“what each individual will bear”

First-degree price discrimination is now

. . . or “it’s not what the market will bear but what each individual will bear.”

The one-handed economist

Economists dislike monopolies because they reduce “surplus” — relative to a market with perfect competition — by restricting quantity supplied to increase prices. The figure below compares consumer surplus (CS) to producer(s) surplus (PS)  in each situation, showing the “Dead Weight Loss” (DWL) from the monopolist reducing quantity form Q_pc to Q_m. It also shows why the monopolist does this: the surplus it loses (the lower half of the DWL triangle) is more than compensated by the surplus it takes from the consumer (the rectangle bounded from above and below by P_m and P_pc and left and right by 0 and Q_m). The consumer loses the upper half of DWL as well as the surplus taken by the monopolist.

Now, it’s important to emphasize that economists are upset by DWL — not by the transfer of surplus from the consumer to the producer! That’s because we focus on the “size of the pie” rather than how that pie is split. You can see this when economists shrug their shoulders when a buyer pays $20 “too much” for a widget, for example, since the seller gets that $20. From a social perspective, the trade is good (the buyer wants the widget more than the seller). The price/share of surplus doesn’t matter, only the fact that they are trading.

Thus, economists don’t mind if a monopolist (or any company with market power) takes more surplus as long as they are supplying the “efficient quantity” (Q_pc).

To understand how market power translates into pricing and division of surplus, we talk about three types of price discrimination. The least efficient is “third degree” (same higher price for everyone, as seen above). The most efficient is “first degree” (FDPD) where the monopolist charges exactly what each consumer is willing to pay (WTP), to extract their entire surplus (well, 99% of it) while supplying as many customers as possible (Q_pc). How can a monopolist implement FDPD? By charging each consumer’s WTP.

Thus, they need to be able to know customers’ WTP as well as charge each one their own “special for you, my friend” price.

If you’re perhaps thinking “too much theoretical mumbo jumbo” then you’re not remembering how airlines charge hundreds of different prices for seats on the same plane, or how the carpet seller/used car salesman is always fascinated to know what country you’re from and what you do, or how art is sold “to the highest bidder.” There are many examples of setting prices as high “as the market — or individuals — will bear”

The internet is an excellent place to implement FDPD (think A/B testing or websites that offer different prices when you’re logged in or not, coming from country X vs Y, etc.), but companies get a lot of push back when they are “caught” doing FDPD, so they try to do it as quietly as possible. (I can’t find a link, but I remember Amazon tried this more than 10 years ago.)

… and they are doing it more and more, thanks to the combination of AI and data brokers. (This article about Delta Airlines using AI for FDPD triggered me to write this post.)

AIs are important because they can crunch a lot of data, quickly, without needing a formal structure. AIs are taking this kind of work from junior consultants at McKinsey, for example.

Data brokers are important because they are willing to sell anything to anyone. This “market” is most developed in the US, where lots of data (geo-location, credit history, addresses, criminal records, medical history, etc.) is for sale. I recommend listening to this interview with a guy who was making  $millions re-selling data brokers data to criminals who used it for fraud.* This Perplexity summary of how government agencies — like many others — are using what people write about themselves on social media ends with “Facebook and other social media platforms serve as vast intelligence gathering operations, enabling government agencies to monitor, analyze, and potentially target individuals based on their online activities and expressions.”

My one-handed conclusion — that AIs will use brokered data to charge you as much as possible — is not even a prediction. It’s happening:

The Federal Trade Commission’s 2025** surveillance pricing study reveals [FDPD] has evolved from theoretical economic concept to widespread business reality, enabled by sophisticated data collection and AI-powered pricing algorithms that track everything from mouse movements to emotional states.

Read the rest of that Perplexity analysis.

*Read my 2018 review of Future Crimes if you want to learn more about how criminals are operating in the internet/data space.

**That study came out just before Trump took office.