The Tragedy of Deadweight Loss

A blog about business and economics.
Dec. 13 2011 8:54 AM

The Tragedy of Deadweight Loss

Instances of "price discrimination" often make people angry. It's a kind of discrimination, after all! Why shouldn't I pay the same as everyone else? Me, I'm a cold-hearted rationalist and what makes me angry is the massive inefficiency that takes place when price discrimination fails. Charlotte Cowles describes the positively awesome-sounding web archives that Vogue is bringing to the table:

Vogue's much-hyped archive website goes live today, and as promised, it contains every single page from every issue dating back to the magazine's American debut in 1892. According to Vogue's press release, the site is searchable by decade, brand, designer, and photographer; you can also sort results by articles, images, covers, or ads. It's a wildly impressive undertaking to organize such a massive amount of information, and bravo to Vogue for providing a great tool for researching the historical context of moments in fashion and society.

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I don't care even a little bit about fashion and I've never bought an issue of Vogue, but I bet I could have a ton of fun with this. Unfortunately for me, I never will since it costs $1,575 a year. Felix Salmon makes the case that this is a perfectly sensible price since the archives have huge monetary value to people in the fashion industry and he's very persuasive. But think of the deadweight loss! The cost to Vogue of adding a new subscriber is tiny. If there's somewhat out there who'd gladly pay $1,000 a year for these archives but won't pony up the extra $575 that represents a huge loss of utility to the users and a huge loss of revenue for Vogue. What you really want out of these scenarios is for vendors to come up with clever means of doing price discrimination so that people who'd only get a little value from the archive (or people who objectively have a low ability to pay like students) can get it for cheap, while well-capitalized professionals pay through the news. In practice, this is tricky to pull off. But the business model innovators who find more and better ways to price discriminate are providing an important source of value to the world and that's increasinly the case in a digital universe where marginal costs tend to be very low and thus the scope for efficiency-enhancing discrimination tends to be extremely large.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.