Price Discrimination

One of the first things you learn in Industrial Organization (IO) is price discrimination. As in all IO models, the main objective of the sellers is to extract as much surplus as they can from the buyer. Since the seller can not discern between the different types of consumers or their willingness to pay, s/he has to devise different pricing schemes to optimize the revenue.

An excellent paper that looks at non-linear pricing for information goods is Prof Arun Sundararajan’s eponymous paper, found here. One of my all time favorite reads.

Of course, a different pricing scheme is needed in the case of non-information goods, because the key assumptions of the model may not be valid (non zero marginal costs, for example). Therefore, as always, I turn to Scott Adams for inspiration.

Yes, that is it. The golden rule of pricing: it depends.