Price Discrimination is Good, Part 3

Josh Wright —  16 December 2008

At Knowledge Problem, Michael Giberson collects anecdotal evidence on New York’s zone pricing ban, i.e. a prohibition on price discrimination. While gasoline prices are falling all over the country, the anecdotal evidence is that New York’s zone pricing ban is resulting in higher profits for retailers at the expense of consumers. Former George Mason economist (now at Chapman with Vernon Smith) Bart Wilson and Cary Deck have a fascinating experimental paper on the impact of zone pricing which anticipates this result. Of course, most economists agree that zone pricing benefits consumers. Here’s Giberson summing up the literature in a earlier post:

  • Experimental economics work by Cary Deck and Bart Wilson, published this year in the Journal of Economic Behavior & Organization, finds that zone price bans tended to result in higher wholesale prices in what would otherwise be lower wholesale-price zones, but without leading to lower prices in the less competitive, high cost zones.
  • In a review of literature on “Retail Policies and Competition in the Gasoline Industry“, UC-Berkeley economists Severin Borenstein and Jim Bushnell suggest that zone pricing will lead to higher prices for some consumers and lower prices to others, overall “it is unclear whether it benefits or harms consumers.” They point out that price discrimination can lead to overall net benefits to consumers even if some consumers are paying higher prices.
  • A review of zone pricing by the Federal Trade Commission found the effects on consumers to be “ambiguous.” In 2007, the FTC told Connecticut that a bill similar to the new New York law would likely harm consumers because it would reduce incentives to supply gasoline in under served areas.
  • An article by Christopher Ball, Mark Gius, and Matthew Rafferty, in Regulation magazine, relied upon a earlier version of the Deck and Wilson research to estimate that with the Connecticut policy under consideration in 2007 “the average price at the pump increases and the burden of the increase falls disproportionately on those with the lowest incomes.” The Connecticut legislature did not pass the bill.

I wonder how much of economists’ failure to win these policy debates on points where this is much agreement is the result of bad marketing on our parts and how much can be explained by public choice.