Spotting (Nearly) True Price Discrimination in the Wild, Tesla Edition…

price discrimination: n. the action of selling the same product at different prices to different buyers in order to maximize profits.

This is, of course, the definition of price discrimination that I give to my classes. In practice, however, this notion of “same product” isn’t quite as simple as us instructors would have you believe. (Is anything ever, really?) We know that early-bird discounts at restaurants are generally considered price discrimination, as are higher prices for airline tickets purchased at the last minute…but is dinner at 4pm really the “same product” as dinner at 7pm? If you look at what economists file under price discrimination, we could probably expand the definition to “selling different versions of a product at different prices, where the differences in prices largely aren’t driven by cost differences.”

As such, when I was looking into the purchase of a Tesla (I was feeling fancy ok) and saw that the longer-range battery added an extra $3,000 to the price, I remember thinking to myself “heh I bet that’s mostly a price discrimination thing since I’m guessing it doesn’t cost an extra $3,000 to make a better battery,” but I certainly wasn’t expecting this:

Elon Musk auto-magically extends the battery life of Teslas in Florida to help drivers evacuate

Elon Musk auto-magically extends the battery life of Teslas in Florida to help drivers evacuate

Normally the upgrade costs at least $3,000.

Source: qz.com/1073742/hurricane-irma-tesla-auto-magically-extends-the-battery-life-of-vehicles-in-florida/

Wait, what? First, I guess I should point out that this is a nice thing to do. But…you mean to tell me this whole time you were just sandbagging some of the batteries???? That’s…bold, among other things. I hope the warm fuzzies you get for this gesture outweigh whatever customer fury may be heading in your direction…(personally, I can’t decide whether I would be more irritated if I had or hadn’t paid for the better battery) Granted, even this isn’t “true” price discrimination, narrowly speaking, since the lower-priced Tesla doesn’t come with the same functionality from the driver’s perspective.

People typically aren’t thrilled when they hear the phrase “price discrimination,” since they seem to assume it’s just another fun way for a company to rip them off. Not all of these customers are wrong- it’s entirely possible that some customers pay higher prices than they would otherwise if a company decides to price discriminate. That said, it’s almost always the case that price discrimination results in lower prices for some customers, and it’s even possible that price discrimination results in lower prices for some customers without subjecting any customers to higher prices. Let’s look at a simple example to see how this could be the case:

Willingness to Pay
Customer 1 $10
Customer 2 $4

(Assume for simplicity that whatever good this is doesn’t cost anything to produce.) Without price discrimination, the company can either sell 1 unit of the product to Customer 1 and make $10 or sell 2 units (1 to each customer) at $4 each and make $8. Given these numbers, the company isn’t going to be willing to lower the price to sell to Customer 2, since it would have to lower the price to customer 1 as well. But Customer 2 is willing to pay more than it costs to produce the product (i.e. nothing), so this seems inefficient- what if there were a way to give a lower price to Customer 2 without lowering the price to Customer 1? In that case, the company could sell to Customer 1 for $10 and to Customer 2 for $4 and make $14. In this case, price discrimination made the company better off, gave the company the incentive to sell to more people, and didn’t raise the price to anyone. Boom. (As a related observation, I don’t generally see companies jack up their regular prices once they start offering student discounts so…)

Of course, Customer 1 might be annoyed that someone, somewhere is getting a better deal than he is, but I’m not sure what to do about that. This discussion also makes me wonder how many people complain about the possibility of price discrimination even when they’d be in the group to benefit from it. In related news, this might be why I have Uber pick me up at the 7-11 down the street, so next time maybe we’ll talk about how price discrimination doesn’t work if people can fake being in the low willingness-to-pay group.

4 Replies to “Spotting (Nearly) True Price Discrimination in the Wild, Tesla Edition…”

  1. Does price discrimination have any relation to R&D incentives? Any model or real world research i could peruse?

    adding on to your example…
    if the company is able to sell more product due to price discrimination, then, all other things being equal, it will feel less of a need to reduce production costs (via R&D or other means) to stay profitable.

    If there more detailed models that account for how the benefits of price discrimination are spread, I’d love to learn about it. It often seems that price discrimination benefits the shareholder and not the consumer. Sometimes it seems i confuse price discrimination with rent seeking behavior. I know they are not mutually exclusive, but I don’t know a quick way to mentally run and compare both models in my head. … any ideas?

    Another way for me to state my concern. In the real world or in a model, how can I figure out how the benefits of price discrimination are handed out? “real world” seems hard to figure out b/c once money goes into an account any analysis of where the money went can be fooled by varying accounting practices.

  2. Does the upfront cost difference between shorter / longer range have an economic trade-off in the form of more / fewer recharges at charging stations down the road? Because that could be a component of the pricing differential, rather than a straight price discrimination.

  3. I’ve not gone through the Florida details, but many EVs (including Tesla) have more potential battery capacity than advertised because of charging issues. It’s hard to charge the last little bit of a Li-ion battery, for a variety of reasons, and not good to drain completely. The “official” capacity takes such issues into account. In extremis you can drain more than normal, at some cost to battery life. So I wonder whether Tesla will reverse the capacity boost.

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