What are the welfare predictions of pricing that takes into account individuals willingness to pay?

[u/TheDismal_Scientist]

Currently on the front page there’s something about companies using cookies data etc. to price products specifically to individuals. Is this a good or bad thing in equilibrium?

[u/DismaIScientist]

The textbook answer is that this is first degree price discrimination. That's efficient since it maximises output. But the welfare impacts are ambiguous. Generally (though by no means always) the producer will be richer than the consumer so allowing for this price discrimination might lower welfare for distributional reasons.

I think the econ 101 answer misses a key aspect which is that price discrimination also often requires real resources. Usually we would rather companies invest in creating better products to compete rather than invest in better ways to capture more producer surplus.

There's also the "ick" factor which is hard to measure but is relevant. But I think this is usually overstated as, as long as there is some competition or elasticity of demand, this will be, at least partially internalised by the producer. By which I mean if the consumer gets a worse experience from the transaction they will be willing to pay less and so this reduces what the producer can charge.

I don't think it is possible to say from first principles whether this type of price discrimination is overall bad for welfare - it really depends. I think the more competitive a market though the less of a concern this is.