Memo to WaPo: Price discrimination does not imply monopoly

[Commentary] In a blog post at the Washington Post’s “The Switch” site, the usually reliable Timothy Lee set out to analyze pricing in the market for Internet access services. I have a lot of respect for Tim, but his blog contains some pretty fundamental economic errors that need to be set straight. Most important, the blog buys into the long-discredited notion that price discrimination implies monopoly power.

Economists have understood since at least the early 1980s that price discrimination can and does occur in competitive markets where there are large sunk costs. Not only that, but it is widely understood that price discrimination in such markets is not only possible, but necessary, and not only innocuous, but welfare maximizing. Jonathan Baker wrote (a decade ago): “Competitive price discrimination is probably found most commonly in high-technology markets and other industries with low marginal cost, high fixed costs, and some product differentiation.”