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You know those psychology games where there are two people and the first person is given $10 to split between the two of them. They can split $5/$5 or $1/$9 or even $.01/$9.99. Then the second person can either accept the split and take their share or nix the whole deal and no one gets anything.

Aggressive price discrimination reminds me of this game. If I'm willing to pay exactly £20 to see that movie and the movie theatre is charging £19.99 I should take that deal. Even if they're only charging you £9.99 (because your willingness to pay is only £10).

Taking that deal is the right thing to do. Right?

But it turns out in those experiments that if the split proposed is two uneven then the second person will say screw it. No one gets nothing! People have an innate sense of fairness.

The same thing applies to what's going on here. Something about charging people differently based on their User-Agent really rubs people the wrong way. It's a step too far so they just table flip and say screw it.

Is it rational in an homo economicus kind of way? Nope. Is the the way people actually behave. Yup.

I don't remember where I saw this, but I believe this has to do with culture. In North America what you described is true, where as in developing countries it is not. The second person would rather just take whatever money is given and run.

If someone can remind me of the name of this game I can find it..

It is called the ultimatum game. Edit: I originally had this mixed up with the dictator game.

http://en.wikipedia.org/wiki/Ultimatum_game

This article talks about it at length, but doesn't really name the game though.

http://www.psmag.com/magazines/magazine-feature-story-magazi...

The paper is here[0]; though it's more to do with U.S. undergraduates being weird than north americans vs developing countries.

[0] http://www2.psych.ubc.ca/~henrich/pdfs/WeirdPeople.pdf

In North America what you described is true, where as in developing countries it is not.

Not true. The game was conducted in "developing countries" as well, and the results seem to be same. I can't locate the references right now, but a little googling might help (Especially I remember the results being mentioned one of the TED talks.)

I remember at least one case where the game was played, and the person who got to choose took 9 bucks out of 10, and they all thought it was fair, simply because he was lucky to be the guy who got to choose.

edit: it's in the article HaloZero links in this thread.

When he began to run the game it became immediately clear that Machiguengan behavior was dramatically different from that of the average North American. To begin with, the offers from the first player were much lower. In addition, when on the receiving end of the game, the Machiguenga rarely refused even the lowest possible amount. “It just seemed ridiculous to the Machiguenga that you would reject an offer of free money,” says Henrich. “They just didn’t understand why anyone would sacrifice money to punish someone who had the good luck of getting to play the other role in the game.”

Very young human children have been shown an innate drive to share the rewards of a task fairly. Chimpanzees have been shown to lack this.

The children didn't share when the other party wasn't involved in completing a task though, so I'm unsure if this applies here.

> Is it rational in an homo economicus kind of way? Nope.

I disagree.

It's not rational if you view it as a single transaction ever, but at the moment you begin to think of the relationship as an iterated game of possible transactions, punishing the other party at a cost to yourself can change their future behavior and advantage you over the long run.

So what you're arguing doesn't make sense in a single transaction is actually a good strategy in the iterated environment that the market actually is.

Example: if there's a correlation between you turning down their offer and them making you a better offer in the future, turning down offers in an iterated version of the game you commented on becomes a viable strategy and even rational in some situations.

Ya. It turns out that even in these games where the person running the experiment tells the participants that there will only be one iteration it doesn't change the results any.

That being said I pretty much agree with you. An experiment with a single iteration is very unlike the real world so it's no surprise that participants pretty much ignore that directive.

Even in the case that the game is a single iteration, it doesn't erase the background fact that society still exists and that punishing people for breaking societal norms can enforce societal norms of fairness.

The experiment doesn't control for the fact that even though it's an isolated game, it's still happening in the context of these people being members of society and hence trying to enforce societal norms even in the game. Society is a large pool of random encounters over and over, so the players are making the correct play given that there's no control of that factor, ie, it's not truly a stand alone game.

I find a lot of the analysis of these games from psychologists leave out details like that which make the responses move from irrational to rational.

Ya, my thinking here is exactly the same as yours.

This type of thinking reminds me of the show Golden Balls: two parties get the same thing or no one gets anything at all.

https://www.youtube.com/watch?v=S0qjK3TWZE8

Your analysis is extremely one-sided in favor of producers and against consumers.

