Coase-Sandor Working Paper Series in Law and Economics
Price discrimination gets a bad rap. It is associated with the exploitation of monopoly power and with opportunistically extracting surplus from consumers. As merchants develop ever-more-powerful mechanisms for gathering and compiling information about consumers, the specter of fully personalized pricing seems to loom as an ominous threat. Despite past economic defenses of price discrimination as an efficient and even consumer friendly move in some contexts, 1 recent writing highlights the perceived unfairness of tailoring prices to willingness to pay, especially when this is accomplished through “big data.”2
Yet a parallel phenomenon quietly coexists with all this distress over personalized prices: models that encourage people to voluntarily contribute, typically in varying amounts, the sums necessary to cover the fixed costs of producing new goods or services. That nonprofits rely on forms of “voluntary price discrimination” to cover their costs has been understood for decades. 3 “Provision point mechanisms” that make production of a good or service contingent on reaching a threshold of voluntary contributions have a long history, as well as a modern presence in models like Kickstarter’s.4 Firms, artists, and organizations have also experimented with “pay what you want” models in a variety of contexts.5
This paper explores the possibility of enabling customers to opt into price discrimination6 in settings where it might serve socially valuable purposes— from extending access to lower-income consumers, to facilitating the provision of products that serve small or niche markets, to accomplishing social goals in tandem with consumption. It builds on the rationale for Ramsey pricing, a form of surplus-maximizing price discrimination that covers fixed costs through prices that inversely correlate with buyers’ elasticity, subject to a profit constraint.7 An opt-in model, similarly constrained, could add structure to existing voluntary provision models and enable them to be expanded into new domains.
Such an approach might be accepted by many consumers. Despite the overheated rhetoric around price tailoring, consumers do not always object to the personalization of price. Haggling is an age-old8 form of price discrimination that many customers willingly tolerate or even enjoy. The difference is that consumers perceive themselves to be voluntary participants in the negotiation process, not unwitting marks being fleeced by a corporate algorithm.9 Presumably, they also overwhelmingly believe (even though, statistically, they must often be wrong) that they are getting a better-than average price. Optional price discrimination similarly extends control to consumers, but, unlike haggling, can be structured in ways that ensure those consumers are made better off as a result.
The analysis here proceeds in three parts. Part I explains how price discrimination works, surveys the reasons for hostility to it, and outlines its potential advantages for consumers as well as sellers. 10 By offering alternative ways to cover fixed costs, price discrimination can generate benefits like broader access to products and a wider variety of products. Part II reviews some existing forms of voluntary price discrimination that pursue these goals. Part III examines how an optional approach to price discrimination might be extended into additional contexts. It considers how such an approach could be structured to mutually benefit consumers and firms, and considers the role of government in facilitating it.
Although there are a variety of different forms that optional price discrimination might take, the approaches I have in mind here would give the consumer a genuine choice whether or not to participate in personalized pricing, and would involve specific, clear representations about the terms on which that pricing will be applied. Such clarity serves two purposes, beyond the obvious one of letting consumers know what is on offer. First, it facilitates actions based on fraudulent misrepresentations if merchants provide misleading or false information about their pricing practices. Second, the existence of transparently presented and fully voluntary forms of personalized pricing may help to crowd out forms of price discrimination that do not share these attributes.
The approach to price discrimination developed here is optional in the sense of being voluntary on the part of consumer-participants. It is also optional in a second sense: it contemplates enabling consumers to effectively write or exercise options to buy goods and services based on their valuations.11 Such options could leave consumers—both collectively and individually—better off than under uniform pricing. 12
Lee Anne Fennell, "Optional Price Discrimination," Coase-Sandor Working Paper Series in Law and Economics, No. 961 (2022).