Thursday, November 18, 2004

Price Discrimination

In economics, the practice of price discrimination occurs if a seller charges different prices for the same product that are not justified by cost differences (Tucker, 2003: 210).

In order for this to occur, three factors must be in place:
First, the seller must have some control over the market price (i.e. have some monopoly power (be the only provider of the good or service, or one of a few providers); second, the seller must be able to distinguish between consumers willing to pay different prices; third, it must be impossible or too costly for customers to engage in arbitrage (the practice of earning a profit by buying a good at a low price and reselling the good at a higher price).

There are loads of examples in the real world of price discrimination. One is that airlines charge "business travellers" more money for their tickets. How do they do this? Well, by offering lower priced flights to people willing to stay over on a Saturday night, they presumably weed out business travellers who want to get home for the weekend.

As it turns out, the said sperm bank in the previous post also practices price discrimination. They charge $195 per sample for most donors and $235 per sample of their "professional" donors. Professional donors are "Donors who have completed or are completing a Professional Degree i.e. Medical, Dental, Optometry, Law, MBA., Ph.D., etc."

While "shopping" it is difficult to resist purchasing the "professional's" sperm. Heck, you want a smart kid, don't you?

Upon closer examination, however, this seems rather preposterous for several reasons. Firstly, you have the self-selection issue. Many of the donors are poor college kids. They donate because they need the money. According to the Bank's own literature: "All of our donors are high school graduates with some post-high school level education. Our Semen Donor Catalog, Donor Profiles or Donor Portfolios offer specific levels of education. A majority of our donors are college students and professional men." So its not that the non-professional are a bunch of homeless men in need of a little cashola for their next pint. Its just that the guys are too young to have even gone on to professional school.

Secondly, if this good were truly priced in an efficient way, you would expect the cost to be linked to productivity. The Bank has a lot of information about the productivity of this good. It is measured in various ways from the number of sperm per sample, to the motility of the sperm, to the ultimate outcome: the number of pregnancies resulting from this sperm. Interestingly, these productivity variables do not seem to factor into the cost.

Taggert over at A Random Walk hypothesized that the cost difference is based on the opportunity cost of the donor. "Opportunity cost" is the "best alternative sacrificed for a chosen alternative." O.k. what the heck does that mean? That means that in order to entice the professionals to take time out of their busy (and more lucrative) schedules, the Bank will need to offer them more money for an hour or so of their time than they would need to offer the college kids.

The problem with that is that as far as I can tell, donors don't get paid different rates.

It seems that the markup is due nearly entirely to the technology of cryogenics. Not productivity however measured.

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