Personalized Pricing and the Return of Wealth Redistribution at the Market Level
48 Pages Posted: 24 May 2019 Last revised: 9 Sep 2019
Date Written: February 17, 2019
Both antitrust law and most state and federal rate regulatory regimes are explicitly redistributive in the sense that they contain mandates to protect consumers’ share of the economic rents generated by productive activities, even at the expense of producers. Law and economics scholars have long argued, however, that redistribution through regulation is inefficient relative to the income tax system. These scholars point out that redistribution through regulation generally creates two market distortions, one to behavior in the regulated market and the other to behavior in the labor market due to income effects, whereas income taxation distorts only the labor market. Redistribute incomes, they argue, rather than economic rents. The information age is fast undermining this position. Perfect price discrimination, which is increasingly viable due to advances in information technology, eliminates the inefficiency of regulatory redistribution relative to income taxation. As economists have long recognized, the personalizing of prices that takes place under perfect price discrimination liberates the regulator from the constraint of uniform pricing, ensuring that the achievement of a particular distributive result will no longer require the regulator to price some willing buyers or sellers out of the market. Firms of course will want to use personalized pricing to extract every last penny from consumers, but, free of efficiency concerns, regulators should rely on their consumer protection mandates to insist instead that firms price discriminate to maximize consumer welfare, or regulators should coordinate to achieve economy-wide redistributive goals.
Keywords: antitrust, public utility, rate regulation, income tax, tax, tax and transfer, personalized pricing, price discrimination, big data, algorithms, chicago school, indirect tax, direct tax, progressive movement
JEL Classification: L12, L40, L43, L50, P11, P48, K20, K21, K23, K34, H21
Suggested Citation: Suggested Citation