Knowledge that Transforms

M. L. Greenhut, M. J. Hwang, and H. Ohta have done an excellent job in pointing out the overly rigid assumptions of my model of motor carrier price discrimination (that is, constant elasticity of demand and perfect competition among shippers) and my incorrect interpretation of some of the results (that is, failing to recognize that the absolute difference between motor carrier rates and motor carriers costs increases with distance even though their ratio declines). Furthermore, they have developed a much more general model to explain why motor carrier discrimination varies with distance. If one assumes that elasticity of demand increases as the price of the good increases (a very logical assumption), then distant consumers will have more elastic demands and the difference between the profit maximizing motor carrier rate and motor carrier cost will decline. There are only two points in their paper with which I wish to disagree. In Figure 1, they show that under my assumptions the absolute difference between motor carrier rates and motor carrier costs increases with distance, thus making the difference between price of good and cost of producing and shipping it greater in distant than in near markets. This fact leads thenm to state later that . . . resale possibilities by nearer buyers militate against the use of this type of price discrimination. Resale of goods between two markets is profitable if the difference in price of the good between the two markets is greater than the additional shipping costs. Suppose there is a buyer at a short distance m from the original producer who is considering reselling to another buyer at a greater distance M, from the original producer. The distance between the two buyers is M-m. Assume that the motor carrier cost of shipping a good, K, is broken into its terminal and line-haul elements, Ko and m. Then the cost of hauling from the producer to the nearby buyer Km, can be expressed as: