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Quality Contributions Report for April 2023

This is the Quality Contributions Roundup. It showcases interesting and well-written comments and posts from the period covered. If you want to get an idea of what this community is about or how we want you to participate, look no further (except the rules maybe--those might be important too).

As a reminder, you can nominate Quality Contributions by hitting the report button and selecting the "Actually A Quality Contribution!" option. Additionally, links to all of the roundups can be found in the wiki of /r/theThread which can be found here. For a list of other great community content, see here.

These are mostly chronologically ordered, but I have in some cases tried to cluster comments by topic so if there is something you are looking for (or trying to avoid), this might be helpful. Here we go:


Quality Contributions to the Main Motte

@ymeskhout:

@gattsuru:

@johnfabian:

Contributions for the week of April 3, 2023

@Soriek:

@FiveHourMarathon:

@grendel-khan:

@ymeskhout:

Recognition Diplomacy

@naraburns:

@07mk:

@FiveHourMarathon:

Contributions for the week of April 10, 2023

@HlynkaCG:

@TracingWoodgrains:

@FlyingLionWithABook:

@Soriek:

@RandomRanger:

Transitive Reasoning

@Lewyn:

@self_made_human:

@roystgnr:

@RandomRanger:

@TracingWoodgrains:

Contributions for the week of April 17, 2023

@gattsuru:

@ControlsFreak:

@faul_sname:

Identity Politics

@throwawaygendertheorist:

@RenOS:

@SophisticatedHillbilly:

@FCfromSSC:

Contributions for the week of April 24, 2023

@naraburns:

@faul_sname:

@Dean:

@self_made_human:

Discriminating Taste

@RenOS:

@Unsaying:

@Esperanza:

@FCfromSSC:

@MonkeyWithAMachinegun:

@laxam:

@DaseindustriesLtd:

19
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Holy crap. That @ControlsFreak post on personalized pricing just blew my mind. I hadn't seen it when it was first posted, but I'm very glad that I did because it just changed my perspective on the whole financial assistance thing.

Thanks for such positive feedback! It's really nice to hear that it resonated with people; when I first wrote it, I got no responses, so I actually figured that it had just fallen flat with the audience.

If you look, it got more upvotes than the post it was responding to, so most likely people who saw with it agreed but didn't have anything of their own to add in response.

I don't know about everyone else, but I don't dig into the responses on every top level post, only ones I find interesting. And often miss responses if they happen after I've already read the top level post, as I usually don't go back and find new responses. So that's why I missed this one, because I do read every top level post, but I didn't care about this one.

I also more frequently respond to people I disagree with than people I agree with, because people I agree with already said half of my thoughts. So that's a bias towards non-response which was probably relevant here given how insightful your post was.

So I guess as a followup here:

Is there a solution? I think we'd both agree that this scenario is generally bad for society if businesses capture all of the gains, because that screws over the customers. Economic surplus is created by the economic trade between producers and customers, and thus both are partially responsible for it, so both deserve some of the surplus. Not necessarily exactly 50-50, but some reasonable fraction. So if producers capture 99% of surplus by near-perfect price discrimination and leave just a tiny scrap of surplus to customers to push them over the edge of indifference, then customers are being deprived of surplus that is rightfully theirs.

On the other hand, price discrimination is often more economically efficient than a flat rate.

Suppose we have 10 consumers who value a good with utility 1,2,3...10. And a producer who can produce the good with cost 2.

1: With a flat price for all customers, the producer maximizes profits by setting their price at 7 - ε, in which case they sell to 4 consumers. The total surplus is 26, of which 20 - 4ε is captured by the producer and 6+4ε is captured by consumers.

2: With perfect knowledge and price discrimination, the producer sells to each person with value greater than 2, at a cost ε less than their valuation. They sell to 8 consumers, the total surplus is 36, 36-8ε is captured by the producer, and 8ε is captured by consumers.

So even though the consumers are better off in the flat price scenario, the total economic surplus created with price discrimination is higher. If we could somehow detect these scenarios and redistribute the surplus back to the consumers in a way that didn't distort the economic incentives of the producers or consumers, the price discrimination scenario is better. I will note that there's also a third scenario with comparable surplus:

3: If the producer is altruistic/non-profit, they can set a flat price equal to 2+ε, they sell to 8 people, the total surplus is 36, but now 36-8ε is captured by consumers and 8ε is captured by the producer.

So if the balance of power tips too far in either direction, one of the groups will snatch all of the surplus. I think a fair equilibrium would maximize surplus while splitting the distribution somewhere in the middle. Not necessarily 50-50, but somewhere in the ballpark. But how do you do that here? Taxes and explicit forms of redistribution usually distort incentives, but maybe there's something clever I'm not aware of?

So if producers capture 99% of surplus by near-perfect price discrimination and leave just a tiny scrap of surplus to customers to push them over the edge of indifference, then customers are being deprived of surplus that is rightfully theirs.

I know you're probably speaking casually, but customers do not have a "right" to anything here (other than a right to the product or service they paid for). We can say that we prefer it when gains from trade are divided as evenly as possible, but there is nothing morally wrong about selling something for a price that a customer is willing to freely pay.

And as we see in your own example, total surplus can be greater when price discriminating. In fact, we often see price discrimination as laudable in medical context: if a doctor charges clients based on what they can afford to pay, we see that as a good thing. Perfect price discrimination is just charging people exactly what they can afford to pay: that is, the most they'd be willing to pay for the good or service you're providing.

This means poor people benefit greatly from price discrimination: they get goods or services they want at a price they are willing to pay when otherwise they wouldn't be able to afford it.

EDIT: One further thought. If we had to choose between producer and consumer getting the majority of the surplus, favoring the producer has the benefit of incentivizing more people to become producers. Which benefits everyone.

This means poor people benefit greatly from price discrimination: they get goods or services they want at a price they are willing to pay when otherwise they wouldn't be able to afford it.

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.

This means poor people benefit greatly from price discrimination: they get goods or services they want at a price they are willing to pay when otherwise they wouldn't be able to afford it.

No, the entire point is that they don't. They benefit a tiny tiny bit from price discrimination.

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.

No one thinks that when you go to the grocery store, or go to buy a TV, a refrigerator, or car,

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.