Shostack + Friends Blog Archive


Economics of Price Discrimination

Scrivner points out that the airlines, masters of price discrimination are giving up:

In response they’ve become perhaps the world’s most expert practitioners* of price discrimination, mastering the art of charging the business traveler $1,000 more than the tourist in the next seat in exchange for a short-notice booking with few restrictions.

But even that has not been enough, and one after another — Pan Am, TWA, Braniff, Eastern, Continental, US Air, Northwest, United — has flown into bankruptcy or history. Delta, the least unionized and among the best managed, has lasted the longest — but now it clearly sees that its time too has come.

With the low-cost airlines improving the quality of their service towards matching that of the legacy airlines’ top-price service, the fare differential the latter have depended upon has become unsustainable — and Delta has now decided to bite the bullet by dropping its prices from the top.

Andrew Odlyzko, who is one of the more interesting practitioners of security and economics, has written several papers such as “Privacy, economics, and price discrimination on the Internet” and “The evolution of price discrimination in transportation and its implications for the Internet” (both pdf). One of his main thesis is that companies invade their customer’s privacy in order to maximize their income: If you can pay more, and the railroad knows it, you will. What Scrivner implies is that, with enough choice, such as low cost competitors, the ability to capitalize on such information falls away. This is good news for privacy.

3 comments on "Economics of Price Discrimination"

  • When price discrimination doesn’t work

    Adam Shostack posts Economics of Price Discrimination that looks at how low cost airlines have neutralised the yield management systems of the full service carriers.
    The airline yield management systems assume that through price discrimination, so…

  • Chris Walsh says:

    There may be a middle ground here.
    Individuals may informedly give up parts of their privacy in order to obtain a pseudo-customized product. In large part, what is bought may be the same across customers, but differences in many small details of the overall purchase experience may be worth it for people to surrender personally-identifiable information. I’m thinking of things like suggestion services (a la Google or Amazon) which may or may not themselves be part of a larger, pretty much off-the-shelf product.

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