taken to extremes.
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If I may--I think the disconnect here is one the difference between poor people benefiting from specific cases of price discrimination, and poor people benefiting from the overall existence of price discrimination.
A producer who is willing to let a good go for as little as $10, assuming a single transaction ever, is different than a producer who is willing to let a good go for as little as $10, conditional upon someone else paying $20 for the same good, or for some other good. My understanding is that airline pricing often functions in approximately this way. If you have a ten-seat airplane, and a flight costs you $10,000 to run, then your break-even point is $1,000 per seat. But if there are five people willing to pay up to $2,000 per ticket, and five people willing to pay up to $200 per ticket, and no other possible customers, then your ability to price discriminate means you get to make a $1,000 profit beyond your break-even, and five people get to fly who would not have gotten to fly at a flat, evenly-distributed price. The "poor people" in this scenario got a benefit, even though the airline could arguably have accepted $100, or $10, for those other five seats.
I don't think every case of price discrimination looks like this; I'm not even sure most cases look like this. But it does seem to me that "willing to accept an $X transaction conditional upon other transactions" is an important part of how to think about price discrimination.
I think this is right, and I think the usual justification for why it would be beneficial in increasing output is often related to situations with significant fixed costs and small marginal costs. Buying a plane/operating a flight has significant fixed costs and low marginal costs. Another standard example is a drug company selling a pill in Africa for a tenth of the price they sell it for in America. Drug development has high fixed costs, while production of the pills often has low marginal costs. The key question is, "Would not being able to price discriminate lead to market exit?" In the drug case, if a company couldn't price discriminate between America/Africa (i.e., they had to choose one price everywhere), they're simply not going to sell drugs in Africa. They're going to exit the market. If an airline can't price discriminate at all, then some routes are going to become unprofitable, and they're just not going to offer the flights (and not buy the aircraft to fly the routes). I think this is essentially your idea that they're willing to sell African pills/cheap flights conditional on being able to price discriminate with other transactions. But in both of these cases, I think it's important to note that the price they're willing to give to the "poorer" folks is still above the marginal cost of production. This is obviously true, because otherwise they wouldn't sell a seat to a poorer person or a pill to an African, even with price discrimination.
A couple other salient differences between these examples are 1) monopoly power, and 2) the nature of the price discrimination. On (1), the drug example really only applies to drugs that are patented (and thus, the producers have monopoly power). For example, some countries don't respect patents of US drug companies, and those consumers get generic pills at the (low) marginal cost of production. Once a regular drug goes off-patent, no one really argues for the benefit of price discrimination, because everyone ends up enjoying paying the (low) marginal cost of production! Both in the US and Africa! (Remember, both sets of consumers were paying above the marginal cost of production during the period of monopoly + price discrimination.) The point of difference here is that while airlines have some significant regulatory and other barriers to entry, the market for air travel is much more competitive than that of a patented drug. Part of the question really boils down to how much "cartel-like" control one actually thinks universities/hospitals/whatever actually have. (We could probably argue about this another time; is a pretty rich conversation.)
Concerning (2), I think there is a significant difference in the nature of the price discrimination. Drugs in US/Africa is in a meaningful sense, I think, targeted at general income patterns by regional area. That is short of the very individualized income data that universities/hospitals are able to use. The price discrimination will be a little "less perfect". Moreover, I think that there is a conceptual difference between a company simply being able to look at incomes (whether abstracted over a region or individualized) as opposed to traditional means of price discrimination. Like I mentioned in the OP, all companies want to price discriminate. They want to know incomes. They want to know everything that is going to correlate with willingness-to-pay. But usually, they have to fall back on some other sort of weak correlate. "Vacation travelers tend to book further in advance than business travelers, and the latter tend to have higher willingness-to-pay." "Retirees are more able to view a 2pm matinee at the theater on a week day, and they tend to have lower willingness-to-pay." It may in some sense be correlated with income, but they're actually targeting something else. I also think it's meaningful if the method involved includes actually giving people a different product. Sure, selling a business class ticket for $2k may help make it profitable to run a flight that also includes some $100 seats, but they have to at least, like, try to make that business class seat better in some way. Some incentive for the person to choose to pay $2k rather than just, "Whelp, we magically know your income, so you're gonna have to pay more for the same thing, because fuck you, that's why."
