From Tutor2U's fine summary of Price Discrimination:
What is Price Discrimination?
* Price discrimination involves market segmentation
* It is practiced by any firm with price setting power
* It does not occur in perfectly competitive markets
* A firm price discriminates when it charges different prices to different consumers for reasons that do not fully reflect cost differences
* Involves extracting consumer surplus from buyers and turning into additional revenue and profit (producer surplus)
Conditions for Price Discrimination
* The firm must have some price‐setting power (i.e. the business is operating in an imperfectly competitive market)
* There must be at least two consumer groups a with different price elasticity of demand
* The firm should be able to identify consumers in each group, and set prices differently for each (requires sufficient information about consumer preferences)
* The firm must prevent consumers in one group selling to consumers in the other (i e there must be no market arbitrage or market seepage)
1. We can therefore conclude that if there is a lot of price discrimination, i.e. totally different prices are being charged for something with the same cost of production, that some form of monopoly is in place and that any difference between prices charged and the lowest price for which that same service is being provided elsewhere is monopoly/unearned profit or 'rent' (in the wider sense). The bigger the differences, the more powerful the monopoly.
2. Which is indeed the case with land/location rents (in the narrow sense and literal meaning). The cost of producing land at any particular location, from the point of view of the owner of land (or a mooring) at any location is precisely zero. Sure, it happens that some land is less suitable for building on than other land, it's marshy ground or whatever (in which case you either drain it and build buildings, or dredge it and build a harbour), but that is a cost of physically improving the land at that particular location; the location is simply there (and its value is dictated by what 'everybody else' does).
3. In summary, this is yet more evidence that land ownership is the biggest monopoly of all. The fact that land is divided up into small plots and lots of different people own those different plots does not mean that it is not a monopoly; any more than than fact that shares in a monopoly utility company are widely held or freely traded does not mean that the company itself does not have a monopoly.
4. If the price (rent) for any location is set by the ability and/or willingness of the single highest bidder to pay that price (rent) we also observe that a tax on those monopoly profits would be borne in its entirety by the current owner of that location; the would-be occupant is already paying as much as he is willing and able to pay and will not pay a penny more.
Monday 14 May 2012
Price discrimination & monopolies
Subscribe to:
Post Comments (Atom)
19 comments:
Well, that seems to do it for 'value pricing'...
L, Wiki says "Value based pricing... sets selling prices primarily, but not exclusively, on the perceived value to the customer, rather than on the actual cost of the product, the market price, competitors prices, or the historical price."
I think that just about covers land rents.
As a non-economist I like the logic of this. It feels sound to me.
"Sure, it happens that some land is less suitable for building on than other land, it's marshy ground or whatever but that is a cost of physically improving the land at that particular location; the location is simply there (and its value is dictated by what 'everybody else' does)."
It is possible to have a scenario where all the value of the land is created by the landowner and none of it by anyone else. Take Porthmadoc and its environs for example. Before William Madocks started work there, there was nothing, just an estuary and some mountains, no houses, no roads, nothing and it was miles from anywhere in Wales. The "location value" was precisely nil. By the time he and his sucessors had finished, there were roads, railways, a port, a town and several thousand acres of farmland; there was plenty of location value, but it was all, ultimately, due to Madocks's efforts.
AKH, ta.
B, not really. You can build as many railways etc as you like, land still has no location value until there are people there (or people in the vicinity prepared to travel there, for whatever reason).
Had he snapped up a few acres in the Antarctic and done the same exercise there, he would discover that the land still has absolutely no location value.
Re Porthmadoc again, the cost of building the railway and houses etc would be deducted from the total rental value of the houses, it is only the excess which is location rent.
"(or people in the vicinity prepared to travel there, for whatever reason)."
Ah, but people are only prepared to travel to a place and invest time and money in it (buy land, build houses, roads etc) if it has some location value and it will only have location value if people are prepared to travel there and invest money in it. Which comes first, the chicken or the egg?
In this case, people ("everyone else") was only prepared to go to Porthmadoc and farm the land, build the houses, roads, railways etc because Madocks built a dam across the Glaslyn estuary, so giving the land some location value in the first place. Thus all the "location rent" is due to his efforts. If the dam had been swepts away in a storm (as nearly happened once), then the farmland, the port and the town would have ceased to exist and the location value would have returned to zero (by early C19th standards; I realise the area would have location value today by virtue of the local scenery, beaches etc., but that counted for nothing then).
B: "Which comes first, the chicken or the egg?"
They are the same thing.