In economics, the difference between the maximum a consumer is willing to pay for a certain good and the the actual price charged is called "consumer surplus". For example, if I buy an apple for $0.50 but the maximum I would have payed is $1.25, I enjoy $0.75 of consumer surplus.

Essentially what you are proposing is that consumer surplus should always optimally be zero. That in a perfect world, every producer would charge each consumer exactly their maximum willingness to pay for each good.

But just as there is consumer surplus, there is producer surplus. Producer surplus is the difference between the minimum price they would be willing to sell a good for and the actual price they sell that good for. So, as an apple producer, if the lowest price I could profitably sell an apple for is $0.10 but I actually sell if for $0.50, I enjoy $0.40 of consumer surplus.

In traditional free-market models, at an equilibrium price there is a mixture of consumer and producer surplus. Consumers buy things for a bit less than their maximum willingness to pay, and producers sell things for a bit more than their rock-bottom just-marginally-profitable price.

In your model of perfect price discrimination, there is a huge shift in surplus from consumers to producers. Yes, it's efficient in terms of allocation. But there's a huge loss in utility for consumers.

This is true for any case in isolation, but for all consumers in aggregate there is no other way to do things that ensures an increase in everyone's wealth.

Any kind of flattened pricing structure will always harm some consumers for the benefit of others in a sufficiently large market. If I'm willing to pay £12 for X, you're willing to pay £8, and the producer is asking for a flat £10 because people like me find price discrimination morally abhorrent, then: I get the utility from having X plus a bit more from the £2 kickback; the producer isn't fulfilling his goal of profit maximisation and has incurred an opportunity cost of my £2 + your £8 = £10; and you get nothing. I'm the only winner, and the £2's worth of economic value I've gained by enforcing an unfair pricing structure is less than the sum of the value I've deprived you and the producer of - my behaviour is tantamount to stealing a small slice of yours and the producers combined utility and burning the rest.

The only way around this is to find a way to set price equal to true valuation on an individual basis. Of course, if you allow your model to not be Pareto efficient ("there is no change that could be made to benefit someone without harming someone else") then there are much more efficient ways to steal wealth than flat pricing.

My issue with such opaque pricing methods is that there are substantial economic externalities. If you charge students a different rate, no big deal. You are either a student or you are not a student. But once you get into more complex price discrimination, you force the user to expend time and effort to understand how the company is price discriminating, and to spend time trying to figure out how to counteract it.

For example, airline pricing is a clusterfuck of opaque pricing. I spend literally hours whenever I book a ticket, trying to figure out the optimal flight. Other flyers also spend similar amounts of time trying to figure out the pricing algorithms and not get screwed. Overall then, thousands upon thousands of man hours are wasted just trying to figure out how to get charged a decent price.

Frankly, I think such bullshit should be illegal. The airlines may earn a few extra bucks, but no one considers how much time and effort is wasted by the user.

”no one considers how much time and effort is wasted by the user”

It depends on how you valuate your own time. The CEO of a Fortune 500 company would probably not spend hours for a gain that is so low compared to his salary.

This is what I was thinking. It doesn't take a CEO's wage to decide it's worth paying $50 to not spend hours optimizing your flight or compromising on a connection or whatever.

Any pricing system where jumping through more hoops will save you money itself a form of price discrimination. The less you're willing to pay, the more time you'll spend trying to get the best deal.

It's the same reason why coupons exist. Someone who is willing to pay more is less willing to spend the time to clip coupons out from the paper.

It is a real difference when you see that there is a student price posted at the box office, but you can also see that the regular price will apply to you, so you pay that.

In an opaque market in which everyone pays a different price, but no one knows what anyone else is paying, the consumer is at a disadvantage. There have always been coupons, special deals, and so on, but having every transaction getting prices separately and privately is something new, and consumers aren't going to like it, for two reasons: they hate the idea that other people are getting a better deal, and the information asymmetry means that they are almost certainly actually going to pay more on average.

Those sales tactics are not new, but they may be new to some markets. The tactics have been in play by salesmen in multiple markets for generations. For example, car sales operate much this way in most cases. Which is probably why car salesmen have such bad reputations among buyers.

