The Economics Book

180

DIFFERENT PRICES

TO DIFFERENT PEOPLE

PRICE DISCRIMINATION

I

n the 1840s the French

engineer and economist Jules

Dupuit suggested that tolls

should be set for the bridges and

roads he was building. He proposed

to charge people according to how

much each was willing to pay.

Dupuit was the first economist

to consider setting different prices

for different people for the same

service. This is known as price

discrimination. It can usually only

happen where there is some degree

of monopoly power, which allows

firms to charge different prices.

In 1920, three different “degrees”

of price discrimination were

identified by the British economist

The key is to find a way of selling

the same product at different

prices to different people.

IN CONTEXT

FOCUS

Markets and firms

KEY THINKER

Joan Robinson (1903–83)

BEFORE

1849 Jules Dupuit considers

how different prices can be

charged for the same goods.

1891 US economist Frank

Taussig says that differences

in train prices reflect different

levels of demand.

1920 Arthur Pigou defines

the three basic types of

price discrimination.

AFTER

1933 US economist Edward

Chamberlin says that close

competitors try to gain market

power by differentiating

their products.

1996 US economist Thomas

Holmes shows that price

discrimination is possible

even in markets with only

a few firms.

Firms want to maximize profits.

They will normally attract more buyers at a lower price...

... but then they miss out on the extra profits that would

come from people who would happily pay more.