"Thus all the "location rent" is due to his efforts"
Nope. Had he built that dam in the Antarctic, he would not have got his money back. If he can build a dam at an amortised cost of £1,000 a year and collect rents of £1,500 a year for the land now available for farming, the extra £500 is location rent. And if there is £500 unearned extra profit to play for, and he hadn't built the dam, then somebody else would have done.
"Price Discrimination" is rampant in Software.
SB, yup, and the larger companies are overly protected by patents and other IP rights. But this is a minor problem, if you get stiffed by £50 for your new Microsoft Office suite that's nothing in comparison to paying £10,000 a year in ground rent.
" If he can build a dam at an amortised cost of £1,000 a year and collect rents of £1,500 a year for the land now available for farming, the extra £500 is location rent."
How does that differ from building a factory, with a total amortised cost plus running cost (including rent) of £1,000 a year and getting an profit from the business of £500 a year?
B, because the £500 is (presumably) business or trading profit (or 'interest' if you are a Georgist purist), instead of being ground/location rent.
The £500 profit from the factory is completely independent of where he trades from (if he traded from a less favourable location, gross profits would be lower but rent would also be lower). The extra profit you get from building a dam (or a toll bridge or a house etc) is entirely dependent on where you build it.
I can't see that having a profit that is dependent on location makes it "unearned", any more than one that is independent of location. OK, to reclaim land, you need a location where it is economically viable, but to do lots of things, you need that, too, like building a factory. To take your example, if my entrepreneur built his factory in Antarctica, he wouldn't make any money either, even though his ground rent would be zero.
To take a simpler example: let us say I find a derelict cottage somewhere, with no mains services or road to it. The landowner rents it me for half nothing on a long tenancy. I spend my money repairing it, putting in the services and the road and rent it out for a market rent, giving myself, say, a 6% return on my amortised and running costs. What part of that 6% is "earned" and what part is "unearned"?
B, if in doubt apply commonsense. To the extent that the higher rent on the cottage reflects higher maintenance spend or amortised cost of improvements, it is earned.
If then a pig farm is opened next door and your rents halve, that reduction is an 'unearned loss' or a reduction in the unearned part of it. Or if the roof blows off and you can't be bothered to repair it and the rent halves, then that is a reduction in the 'earned' element.
"To the extent that the higher rent on the cottage reflects higher maintenance spend or amortised cost of improvements, it is earned."
But surely all the location rent is taken up in the rent I pay the landowner. I haven't moved the cottage after all.
You've avoided my point about the factory in Antarctica....
B, the location rent is the total rent minus the running costs/amortised improvement cost, it may be that the half of nothing is more or less than the location rent, if the cottage was derelict enough, it might be less, I can't say from this distance.
There is such a thing as negative improvements, if the previous occupant of the cottage completely poisoned all the soil, then this pushes down the rent he can charge for the cottage, and if there is a legal obligation on him to clean it up, then the land might have a negative value to him. But the location value is still positive.
"To take your example, if my entrepreneur built his factory in Antarctica, he wouldn't make any money either, even though his ground rent would be zero."
Then he'd be a complete idiot and of no relevance to a debate about economics. Because the true location value of a plot in Antarctica is not actually zero, it is a a colossally huge minus which wipes out any income he can get from employing people and making stuff to sell. Only if somebody were prepared to actually compensate him for this negative value would it be worthwhile him setting up there. Hopefully nobody is that idiotic, so that still not a realistic example.
"price setting" is a very interesting term when talking about markets.
If the price is being set THERE IS NO MARKET!
Why make it all complex.
I'm still not clear what you mean by "amortised cost". Does that include an element of profit? If you add value to land, why is part of that added value considered unearned, when if you add value to labour and raw materials, all the added value is considered earned?
To return to my original example, if Madocks had leased the Glaslyn estuary, would not all the location element be represented in that lease? (Which he might well have had to do, considering that most of the estuary was foreshore and hence owned by the Crown. I'm not sure how he got round that.) Assuming the Crown didn't whack up the ground rent once he'd turned mudflats and beach into farmland and settlements, would not the additional rent from the land be earned?
RS, all suppliers have to decide what price to set, there is an upper limit to the price that even a 100% complete monopolist can charge.
B, of course "amortised cost" includes an element of profit, i.e. the interest you could have earned on the money invested in the improvements. And while you can increase (or reduce) the value of your physical land you cannot increase the value to your location (but you can of course increase or reduce the value of neighbouring locations).
Let's assume that Crown Estates owned the estuary and knew that if a dam were built costing £1,000 a year that the land rents would be £1,500 a year, then the starting lease payment in negotiations would be about £500 a year. That £500 is unearned. Crown Estates didn't have to do anything to earn that money apart from have the power of the state behind it.
Post a Comment