Aug

14

In order to price-discriminate, a firm must be able to prevent the transfer of the good once it is sold. So, for example, if a Broadway producer knew exactly who was willing to pay $5 for a ticket, and who was willing to pay $1000, it would have difficulty trying to charge $1,000 to those willing to pay $1,000 because the people willing to pay $1,000 would contract with those who are willing to pay $5 to buy their tickets for $10.Restaurants get around this by creating different meals for children and delivering them only to children. Movie theaters and other outfits check IDs before giving their discounts to seniors. Airlines charge based on customer profiles (how soon in advance you buy, or whether you stay over Saturday night) and do not let you transfer tickets to others. Universities charge everyone the $1,000 and then pretend to be generous by giving aid to those who they think can only afford the $5.

So what does this mean for markets?

  1. Traders and dealers should be able to make more money and markets where there is less public information, i.e. when the person willing to pay $1,000 for a ticket is unaware that others are paying only $5 for it.
  2. There is money to be made by customer profiling and knowing who is willing to pay how much for a security, so that you can buy it at a better price from someone else and re-sell it to the person willing to pay more.

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