I’ve been thinking about weird markets where the normal math of supply and demand doesn’t work. I discussed some of these in a comment on the Picasso post below (by the way, get over there and comment about the pictures!).
Another example is buying things over the Internet: both regular goods like books which Amazon.com and other online booksellers will provide cheaper for the right person (big example: college textbooks in the USA are enormously expensive but have “overseas editions” which are half the price or less, which can be obtained from private sellers whom Amazon.com facilitates your finding), and digital goods like music and software where the incentives to illegally copy must be dealt with.
I don’t understand, for example, why buying downloadable songs needs to be so expensive. It seems that there must be some price point at which the incentives to avoid lawbreaking overcome the small amount of money to be saved, and that such a point ought to result in both more profit for the publisher and less lawbreaking than the current system exhibits, but I don’t have data to back this up.
Here is a classic article on the issue, by the mathematician Andrew Odlyzko, which explains why “price discrimination” (making how much you pay for something depend on who you are) is not going to go away, and why it makes Internet privacy so much more expensive and difficult to come by.
Economics students will enjoy Odlyzko’s related papers here.
What makes Price Discrimination such an interesting and vexed issue is that while it unquestionably leads to better allocation of resources than fixed pricing, it is extraordinarily unpopular with consumers and thus must be disguised or coerced through regulations which allows the producers to escape blame. There is a corresponding political incentive for producers to support such regulations. My college-age daughter ran into an example of this last week when buying a bus ticket to come home for her Thanksgiving break; an $18 fee, which was 35% of the original ticket price, was charged because the ticket was bought on the Internet with a credit card (mine) in the name of someone other than the traveler. They pretend this is for security reasons, but no verification of identity takes place, and it is always possible to buy a ticket anonymously by going to a bus terminal with cash. The bus company figured that when someone else is paying the traveler is less likely to protest.