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NOTE 10.06. Multiform Prices and Monopoly

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6. Multiform Prices and Monopoly

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Up to this point we have always concluded that the market tends at any given time to establish one uniform market price for any good under competitive or monopoly conditions.

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One phenomenon that sometimes appears, however, is persistent multiformity of prices.

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We must consider, of course, a good that is really homogeneous, otherwise there would

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merely be price differences for different goods.

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How then can multi-formity come about, and does it in some sense violate the workings

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or the ethics of a free market society?

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We must first separate goods into two kinds, those that are resaleable and those that are

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not.

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Under the latter category come all intangible services, which are either consumed directly

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or used up in the process of production.

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In any case, they themselves cannot be resold by the first buyer.

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Non-resalable services also include the rental use of a tangible good.

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For then, the good itself is not being bought, but rather its unit services over a period

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of Time. An example may be the renting of space in a freight car.

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Let us first take resaleable goods. When can there be persistent multi-form pricing of

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such goods? One necessary condition is clearly ignorance on the part of some seller or buyer.

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The market price for a certain kind of steel, for example, may be one gold ounce per ton,

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But one seller out of pure ignorance may persist in selling it for half a gold ounce per ton.

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What will happen?

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In the first place, some enterprising person will buy the steel from this laggard and resell

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it at the market price, thus establishing effective uniformity.

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Secondly, other buyers will rush to outbid the first buyer for the bargain, thus informing

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the seller of his underpricing.

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Finally, the persistently ignorant seller will not long remain in business.

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Of course, it may happen that the seller may have a strong desire to sell steel for lower-than-market

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price for philanthropic reasons.

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But if he persists in doing so, then he is simply purchasing the consumer's good, to

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him, of philanthropy and paying the price for it in lower revenue.

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He is here acting as a consumer, rather than as an entrepreneur, just as he would if he

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hired his ne'er-do-well nephew at the expense of a cut in profits.

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This then would not be a genuine case of multi-form pricing, where the good must always be homogeneous.

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Nor is the buyer in a different condition.

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If a buyer were ignorant and continued to buy steel at two gold ounces a ton when the

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market price was one gold ounce, then some other seller would soon apprise the buyer

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of his error by offering to sell him the steel for much less.

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If there is only one seller, then the cheaper buyer can still resell at a profit to the

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The buyer charged a higher price, and a persistently ignorant buyer will also go out of business.

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There is only one case where a multi-form price could possibly be established for a

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resaleable good, where the good is being sold to consumers, the ultimate buyers.

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For while entrepreneurial buyers will be alert to price differentials, and a buyer of a good

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The good at a lower price can resell to another buyer charged a higher price.

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Ultimate consumers do not usually consider reselling once they buy.

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A classic case is that of American tourists at a Middle Eastern bazaar.

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The tourist has neither the time nor the inclination to make a thorough study of the consumer markets,

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and therefore each tourist is ignorant of the going price of any good.

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Hence the seller can isolate each buyer, charging highest prices to the most eager buyers, less

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high prices to the next most eager, and much lower prices to the marginal buyers of the

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same good.

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In that way the seller achieves a generally unfulfilled objective of all sellers, the

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tapping of more of the consumer's surplus of the buyer's.

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Here the two conditions are fulfilled.

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The consumers are ignorant of the going price and are not in the market to resell.

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Does multi-form pricing, as has often been charged, distort the structure of production,

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and is it in some way immoral or exploitative?

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How is it immoral?

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The seller aims, as always, to maximize his earnings in voluntary exchange, and he certainly

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We cannot be held responsible for the ignorance of the buyer.

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If buyers do not take the trouble to inform themselves of the state of the market, they

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must stand prepared to have some of their psychic surplus tapped by the bargaining of

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the seller.

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Neither is this action irrational on the part of the buyer, for we must deduce from the

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buyer's action that he prefers to remain in ignorance, rather than to make the effort

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or pay the money to inform himself of market conditions.

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To acquire knowledge of any field takes time, effort and often money, and it is perfectly

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reasonable for an individual on any given market to prefer to take his chances on the

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price and use his scarce resources in other directions.

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This choice is crystal clear in the case of a tourist on holiday, but it is also possible

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in any other given market, both the impatient tourist who prefers to pay a higher price

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and not spend time and money on learning about the market, and a companion who spends days

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on an intensive study of the bizarre market, are exercising their preferences, and praxeology

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cannot call one or the other more rational.

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Furthermore, there is no way to measure the consumer surpluses lost or gained in the case

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of the two tourists.

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We must therefore conclude that multi-form pricing in the case of resaleable goods does

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not at all distort the allocation of productive factors, because, on the contrary, it is consistent

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with, and in the case of the tourist, the only pricing consistent with, the satisfaction

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of Consumer Preferences.

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It must be emphasized here that no matter how much the seller at the bazaar taps of

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his customer's psychic surplus, he does not tap it all, otherwise the sale would not be

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made at all.

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Since the exchange is voluntary, both parties still benefit from making it.

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What if the good is not resaleable?

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In that case, there is far greater room for multi-form pricing, since ignorance is not

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required.

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A vendor can sell an intangible service at a higher price to A than to B without fear

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that B can undercut him by reselling to A. Hence, most actual cases of multi-form pricing

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take place in the realm of intangible goods.

