The Consumer Surplus and Price Discrimination

When a reflective man buys a crowbar to open a treasure chest, he may well remark to himself that if necessary he would have been willing to pay tenfold the price. … Marshall gave the odd name of “consumer’s surplus” to these fugitive sentiments.

—George Stigler, Nobel Prize–winning economist (1911–1991)

Imagine you are booking a flight for the entire family. Most likely you will select the cheapest fare possible, even if you must sacrifice flying out of your nearest airport, departing or returning on the exact date and times you want, or a multiple-stop versus a nonstop route. What is interesting about this situation from a pricing perspective is how the notion of demographics, or even psychographics, does not offer much help in predicting your price sensitivity. During the 1960s, marketing managers paid a lot of attention to segregating their customers based on demographics—income, neighborhood, race, gender, and so on. Then in the 1970s, an article was published asking a provocative question: “Would you treat Tricia Nixon Cox the same as Grace Slick?” (The former is the daughter of the late president Richard Nixon, and the latter was the lead singer of Jefferson Starship). Demographically, these two women at the time were indistinguishable—both were 25 to 34 years old, family size of three, urban residents, and college educated. Psychographics opened up a whole new way of thinking about customer behavior, and many companies ...

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