Bringing it back to universities (maybe I'll do healthcare another day), I think they are remarkably more cartel-like than most people understand. They control the accreditation boards that determine who is allowed to sell education. They control processes that require universities to "show a need" for opening up a new program even within an existing university (at least sometimes)! They went knives out in regulatory processes against for-profit colleges, MOOCs, etc. (notwithstanding other legitimate concerns that may exist with those things). You should hear the stories of various tech people/billionaires/etc. who have tried to go after the academia cartel. They give up, because the cartel is stronger than you think. We've bolstered it by subsidizing demand and restricting supply. That's the first problem. Then, I don't think there's any real charge that they will exit the market if they can't price discriminate. While their marginal costs are pretty low, their fixed costs don't really correlate with market exit in the same way that say, not buying a plane to fly a route or not bringing a drug to market does. They have no natural analog to simply not selling drugs in Africa if they're unable to price discriminate. And finally, they've always been able to "price discriminate" by offering a different product. Business class seats are like living in the fancy new dorm building. I don't know that anyone really cares about it that much. Those consumers are genuinely getting additional consumer surplus out of the deal. It is specifically the, "We've magic'ed (by force of government) into existence a new way to just take the surplus from you, not by giving you something else you want or by providing more things to more people, but because we vaguely threatened 'poor people' enough that the gov't now tells us how much money you make," that is a problem.
No one would accept this in any other industry that hasn't already been mammothly screwed up. No one thinks that when you go to the grocery store, or go to buy a TV, a refrigerator, or car, or anything else, that you should first have to just give them all your financial information so that they can tailor your price. Everyone realizes that if the starting point is one of those regular, well-functioning, competitive markets, there would be no benefit to such a thing; it would be a pure transfer of surplus from consumers to producers. Everyone realizes that apples/TVs/refrigerators/cars are already sold at the marginal cost of production, and that adding income-based price discrimination isn't going to magically make producers sell them below the marginal cost of production to poor people. It's only after we have completely screwed up a market that this starts even being a thinkable proposition.
Actually, for cars, they kinda do that. Especially for used cars, I routinely got asked "how much you can afford to pay?", for which I usually answered "yeah, right, nice try" but in polite form. In other markets, it's less pronounced - e.g. there are often brands that function on substance about the same as another brand (and often are owned by the same company and literally are manufactured in the same place) but add a little bit of polish and a lot of marketing, and charge much higher price, in order to extract surplus from customers that are less price-sensitive. They don't ask for your income level, they just price and market it so the people of certain class - and thus, presumably, income level - would be attracted to it.
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Sure. I wholeheartedly agree that in some instances price discrimination is better for both consumers and producers simultaneously. Especially when costs are nonlinear as in your example.
But in other cases it's bad for consumers (as a whole, every case will have a few specific individuals who benefits at the lowest end of the curve who wouldn't be served without price discrimination, but the average consumer ends up worse off)
And producers with perfect knowledge have no incentive to pick and choose only to use it when it benefits customers. And I don't think it's necessary to demand such a strong burden on them. If scenario A has $500 consumer surplus and $500 producer surplus, while scenario B has $400 consumer surplus and $1000 producer surplus, it doesn't seem unreasonable to allow them to do scenario B without getting upset at them. But if scenario C has $1 consumer surplus and $2000 producer surplus... I feel like something has gone wrong. Like, it's economically efficient on a global scale, the total surplus is higher. But it violates intuitive notions of "fairness" in ways that lead to poverty and discontent. Note that utility is nonlinear with respect to money. A thousand people with $10,000 each will be more happy/healthy/fulfilled/content/secure on average than 999 broke people and 1 person with $10 million.
Maybe if we could figure out a way to losslessly tax them and redistribute some of the profits back to consumers this would be fine? But I'm skeptical of "lossless taxation" on producer surplus being possible. I feel like a more organic market solution involving competition and balanced bargaining power would be better, where prices are set in between customer's values and producer costs such that both could extract nontrivial fractions of the surplus.
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