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Suppose now that seller X has managed to establish multi-form prices for his customers.

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He might be a lawyer, for example, who charges higher fees for the same service to a wealthy

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than to a poor client.

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Since there is still competition among sellers, why does another lawyer, why, not enter the

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field and undercut X's price to the wealthy clients?

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In fact, this is what will generally happen, and any attempt to establish separate markets

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among customers will lead to an invasion of the more profitable higher price field by

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other competitors, finally driving the price down, reducing revenues and re-establishing

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uniform pricing.

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If a seller's service is unusual and it is universally recognized that he has no effective

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The Theory of Money and Credit

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If there be only one seller of a non-resaleable good, and each buyer can buy no more than one unit, then multi-form pricing will tend to be established, barring undercutting by competitors, since the total revenue to the seller will always be greater through tapping more of the consumer surpluses of each buyer.

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It is difficult to conceive of a case in reality to which such a restriction imposed on buyers, called perfect price discrimination, would apply.

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Joan Robinson cites as an example a ransom charged by a kidnapper, but this of course does not obtain on the free unhampered market, which precludes kidnapping.

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But if a buyer can buy more than one unit, revenue becomes a problem.

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For then, each buyer, confronted with a higher price, will restrict his purchases.

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This will leave an unsold stock, which the seller will then unload

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by lowering his prices below the hypothetical uniform price

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in order to tap the demands of hitherto sub-marginal buyers.

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Supposed that the uniform price of a good is 10 gold grains per unit, at which 100 units are sold.

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The seller now decides to isolate each buyer as a separate market and tap more consumer surpluses.

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Aside from the barely marginal buyers then, all the others will find their prices raised.

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They will restrict their purchases, say to an aggregate of 85 units,

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and the other 15 units will be sold by lowering the price to new, hitherto sub-marginal buyers.

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Multiformity can be established only when total proceeds are greater than uniformity provides.

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This is by no means always the case, for the supermarginal buyers may restrict their purchases by more than the sub-marginal buyers can compensate.

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Multi-form pricing has been accorded a curious reception by economists and laymen.

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In some cases, it is deemed vicious exploitation of the consumers.

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In others, for example, medicine and education, it is considered praiseworthy and humanitarian.

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In reality, it is neither.

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It is certainly not the rule in pricing that the most eager should pay in proportion to their eagerness.

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In practice, usually gauged by their wealth. For then, everyone would pay in proportion to his wealth for everything, and the entire monetary and economic system would break down. Money would no longer function.

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If this is clear in general, it is difficult to see a priori why specific goods should be singled out for this treatment.

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On the other hand, the consumers are not being exploited if there is multi-formity.

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It is clear that the marginal and sub-marginal buyers are not exploited.

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The latter obviously gain.

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What of the supramarginal buyers who are receiving less consumer surplus?

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In some cases, they gain because without the greater revenues provided by price discrimination,

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Consider, for example, a country doctor who would leave the area if he had to subsist on the lower revenues provided by uniformity, and even if the good were still supplied, the fact that the super marginal buyers continue to patronize the seller at all, shows that they are content with the seemingly discriminatory arrangement. Otherwise, they would quickly boycott the seller, either individually or individually.

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They would simply refuse to pay more than the sub-marginal buyers, and this would quickly induce the seller to lower his prices.

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The fact that they do not do so shows that they prefer multiformity to uniformity in the particular case.

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An example is private school education, which able but poor youths may often attend on scholarships.

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Able but poor youths may often attend on scholarships, a principle that the wealthy parents who pay full tuition demonstrably do not consider unjust.

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If, however, the sellers have received grants of monopolistic privilege by the government, enabling them to restrict competition in the serving of the super marginal buyers,

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Then they may establish multiformity without enjoying the demonstrable preference of these buyers.

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For here, governmental coercion has entered to inhibit the free expression of preferences.

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An example is medicine, where the government helps to restrict the supply and thus to prevent price cutting.

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So far we have discussed price discrimination by sellers in consumers markets,

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where consumer surpluses are tapped.

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Can there be such discrimination in producers' markets?

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Only when the good is not resaleable, total proceeds are greater under multiformity, and

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the supramarginal buyers are willing to pay.

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The latter will happen when these buyers have a higher DMVP for the good in their firms

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than other buyers have in theirs.

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In this case, the seller of the good with multi-form prices is absorbing a rent formerly

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earned by the supramarginal buying firm.

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The most notable case of such pricing has been railroad freight, discrimination against

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the firms shipping a cargo more valuable per unit weight than that of other firms.

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The gains are not, of course, retained by the railroad in the long run, but absorbed

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Can there be price discrimination by buyers when the good is not resaleable and ignorance among sellers is not assumed?

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No, there cannot, for the minimum reserve price imposed by, say, a laborer is determined by the opportunity cost he has foregone elsewhere.

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In short, if a man earns five gold ounces a week for his labor service in Firm A, he will not accept two ounces a week, although he would take two rather than earn nothing at all, since he can earn nearly five ounces somewhere else.

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And the meaning of price discrimination against sellers is that a buyer would be able to pay less for the same good than the seller can earn elsewhere, cost of moving, etc. omitted.

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Hence there can be no price discrimination against sellers. If sellers are ignorant then, as in the case of the ignorant consumers at a bazaar, we must infer that they prefer the lower income to the cost and trouble of learning more about the market.