Lecture 4 Flashcards
(30 cards)
Why has price discrimination become more relevant with big data?
Big data enables precise estimation of individual WTP, making personalized pricing easier and automatable via AI.
What are the three main topics covered in this lecture on price discrimination?
1) Price discrimination in monopolies, 2) Price discrimination and hiding, 3) Price discrimination and consumer purchasing strategies.
What is first-degree price discrimination?
Charging each consumer their exact willingness to pay (WTP).
In a uniform distribution U[0,1], what are the outcomes without price discrimination?
p* = 1/2, CS = 1/8, PS = 1/4.
What are the outcomes with first-degree price discrimination under U[0,1]?
CS = 0, PS = 1/2.
Is first-degree price discrimination efficient?
It increases total surplus but reduces consumer surplus to zero.
How might consumers react to price discrimination?
They might delay purchases, hide WTP, or get antagonized by post-purchase price drops (Anderson & Simester, 2010).
What are examples of consumer hiding strategies?
Using VPNs, blocking cookies, multiple emails, temporary cards.
What is the hidden cost of hiding (Belleflamme & Vergote, 2016)?
Hiding causes the monopolist to raise common prices, reducing surplus for untracked consumers.
What is a strategic externality in this context?
One consumer’s hiding decision affects others by influencing the monopolist’s pricing.
Can hiding technology harm consumers even when free?
Yes, because it leads to higher common prices.
What is the monopolist’s tracking probability in the model?
λ (lambda), the probability of observing a consumer’s valuation.
What happens if the monopolist does not track and no one hides?
Back to uniform pricing: p = 1/2, CS = 1/8, PS = 1/4.
How does hiding change the pricing equilibrium?
Common price increases to p_h = (1 - c)/(2 - λ), making hiding potentially detrimental.
What condition ensures no consumers choose to hide?
If hiding cost c > λ/2, hiding is prohibitively expensive.
How does consumer surplus change with hiding cost c?
CS increases with c; highest when c ≥ λ/2 (nobody hides).
What is the worst-case scenario for consumer surplus in hiding?
When c = 0; prices rise, few hide, and others lose surplus.
Why might banning hiding be collectively beneficial for consumers?
It returns pricing to the pre-discrimination level, improving collective surplus despite limiting choice.
What happens when consumers anticipate price discrimination in repeat purchases?
They may delay buying, leading firms to lower first-period prices.
When might privacy regulation be unnecessary?
When firms benefit from voluntarily protecting privacy to secure purchases.
When might privacy regulation hurt consumers?
If firms use tracking to add consumer value or can’t commit to privacy, regulation may reduce benefits.
How does free hiding affect consumers in repeat purchase scenarios?
Firms don’t need to lower initial prices, so consumers lose surplus.
When does costly hiding benefit consumers?
It forces firms to lower initial prices, encouraging early purchases and reducing later discrimination.
What level of hiding cost maximizes consumer surplus?
Intermediate levels of c; not free, not prohibitively expensive.