> This is what these guys are doing. And it's a good thing. To say "this is wrong and it should stop" is incredibly selfish -

This is done en-masse to my entire country, Australia. We call it "The Australia Tax". And yeah, it pisses us off.

In some cases it has been cheaper to fly economy from Sydney to LA to purchase sofware, than the local price. Even for downloadable products. It's not an exchange rate thing, nor a local tax issue, and it's not the tyranny of distance either. It's more to do with the fact that we are perceived as a rich country.

Using VPNs and also mail forwarding services to get around some of the more outrageous markups is becoming more popular. Australia Post even launched their own US address forwarding service this week to get in on the action.

With software goods, the best downward force with regards to price is piracy. We have seen this force in effect in the movies and music. Movies used to take two years to go from box office to rental. Now movies only take 6 weeks to go from big screen to DVD. The big change here is that piracy was the downward force. And it served as a great effect to bring materials to market quicker.

Admittedly piracy is illegal, but also very effective. Considering the small amount of bandwidth needed to pirate software, it would be negligabe to get at will.

The best plan, though, it is to use open source software. But in cases of market capture, one must use the de facto software.

Yeah I get that. It's worth pointing out that I'm talking largely from an academic stance and what I'm saying doesn't really apply to shitty implementations. The theory is compelling and the reality is always different, but that doesn't mean it shouldn't be tried.

Student pricing at the cinema is disanalogous to the way price discrimination is done on the internet. In the former case, the fact that students (and children and seniors and, and, and) pay a different price than others is clearly disclosed to everyone. Online, it's not.

...and it makes sense. Also, IMHO the thing isn't about people with PCs paying less, but people using Macs getting charged more.

The only way transparency affects the optimality of a price discriminating system is possibly by screwing the whole thing up by creating resentment. This doesn't happen so much for cinema tickets as children/students/OAPs are more (almost universal) stages of life that we can all relate to as opposed to groups based on some trait.

No matter how pissed off people get about finding out that they paid more than someone else, it has absolutely no bearing on the mathematics which shows this to be the optimal (for both producers and consumers) way to allocate scarce resources.

For a single-shot game, perhaps. But in iterative games, not even close. Expected value is a far more complex calculation than that.

Game theory doesn't come into the optimality of this. Sure you could write out a single sale as a game between producer and consumer, but it's a long way around to get the same numbers out. An iterative game to buy something - what would that be? Extended bartering? I already explained that. I don't understand where expected value comes into it, it's not that kind of analysis.

Actually it is not. Many places have student discount but don't advertise it. You have to ask.

> Everyone has their own "true" valuation for a given product (not how much they think it should be worth, but how much they're willing to pay), and if you're a supplier with a magic ball which can divine this with 100% accuracy then you're as well selling your product at 1p over cost if that's your customer's true valuation. Again: they get the product they wanted and you get profit you couldn't have had any other way, and everyone's as happy as they can be.

This is where you're wrong. Not everyone is as happy as they could be. If there were no price discrimination then the theatre would make more money charging £7 to all 20 adults and 10 students (£210) than charging £10 to only the 20 adults (£200) and having ten empty seats. In consequence the adults are worse off to the tune of £3 than they would be in the absence of price discrimination.

The good that price discrimination is theoretically supposed to do is where e.g. it costs $10 to make a widget and most customers are willing to pay $50 but a small minority are only willing to pay $12. Obviously if the seller has to pick one price it will be $50 and the $12 customers are out of luck.

The problem with this is that it assumes either a monopolistic seller or explicit or implicit collusion between sellers. Because if the market has vigorous competition then engaging in price discrimination will only drive the customers being discriminated against to your competitors.

So if you think you've found a situation where price discrimination would be a good thing, what you've really found is a situation where antitrust enforcement would be a good thing.

> This is where you're wrong. Not everyone is as happy as they could be. If there were no price discrimination then the theatre would make more money charging £7 to all 20 adults and 10 students (£210) than charging £10 to only the 20 adults (£200) and having ten empty seats.

No, I'm not. For one thing, I picked £7 out of thin air. Change it to £6 and this (erroneous anyhow) statement falls apart. Moreover your analysis is wrong - not everyone is as happy as they could be, you're only thinking from the consumer's perspective. The cinema could have made £7 * 10 + £10 * 20 = £270 so in your "best" case for everyone, the cinema is actually £60 short of their best scenario. The 20 adults were willing to spend £10 each, so their arbitrary £3 bonus that they didn't actually demand is optimal based on what? Consumers being less evil than companies? Give me a break.

