Differential Pricing and Efficiency | Zendy

Hal R. Varian | Zendy

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Differential Pricing and Efficiency

Author(s) -

Hal R. Varian

Publication year - 1996

Publication title -

first monday

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.533

H-Index - 70

eISSN - 1396-0466

pISSN - 1396-0458

DOI - 10.5210/fm.v1i2.473

Subject(s) - marginal cost , scope (computer science) , economics , microeconomics , willingness to pay , returns to scale , differential (mechanical device) , profit (economics) , economies of scope , fixed cost , economies of scale , outcome (game theory) , industrial organization , marginal profit , econometrics , business , computer science , production (economics) , engineering , programming language , aerospace engineering

The classic prescription for economically efficient pricing---set price at marginal cost---is not relevant for technologies that exhibit the kinds of increasing returns to scale, large fixed costs, or economies of scope found in the telecommunications and information industries. The appropriate guiding principle in these contexts should be that the marginal willingness to pay should be equal to marginal cost. This condition for efficiency can be approximated using differential pricing, and will in fact, be a natural outcome of profit-seeking behavior.

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