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Describe one.

Trade only occurs in regions above the supply curve and below the demand curve. There is no way to slice that area up such that the pieces have greater total area than the whole.

Unless you get into odd situations like luxury goods or Geffen goods, the maximum benefit is always going to be obtained when the last good is sold at the market-clearing price. And the only way to really guarantee that--since consumers don't line up to buy in order of their positions on the demand curve--is to sell every good at that price.

There are many ways to divvy up that area such that suppliers get more or less than they would at one fixed price, but those ways do not make the trade worth more in absolute terms. In order for the suppliers to get more, the consumers must get less. Price discrimination is absolutely a zero-sum game that benefits the suppliers exactly as much as it hurts the consumers.

You are likely discounting the value of the consumer benefit as money not seen in the transaction. A dollar that a consumer would have spent on something, but didn't need to, can still be spent somewhere else.




Describe one

I've heard examples where there are fixed costs for the producer/seller. Suppose to produce something it costs $1000 plus $1 per unit. Suppose there is a buyer A that values it at $800 and 500 buyers (B) that value it at $2.

What price should the seller charge for it?

If the seller charges a fixed price of $2 (or less), then he can make and sell 500 of them, which would cost him $1500, and he would be paid $1000 (or less). He would lose $500, so he would not do it and no value would be created.

If the seller charges a fixed price between $2 and $800, then he can make and sell 1 of them, which would cost him $1001 to produce, and we would be paid $800 (or less). He would lose money, so he would not do it and no value would be created.

There is no single fixed price where any value is created at all.

However, suppose he could charge a different amount to different people. He charges A $700 and charges all the B customers $1.80. He makes and sells 501 of the good at a cost of $1501. He is paid $1600. He profits $99. A gets $100 of surplus value. B buyers gets $0.20 of surplus value each for a total of $100.

By charging different customers different prices we have created $299 of value where a fixed price would have created none at all!


Supply curves are overwhelmingly determined by the marginal cost of production. Fixed costs and barriers to entry help determine the number of supplier firms trading in the market.

The suppliers do not know, a priori, the tastes of buyers and the shape of the demand curve. They only know that they can stay in business as long as their marginal cost per unit is less than the sale price on the open market. You don't know whether 500 people will buy at $2 or 50000 people will.

That $1000 is the entry ticket to the market. If the supplier produces just one unit, it is already paid and gone. As they say, sunk costs are sunk. That up-front cost is not recoverable through per-unit sales. (It is possibly recoverable through the sale of the business or its capital.)

So with respect to your example, the seller pays $1000, sells 501 units at $2, then sells the business assets while exiting the market. The buyer and seller benefit to trade is entirely unaffected.

The total amount buyers would pay is $1800. The total cost to sellers for a cleared market is $501. That makes a potential total benefit to trade for a cleared market of $1299. But the market clearing price only allows the seller to capture $501 of that benefit.

The seller probably does not know those exact numbers beforehand, and cannot use them to conclusively justify the $1000 investment. How does the seller know that one buyer is delusional enough to pay up to $800 for an item that costs $1 to make? If he does know, he simply charges that person that price and removes him from the equations. Then you're still stuck needing to know the next most demanding buyer, and how much they would spend. Each party has imperfect knowledge of the market, and there is no way for any one of them to make decisions based on knowing everything.


I'm certainly not trying to say that every example is like this, but I also don't think it's fair to say that sellers can never consider fixed costs and that imperfect information makes the reasoning impossible.

Another interesting example is kickstarter. It provides goals at different levels, with different rewards at each level. The different levels in many cases are effectively providing price discrimination even though they may have marginal benefits. Some projects reach their goals and get funded only because people at different levels of interest choose to fund those projects different amounts. If they could only set a single "price" for all backers they would never happen.




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