There is one way for the producers to suck out almost all the surplus while maximizing profit: Price discrimination. Which is, of course, difficult to do. In a market for easily transferable physical goods, the best they tend to be able to do is to make multiple, somewhat different versions of a product and sell one at a premium; but this is fairly crude. (Apple products are an example.)
Yes, I think we agree. One nitpick: I would say price discrimination is easy to do, but hard to do in a way that sucks out most of the surplus.
I looked up some studies. Courty (2009)[1] found that price discrimination on concert tickets increased revenue by around 5%. Leslie (2004)[2] estimated the same 5% revenue increase using data from a Broadway play. Shiller (2014)[3] found “Including nearly 5000 potential website browsing explanatory variables increases profits by … 12.2%” (for Netflix subscriptions). Waldfogel (2015)[4] estimated price discrimination would raise revenue by 9.0% in higher education (specifically, a public university grad school program). Namin (2020)[5] estimated price discrimination can increase revenue for cruise lines by over 4%.
The big outlier was Srivastava (2020)[6], which found up to an 82% increase in profits from price discrimination in informal markets in India. Basically, the seller looks at the buyer and tried to guess the buyer’s wealth level. If you look rich, you have to haggle: “Bargaining is found to have a strong downward effect on the final price markup”. Also note weasel words “can raise profits by as much as 82%”, so that is an upper bound.
Disclaimer: I only read the abstracts of these papers. They might have flaws that I am not aware of.
You can only price discriminate if you have a monopoly. (concert tickets, Disneyland admission). Or there is cooperation between sellers, and the government decides to allow it (senior discounts, airline discounts).
There is one way for the producers to suck out almost all the surplus while maximizing profit: Price discrimination. Which is, of course, difficult to do. In a market for easily transferable physical goods, the best they tend to be able to do is to make multiple, somewhat different versions of a product and sell one at a premium; but this is fairly crude. (Apple products are an example.)
Yes, I think we agree. One nitpick: I would say price discrimination is easy to do, but hard to do in a way that sucks out most of the surplus.
I looked up some studies. Courty (2009)[1] found that price discrimination on concert tickets increased revenue by around 5%. Leslie (2004)[2] estimated the same 5% revenue increase using data from a Broadway play. Shiller (2014)[3] found “Including nearly 5000 potential website browsing explanatory variables increases profits by … 12.2%” (for Netflix subscriptions). Waldfogel (2015)[4] estimated price discrimination would raise revenue by 9.0% in higher education (specifically, a public university grad school program). Namin (2020)[5] estimated price discrimination can increase revenue for cruise lines by over 4%.
The big outlier was Srivastava (2020)[6], which found up to an 82% increase in profits from price discrimination in informal markets in India. Basically, the seller looks at the buyer and tried to guess the buyer’s wealth level. If you look rich, you have to haggle: “Bargaining is found to have a strong downward effect on the final price markup”. Also note weasel words “can raise profits by as much as 82%”, so that is an upper bound.
Disclaimer: I only read the abstracts of these papers. They might have flaws that I am not aware of.
https://www.carloalberto.org/wp-content/uploads/2018/11/no.105.pdf
https://www.jstor.org/stable/1593706
Researchgate PDF link
https://onlinelibrary.wiley.com/doi/abs/10.1111/joie.12085
https://www.sciencedirect.com/science/article/abs/pii/S0278431920301493
https://econ.berkeley.edu/sites/default/files/Rishab_Srivastava_Final_Honors_Thesis.pdf
I think the parent meant an ideal form of price discrimination where the entire consumer surplus is instead claimed by the company.
You can only price discriminate if you have a monopoly. (concert tickets, Disneyland admission). Or there is cooperation between sellers, and the government decides to allow it (senior discounts, airline discounts).