Teaching price discrimination: some clarification.

Summary

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A study describing problems in teaching price discrimination, which is defined as a variation in the price-cost ratio, or differentials, across units or across groups of buyers. The research gives emphasis on three areas: the definition of price discrimination, situations or conditions in which price discrimination happens, and the effects of price discrimination. Results show that price discrimination can be understood by students through simple presentation at the introductory and intermediate levels.

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Teaching price discrimination: some clarification.

1. Introduction

Economics is useful and important as a tool for the study of policy. Indeed, what interests students most are those topics with direct policy relevance. We think it important that these topics be covered with as little opportunity for confusion as possible, especially in the Principles course, which may be the only exposure students get to many of these issues. Treatment of price discrimination in both Principles and Intermediate texts are often laden with misleading and even incorrect information.

We have reviewed the discussions of price discrimination in several Principles and Intermediate textbooks. Principles texts we have reviewed include: Mansfield (1992), Baumol and Blinder (1994), Miller (1994), Tresch (1994), Gwartney and Stroup (1995), Samuelson and Nordhans (1995), Taylor (1995), Lipsey and Courant (1996), McConnell and Brue (1996), and Parkin (1996). Intermediate texts we have reviewed include Ekelund and Ault (1995), Mansfield (1997), Nicholson (1997), Hirshleifer and Hirshleifer (1998), Landsberg (1998), Pindyck and Rubinfeld (1998), Browning and Zupan (1999), and Perloff (1999). Across these texts, we have found a wide variance in the approach and the issues raised.

In general, the discussions in Principles texts focus on either theory or antitrust policy, but rarely link the two. Those that focus on theory scarcely mention the regulatory issues and legislation. These discussions usually are part of the chapter on monopoly. Most of these texts indicate that a downward sloping demand curve and market segmentation are required. Some mention that prohibition of resale is a requirement. Most texts in this group define price discrimination as a situation in which the same good is sold at different prices unrelated to cost differences, but there are exceptions. Almost exclusively, the graphical exposition demonstrates first-degree price discrimination, but the examples of real-world price discrimination are of the third-degree variety.

One major problem with these treatments is that the theoretical presentation and the examples are inconsistent. A second problem is that it is very hard to justify the examples as coming from monopolized industries. For example, common textbook cases of price discrimination are senior citizen discounts offered by restaurants, child prices for movie theaters, and differential pricing for business and vacation travelers on airlines. Few people would argue that restaurants, theaters, or airlines are monopolies. Hence, texts suggest ...

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