Price Discrimination and Social Welfare

Standard texts of price discrimination see it as beneficial in a social welfare sense: consumer surplus is transferred to producer surplus, but the fact that quantity increases is good for social welfare (as it reduces the deadweight loss triangle). Interestingly, this isn’t the whole story. Tullock pointed out, a number of years ago, that social welfare loss can originate from the rent-seeking activities of those that are trying to capture these rents.

For instance, in a monopoly setting, standard economic theory would say that the cost of monopolies comes from the reduction in quantity sold (as a result of higher prices), leading to a loss of social welfare. [...]

Everyday Economics – Why are consumer prices generally higher in urban areas than in rural areas?

In condensed urban areas there are many (potential) consumers and many firms operating to produce and sell to these consumers. The retail industry could be seen as operating between perfect competition and monopolistic competition, most retail establishments (including corner shops and the larger chains who sell branded goods; not including own brands) sell homogeneous goods and don’t usually have monopolies (however shop locations can be seen as effective local monopolies, as areas may be restricted as to the number of shops they can have). Therefore we would expect strong competition in this market and hence the driving down of prices for consumers. [...]

Price Discrimination: Motorway Service Stations

A recent survey by TravelSupermarket.com discovered that a family of 4 could be paying almost £29 for a basic lunch (sandwich, crisps, a chocolate bar and a drink) at a service station.

A 500ml of bottle water costs £1.27 on average at a motorway service station whereas it is 25p in an Asda supermarket. For a sausage roll it is 40p in Asda and the equivalent costs £2.30 at a service station.

Is this an example of price discrimination or do service stations simply have much higher costs that they have to pass on? Obviously motorway service stations don’t benefit from the economies of scale that supermarkets do, for a start the shop itself is smaller, meaning it has much less shelf space but will have high labour costs. [...]