> if the market has vigorous competition then engaging in price discrimination will only drive the customers being discriminated against to your competitors.

It is not discrimination in the political sense, but the dictionary sense: to differentiate. Price discrimination in theory should not drive customers anywhere but rather make them indifferent to their choice of supplier.

> Price discrimination in theory should not drive customers anywhere but rather make them indifferent to their choice of supplier.

I think you need to take a step back and think about that in the context of the article.

If people get a worse price based on their OS/browser/tracking cookies and they know, they will feel cheated. Are you OK with a higher price, because you are on your mobile? Does switching the browser reframe your mind so that your "I am willing to pay price X" changes?

I bet not, it is still the same person behind the browser. And humans being humans most will be infuriated to learn they are trapped in a game with intransparent rules.

> No, I'm not. For one thing, I picked £7 out of thin air. Change it to £6 and this (erroneous anyhow) statement falls apart.

So to make your point you have to make the distribution of customers even more unrealistically clustered, when in reality it will almost always be a smooth curve. And the need for this restriction also proves that price discrimination is not always good for "everyone," since in the original case it clearly isn't good for consumers.

But you're also ignoring the point about competition. If the goal is to maximize overall (combined consumer and producer) surplus then price discrimination at best works only as well as competition would if it existed. In a competitive environment a theater can't charge $6 to people who would pay $6 and $10 to people who would pay $10 because the theater across the street is charging $5 to everyone. And that creates more overall surplus because there will still be some students who would pay $5 but not $6 and some adults who would pay at least $5 but not $10.

If you're still not getting it we can go for the reducto ad absurdum. Suppose that food sellers collectively come up with a way to engage in perfect price discrimination and all begin charging that amount. Since without food people die, that amount will always be every last dime the buyer has. I can go into how and why that would be bad if you really want me to but I think it should be pretty obvious.

> Moreover your analysis is wrong - not everyone is as happy as they could be, you're only thinking from the consumer's perspective.

My entire point is that it isn't possible for everyone to be as happy as they could be in a purely distributive scenario. If there is $3 of surplus on the table then whoever doesn't get all of it is going to be less happy than if they did. And all price discrimination does is make sellers happier at the expense of consumers. It has no effect or, if done less than 100% perfectly accurately, a negative effect on overall happiness.

> It is not discrimination in the political sense, but the dictionary sense: to differentiate.

I don't think anybody is confusing it with e.g. racial discrimination. Although I suppose it could create a statistically significant difference in the prices charged to different races, which doesn't exactly help your cause.

> Price discrimination in theory should not drive customers anywhere but rather make them indifferent to their choice of supplier.

If one supplier is engaged in price discrimination then any other will have the opportunity to take their business by charging a lower but still profitable price to the customers being charged the higher price.

> If the goal is to maximize overall (combined consumer and producer) surplus

The goal is to maximise wealth in the whole economy in such a way that gains incurred by one agent cannot come from harm incurred by another (Pareto optimality).

> My entire point is that it isn't possible for everyone to be as happy as they could be in a purely distributive scenario. If there is $3 of surplus on the table then whoever doesn't get all of it is going to be less happy than if they did.

It's not about surplus!

Take a good X and denote it's cost C(X). Assume we're using pennies (i.e only dealing with real, positive integers) and that the market is large and normally distributed. For ANY flat price, P(X) = c (a constant), such that P(x) > C(X)+1 there must exist a class of consumer whose true monetary valuations are in the set V = { v | C(X) < v < P(x) }. They will never be catered for and are always worse off than they could be. Consumers with v > P(x) are gaining v - P(X) at the expense of: the producer, who is incurring an opportunity cost of v - P(X); and members of V, who are each losing Utility(X) - v. We therefore have utility deltas vs. price discrimination of (assuming no indifference for simplicity):

  u1 = Utility1( Consumer1 w/ v1 > P(X) ) = U1( v1 - P(X) ) > 0
    
  u2 = U2( Consumer2 w/ v2 in V )         = U2(v2) - U2(X)  < 0

  u3 = U3( Producer )                     = -U3( v1 - P(X) ) - U3(v2) << 0

For this to have been fair (Pareto) to everyone, these deltas must be u1 = u2 = u3 = 0. As it stands, the inefficient pricing structure delivers | u1 | < | u2 + u3 | i.e. wealth lost by two is greater than wealth gained by one - wealth is destroyed. Violation of Pareto is obvious here, but showing the wealth destruction rigorously is a little more work than I'm willing to do in ASCII, but it's there.

