Why are consumer surpluses useful?

1 Answer
Jun 1, 2015

Consumer surplus measures how much more that the consumers would be willing to pay for some good.

It consists on the difference between the price the consumer is willing to pay for something and price that is actually paid for it.

Companies can benefit from that by trying to extract the most of a consumer surplus they can. For this to happen, a company must expand its demand, trying to personalize its goods/services, usually through goods'/services' prices.

This can be done due to price differentiation, which can be undertaken in three degrees:

• Price discrimination of $1 s t$ degree: consists on charging each consumer one price, decoupling the company's demand into individual units. This form of price discrimination, a.k.a. perfect discrimination, is able to extract the whole consumer surplus, by charging the consumer exactly the highest value (s)he is wiling to pay for it.

A good example of this is social clubs' memberships: usually, to join in, one's charged as much as (s)he is considered able to pay, after an analysis by the admittance comittee or something of the kind. This situation usually requires monopoly power for the seller (company)

• Price discrimination of $2 n d$ degree: the company can charge different prices for different quantities of its goods/services, which can be easily reflected in bulk markets. Also, this can be seen in tickets for a party/night club: the first block of tickets will be sold at a cheaper price than the last-minute ones, sold on the very day of the event.

• Price discrimination of $3 r d$ degree: the company can segment its demand in groups and create solutions that apply for these groups, in terms of goods and services. It's not the law, but poorer consumers (thus, with less surplus) usually buy big boxes, big bottles, etc. whilst wealthier consumers (i.e. with higher surpluses) are able to pay proportionally more for the same product in minor, individualized units. One example: if you priced big bottles of Coke in proportion to the price of cans, they'd be way costlier, wouldn't they?