Sunday, January 14, 2018

Does Perfect Price Discrimination Affect General Equilibrium?

And is perfect price discrimination more of a problem for institutions which rely on time based product, given the growing scarcity of time aggregates in relation to other resource capacity?

Price discrimination incentives for the context of this post, include the extensive requirements of human capital investment for physicians in the U.S. In particular, twentieth century physicians were careful to preserve a direct negotiation position with patients and customers. After all, if they had not done so, other institutions would have quickly stepped in to impose "greater efficiency", which would have translated into quick losses for their personal time management. Such losses would have been even more difficult to bear, given the costs of access for their production rights.

However, physicians preserved direct negotiation in an environment of growing general equilibrium division between (a full range of) time aggregate value and global wealth value. The effects of price discrimination for time based product become more pronounced, as total wealth continues to expand in relation to the full range of aggregate time value. In this organizational setting, healthcare gradually becomes limited to higher income levels. Possibly the only reasonable way to address this general equilibrium coordination problem, is to generate local settings where time value can be negotiated without the (presently necessary) total correlation of aggregate monetary wealth.

From Economics Online:
First-degree price discrimination, alternately known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed. The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare.
Is first-degree discrimination actually rare? After all, U.S. hospitals appear to be organized so as to encourage this practice, even as physicians are sometimes inclined to make amends with more benign institutional norms. Nick Rowe also has concerns about the practice of perfect price discrimination. He writes:
I have always thought, and taught, that Perfect Price Discrimination leads to an effective allocation of resources. I now think that is wrong. It only seems to work if we use partial equilibrium reasoning, for a single monopolist, that practices PPD...It doesn't work in general equilibrium. 
Ultimately, if everyone took the route of perfect price discrimination:
If you make the rich pay more, because they are willing to pay more, nobody will do any work to produce anything. 
One of Nick Rowe's commenters sent him a paper which appeared to reflect Rowe's concerns, "Is Perfect Price Discrimination Really Efficient?: Welfare and Existence in General Equilibrium*" Even though the math made it difficult for him to understand (and of course impossible for me), there were still some pertinent aspects of the paper which seem useful to highlight, here. In the abstract the authors noted an inefficient equilibrium, yet
we validate partial equilibrium intuition by showing (1) that equilibria are efficient provided that the monopoly goods are costly...However, we find that Pareto optima are sometimes incompatible with surplus maximization, even when transfer payments are used.
Indeed, the requirement of education more extensive than other countries, rationalizes the high cost of this monopoly good in the U.S. Nevertheless, the lack of "Pareto optima" for transfer payments, in this instance, also translates into the fact that no government can give additional healthcare time to patients and consumers, which physicians don't already have at their disposal.

This also explains why there's no such thing as "surplus maximization" for sought-after time based product, especially given the fact technology is used (thus far) to change the product into something which is not necessarily time based at its core. What's more, as technology increasingly augments the income and leisure of high skill providers, the result is one example of Nick's observation that people could eventually lose their incentive to work.

Still, the above explanation is a production perspective. How might one think about broad decision making re consumption, in a labor force participation context? One example is employer provided healthcare, which was advantageous at the outset because it allowed insurance markets to seek consumers (workers) who - in relation to total population - were relatively healthy. U.S. healthcare was initially offered to those who didn't find healthcare consumption particularly necessary in many instances. Unfortunately however, as employees age, they are in greater need of the healthcare benefit. Which in turn encourages employers to fire older workers. The shared employee responsibility for healthcare - given its costs - encourages age discrimination, as employees become more expensive.

For the worker, a process can be set into motion after losing full time healthcare with benefits, which eventually leads to a premature exit of the formal workplace. As we age, our employment offers tend to be less likely to include full health coverage. In particular: once workers experience health setbacks which may include bankruptcy, there's a growing awareness of excess risk for remaining employed in work which takes an additional toll on health. And this may be the only work on offer in many locations, especially without a college degree. Once older workers face health risks which could prove more substantial than their personal resources, it may actually be less risky - odd though this sounds - to stay out of the formal workplace, so as to preserve one's health as best as possible.  In short, healthcare price discrimination, even though it is supported by partial equilibrium validation, doubtless contributes to reductions in labour force participation which have yet to be fully understood.

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