Solutions? Well the producer could set a flat price P(X) = C(X), essentially giving all their surplus to the consumers. This removes profit from the equation, which under imperfect competition removes the incentive for the producer to go on doing anything at all, and nullifies the analysis (as well as being completely unrealistic.) The only way to make sure everyone is as happy as they can be without harming anyone else (i.e. members of V) is to make P(X) = vn for any given consumer n.

You may not like the idea of producers taking all the potential consumer surplus, but in the absence of perfect competition, this surplus can only ever be consumer surplus at the detriment of other consumers (members of V) and the producer.

> But you're also ignoring the point about competition.

Perfect competition and perfect price discrimination are equivalent under the usual perfect assumptions, you're quite right. But when we recognise that neither is actually possible this becomes less relevant.

Perfect competition always results in P(X) = C(X) and this whole discussion is moot. Imperfect competition (in the absence of government subsidies, etc) results in P(X) > C(X). Again, members of V are missing out and the case for price discrimination is created. The strength of the case for price discrimination is a function of the sum of the members of V, which in turn is a function of [P(X) - C(X)] assuming consumer valuations are distributed somewhat normally. Therefore, one could argue that the "less perfect" the competitive environment is, the stronger the case for price discrimination (I need not point out that the current state of the world is far from economically perfect). In fact - under the assumption that perfect competition and perfect price discrimination are not possible - I suspect it could be shown that an economy implementing some "good-enough" version of both is optimal.

"The problem with this is that it assumes either a monopolistic seller or explicit or implicit collusion between sellers. Because if the market has vigorous competition then engaging in price discrimination will only drive the customers being discriminated against to your competitors."

That's why gp used a movie theater as an example. The movie market depends on state authorized monopoly in the form of copyright. The result is that price discrimination is more legitimate and more beneficial to producers and consumers than it would be in a competitive market.

Of course, copyright exists as a trade off. The benefits of promoting the arts are worth it even though monopoly is bad, as long as the system is administered reasonably and competition exists between different producers of copyrighted works and each has a monopoly only on his own product.

The economics of a complex trade off like that are not a guide to how other open markets should work.

And even well intentioned state monopolies can be run badly and become a disaster. Just look at software patents.

Suppose the seller produces a good at a cost of $10, buyer A values the good at $13, and buyer B values the good at $16. That means that selling to both can add $9 worth of value. Who should capture that new $9 of value? How should it be divided?

If the price is $10 uniformly, then the seller gets no value from selling, A gets $3 of value, and B gets $6 of value.

If the price is $12 uniformly, the seller gets $4 of value, A gets $1 of value and B gets $4 of value.

If the price is $14 uniformly, A won't buy, the seller gets $4 of value, and B gets $2 of value.

If the seller can divine the true value to A and B and set the price to $12.99 for A and $15.99 for B, then the seller can capture essentially ALL of the value available in the exchange.

It definitely seems there are many cases where price discrimination creates more value. But who should capture that value? Sellers? Buyers? Shared somehow? How?

You are using the term 'value' in a loaded sense. If you use the proper term "consumer surplus," your argument becomes very different. "Who should capture that consumer surplus? Sellers? Buyers? Shared somehow? How?"

In my own mind, it's kind of irrelevant who gets it, because I don't recognize that buyer B has a right to pay only $10 or $13 or any other amount. I think it follows that if you allow sellers to discriminate among any classes of buyers, then there is no way to draw the line at how permissibly narrow those classes can be drawn.

> You are using the term 'value' in a loaded sense. If you use the proper term "consumer surplus,"

And you think he's making loaded arguments? The value he's talking about is simply the sum of consumer surplus and producer surplus. They're both legitimate; a sale price of $10 allots $9 in gains from trade (or "value") entirely to consumer surplus, and perfect discriminatory pricing allots the same $9 of value to producer surplus, but the value is still produced despite the consumer surplus being $0.

