Price Discrimination with Fairness Constraints
55 Pages Posted: 3 Oct 2019 Last revised: 14 Dec 2020
Date Written: September 24, 2019
Discriminatory pricing -- offering different prices to different customers -- has become common practice. While it allows sellers to increase their profits, it also raises several concerns in terms of fairness. This topic has received extensive attention from media, industry, and regulatory agencies. In this paper, we consider the problem of setting prices for different groups under fairness constraints. We first propose four definitions: fairness in price, demand, consumer surplus, and no-purchase valuation. We then analyze the pricing strategy of a profit-maximizing seller and the impact of imposing fairness on the seller's profit, consumer surplus, and social welfare. Under linear or exponential demand, we show that imposing a small amount of fairness in price or no-purchase valuation increases social welfare, whereas fairness in demand or surplus reduces social welfare. We fully characterize the impact of imposing different types of fairness for linear demand. We also discover that imposing too much price fairness may result in a lower social welfare relative to imposing no price fairness. Finally, we computationally show that most of our findings continue to hold for three common nonlinear demand models. Our results and insights provide a first step in understanding the impact of imposing fairness in the context of discriminatory pricing.
Keywords: pricing, fairness, social welfare
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