As we can see, rather enjoying only the smallest amount of producer surplus (light pink area), by adding further prices for certain groups who would prefer lower levels of pricing, the company can enjoy the high profit per item of the market price while enjoying the additional if smaller profit of these economically weaker parties. Of course, as long as the costs of selling the good are lower than the price, profit will still be made.

So using this method, we could claim that a pricing method that uses multiple levels of pricing is more efficient, and therefore better. As more people benefit from the material good or service offered, we can argue that it is definitely utilitarian to use a differentiated price structure. We could also argue that it helps the weaker members of society, with many companies offering discounts for the elderly, students, children, and so on; Rawlsian as well. As the idea is usually done voluntarily by companies (for this greater profit and establishing the habit of using this product or service, I doubt it is because businesses are so full of charity), it is both Nozickian and business positive.





Application of Above Theory

This is more likely to be done when the good has a small marginal cost; things like theme parks, natural parks, going to the cinema; as the cost of allowing one additional visitor is small (it costs a park nearly nothing to allow someone to enter), they are more likely to have this tiered pricing system.

For items which have either a small profit margin, or a large marginal cost of production, we will find that there is very little differentiated pricing structure:

Restaurants who have a profit margin of 3-4% cannot overly offer reduced prices as they’ll lose money. However, some companies like pizza chains may offer multiple pizzas cheaper for students, as the marginal cost is low, and the marginal profit is high; especially as those materials are likely to become unusable in time, it is better to get some profit now than waste later.

A service with a high cost for labour, like hiring a lawyer (who can cost hundreds or thousands of dollars for one hour of work) would be unlikely to offering reduced pricing as it will cut into the profit

Limited supply of service or goods, as the opportunity cost of hiring this lawyer for a reduced price means that someone who can pay the market price cannot hire the same lawyer; in other words, when the opportunity cost is too high.

The Issues of Single Pricing in Policing

In a recent interview, a former U.S. federal prosecutor Preet Bharara (2019) highlights one of the most difficult parts of any government based service; rationing of public funds and scarcity. Because the police are (partly) funded by the taxpayer directly, and indirectly (parking tickets?), there simply isn’t going to be a large police component in any country where the wages of the workers are higher, which is the case in almost every developed country. Let place the allocation of resources to the police against the public wish to pay the police at current taxation levels (demand) and people willing to do it at differing at that wage level (supply).