Compare the $14-uniform-price scenario, where the consumer surplus is $2, the producer surplus is $4, and the gains from trade are $6 when they could be $9. That's $3 of lost value, and I don't see why you think that's a biased or controversial way of putting it.

Sorry if I've used the wrong term. I'm picking them from intuition, but I haven't studied the field. If the proper term is surplus, just use that instead.

The question of how to divide that surplus is very interesting and especially relevant to judgement of price discrimination.

They both do! Value != money.

You don't need to subtract a penny to make it so. The value of the product for A must be greater than $13 or A won't buy it. The value of $13 cash must be greater than the value of not selling the product to the consumer or the seller won't sell. Everybody has more value than what they started with!

The only way this can possibly be true for all cases is via per-consumer price discrimination, anything less will always leave someone out.

  The value of the product for A must be 
  greater than $13 or A won't buy it.

If there's a price where I will buy (value to me > price), and a price a tiny bit higher where I won't buy (value to me < price), there must be a point in between, where I am indifferent to buying (value to me == price)

For example, if I'm a trader and I know I can sell a widget on for $13 (after all costs are taken into account) and a supplier offers it to me for $13 I don't lose any money by taking the deal, but I don't make any money either. So I don't care if the transaction happens or not.

I'm of the opinion indifference is a temporary state of mind that, when encountered, forces one to decide one way or another. If it wasn't, the binary question "would you like to buy this" is unanswerable, as if in some perpetual superposition of yes/no.

This, evidently, doesn't ever happen in the real world: in reality, you'd take into account whether you have time to buy it, whether you have the will to carry it around, etc., before arriving at a definite answer that implies (value - price) has collapsed to some non-zero value.

The total possible benefit to trade is fixed, at the area between the supply and demand curves wherever demand exceeds supply. This area is maximized, giving the greatest possible benefit to the economy, by setting the price where the curves intersect.

Then the consumers take the area above that price, and the suppliers get the value below. These are not necessarily equal areas; they depend on the econometrics shaping the curves.

In your example, the market-clearing price is $13. The consumer benefit is $3 to a and $0 to B, and the supplier benefit is $6. But no single party knows in advance what the market-clearing price is.

The easiest way to find it is for all 3 to engage in a reverse Dutch auction. A writes down "buy 1 @ $16". B writes down "buy 1 @ $13". C writes down "sell 10 @ $10". The auctioneer looks at all the slips and announces that the price is $13 and that C is the first (and only) supplier. Everyone leaves happy.

This analysis only works when all buyers get the same price. There are cases where more value is obtained by having each buyer get a different price.

Describe one.

Trade only occurs in regions above the supply curve and below the demand curve. There is no way to slice that area up such that the pieces have greater total area than the whole.

Unless you get into odd situations like luxury goods or Geffen goods, the maximum benefit is always going to be obtained when the last good is sold at the market-clearing price. And the only way to really guarantee that--since consumers don't line up to buy in order of their positions on the demand curve--is to sell every good at that price.

There are many ways to divvy up that area such that suppliers get more or less than they would at one fixed price, but those ways do not make the trade worth more in absolute terms. In order for the suppliers to get more, the consumers must get less. Price discrimination is absolutely a zero-sum game that benefits the suppliers exactly as much as it hurts the consumers.

You are likely discounting the value of the consumer benefit as money not seen in the transaction. A dollar that a consumer would have spent on something, but didn't need to, can still be spent somewhere else.

Describe one

I've heard examples where there are fixed costs for the producer/seller. Suppose to produce something it costs $1000 plus $1 per unit. Suppose there is a buyer A that values it at $800 and 500 buyers (B) that value it at $2.

What price should the seller charge for it?

If the seller charges a fixed price of $2 (or less), then he can make and sell 500 of them, which would cost him $1500, and he would be paid $1000 (or less). He would lose $500, so he would not do it and no value would be created.

If the seller charges a fixed price between $2 and $800, then he can make and sell 1 of them, which would cost him $1001 to produce, and we would be paid $800 (or less). He would lose money, so he would not do it and no value would be created.

