chapter  6
10 Pages

Pricing quality

In the previous chapter we introduced the concept of indirect price discrimination, in which all consumers are offered the same set of prices, but they make choices such that “strong market” consumers pay a higher total amount to the seller (as by definition they are willing to do), and “weak market” customers, but only weak market customers, pay less, albeit an amount that still adds to the profit of the seller (i.e. they are paying a price above the marginal cost of the service they receive). In this chapter we discuss a second method of indirect price discrimination, where the seller offers goods and services of different quality levels to consumers, charging more for the higher quality options. The practice is commonly observed: automobile, appliance, and consumer electronics manufacturers produce different models of varying luxury and price, couriers offer different speeds of delivery for different prices, airlines offer different classes of seats, and clothing companies produce premium and discount brands. In the cultural sector, performing arts venues “scale the house,” charging different amounts for different quality seats, publishers have hardcover and paperback versions of books, record companies produce “deluxe” editions of CDs along with standard fare, and cinemas charge different amounts according to the day of the week and time of day. The practice is common; in this chapter we see if it is possible to think about setting prices for different qualities in a systematic way.