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Price discrimination can boost competition

26 August 2005

There is no justification for public policies that generally prohibit similar products being sold by a firm at different prices, is the finding of a paper that will be presented at the 2005 World Congress of the Econometrics Society today.

Professor Mark Armstrong of the UCL Department of Economics has shown that price discrimination can often lead to more efficient pricing; more intense competition; and help expand supply in otherwise neglected markets – all of which benefit consumers. Yet, the current European negative stance towards price discrimination is at odds with this view.

The paper analyses how companies use information to target customers with personalised prices. Companies obtain this information either through buying customer data from a marketing company or by keeping track of customers' preferences through loyalty cards and other similar means. With monopoly supply, this extra ability to target different consumers with different prices will tend to harm consumers. But when firms must compete to attract customers, extra information may well make consumers better off.

From a seller's point of view, some people are willing to pay more for a product depending on their income and lifestyle. Customers can be lured in by special offers but such offers also allow customers to shop around for the best deal or renegotiate with their current supplier. If the company they are currently with doesn't match the offer of a competitor they will loose their business.

“With customer loyalty cards, a supermarket can tell if a customer regularly spends £80 on their average trip and may send the customer discount vouchers to encourage them to spend more,” says Dr Armstrong.

“Or if the customer starts shopping elsewhere, they may send generous discount vouchers to attempt to regain their custom. These personalised discounts often act to make the whole market more competitive, although they may also induce excessive customer churn between firms.”

Professor Mark Armstrong of UCL will present the paper, ‘Price discrimination' on Tuesday 23 August between 09.00-10.45am BST.

For further information, please contact:

Judith H Moore,
UCL Media Relations Manager,
Tel: +44 (0)20 7679 7678,
Mobile : +44 (0) 77 333 075 96

Notes to editors

A copy of the paper is available on request from the UCL press office

About the 2005 World Congress of the Econometrics Society

The Econometric Society is the leading international learned society in the field of economics, and its quinquennial world congress is recognised as the most prestigious in economics. UCL is hosting the ninth Econometric Society World Congress from 18-24 August 2005, which is the first time the Congress has been held in London and has not been hosted by a UK institute for 35 years. A full copy of the programme can be accessed on the 2005 Econometric Society World Congress website: http://www.eswc2005.com/