There is no single fixed price where any value is created at all.

However, suppose he could charge a different amount to different people. He charges A $700 and charges all the B customers $1.80. He makes and sells 501 of the good at a cost of $1501. He is paid $1600. He profits $99. A gets $100 of surplus value. B buyers gets $0.20 of surplus value each for a total of $100.

By charging different customers different prices we have created $299 of value where a fixed price would have created none at all!

Supply curves are overwhelmingly determined by the marginal cost of production. Fixed costs and barriers to entry help determine the number of supplier firms trading in the market.

The suppliers do not know, a priori, the tastes of buyers and the shape of the demand curve. They only know that they can stay in business as long as their marginal cost per unit is less than the sale price on the open market. You don't know whether 500 people will buy at $2 or 50000 people will.

That $1000 is the entry ticket to the market. If the supplier produces just one unit, it is already paid and gone. As they say, sunk costs are sunk. That up-front cost is not recoverable through per-unit sales. (It is possibly recoverable through the sale of the business or its capital.)

So with respect to your example, the seller pays $1000, sells 501 units at $2, then sells the business assets while exiting the market. The buyer and seller benefit to trade is entirely unaffected.

The total amount buyers would pay is $1800. The total cost to sellers for a cleared market is $501. That makes a potential total benefit to trade for a cleared market of $1299. But the market clearing price only allows the seller to capture $501 of that benefit.

The seller probably does not know those exact numbers beforehand, and cannot use them to conclusively justify the $1000 investment. How does the seller know that one buyer is delusional enough to pay up to $800 for an item that costs $1 to make? If he does know, he simply charges that person that price and removes him from the equations. Then you're still stuck needing to know the next most demanding buyer, and how much they would spend. Each party has imperfect knowledge of the market, and there is no way for any one of them to make decisions based on knowing everything.

I'm certainly not trying to say that every example is like this, but I also don't think it's fair to say that sellers can never consider fixed costs and that imperfect information makes the reasoning impossible.

Another interesting example is kickstarter. It provides goals at different levels, with different rewards at each level. The different levels in many cases are effectively providing price discrimination even though they may have marginal benefits. Some projects reach their goals and get funded only because people at different levels of interest choose to fund those projects different amounts. If they could only set a single "price" for all backers they would never happen.

Price discrimination clearly involves profit maximization, otherwise the firm would have no incentive to carry it out in the first place. The movie theatre is not practising price discrimination because it's dedicated to some noble goal of clearing the market.

As mentioned above, your method has essentially extracted all possible consumer surplus and shifted it over to the producer. I'm not sure why this is a good thing; every consumer is purchasing at the maximum price they would be willing to pay, which means they're actually getting the minimum amount of utility out of it, while the producer is getting a huge amount of utility (all that surplus).

Furthermore, you seem to be ignoring the fact that money can be spent on more than one product. No, I am not happy as I can be if I'm charged the maximum amount for each product I purchase because that limits my overall utility as I can't purchase as large of a consumption bundle.

Finally, in your example, you say no economic value was created because those students did not get to spend the 70 pounds on the movie theatres. You're implying that the money somehow goes to waste, which is not true. More likely, they'll go purchase a substitute good (dvd rentals, student plays) and increase GDP via consumption through that.

This only works if you only plan on buying one thing. I may value the $10 ticket at an even higher $12 dollars so I'm willing to pay that and the algorithm changes the price to reflect that, but now I'm out of the $2 I was planning spending on popcorn and can't make that purchase. The non-transparent price discrimination makes it impossible to plan future purchases.

So is a student who is willing to pay 10$ doing the wrong thing when they use the student discount and pay only 7$?

If not, why is it wrong for a non-student to desire paying only 7$?

Misleading because it is about maximising profit. That is what leads to the cinema's attempt to clear the market. If they make no profit on the £4 student they don't care whether he sees his film or not.

Peoples valuation isn't going to be consistent either, nor is it going to exist in a vacuum. For instance, if the £7 students here that their stingy friend gets in for £4 then they may well see things differently.

Those people paying £10 are not necessarily happy with it, especially if they realise they could have been paying less.

It is a terrible idea to have an "enter your coupon code" box during checkout for precisely that reason.