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Big Data Might Lead To Higher Prices

9 March, 2018

Big Data Might Lead To Higher Prices

My first graduate microeconomics class didn’t start with any grand theories or mathematical proofs. It started with a demonstration. The professor marched us down to a computer lab, divided us into groups of six, and had us participate in a simulated market. Amazingly, the price of the virtual commodity we were trading quickly converged to a single value and stayed there. This was a powerful demonstration of the so-called law of one price, the economic principle that markets produce a single price for a given commodity or good.

Many sellers would love to change that law if they could. If merchants could raise prices for customers who were willing to pay more, they could make a lot more profit. Suppose there are two potential customers for my product — one who would buy it for $100 and another who would be willing to pay $150. If I have to charge them both the same price, I’ll charge $100, so that I can sell two units and make $200. The second customer, who would have been willing to pay a higher price, ends up getting a bargain. In economics lingo, that bargain is called a consumer surplus.

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