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The Ethics of Price Discrimination

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Tuesday, Jan 5, 2010

Price discrimination is economics lingo for the retail practice charging customers different prices based on what they are willing to pay. Economists generally have no problems with this; that’s just how fairness is defined in capitalist societies. Many consumers, I suspect, find the practice as unpleasant as I do, not merely because it can seem unfair to pay more than somebody else for the same good, but possibly because price discrimination undermines the cherished ideological tenet that there’s a “true price” for goods, that useful goods are really worth something definite, and that fundamental use value is indexed to a good’s cost. Instead, we learn that the price of many goods is indexed to our gullibility, to our negligence, or to retailers’ ability to dupe us.


The price-discrimination game works best when pricing is not transparent—visit a carpet warehouse, for instance, and try to find a price tag. Consumerism puts an end to the norm of haggling, however, since shopping in a consumer society must function as entertainment, and the shifty confrontations, the agonistic bartering with salespeople unnerves a lot of people. It makes us aware of all the asymmetries, makes us wary of bad deals, makes us aware that we must be willing to walk away with nothing oftentimes to not get ripped off. But consumerism requires a far more passive consumer who feels licensed to say yes to everything, to indulge in the pleasures of impulse purchasing, and take pleasure in the gratification of that impulse as mush as in the thing purchased, which more and more becomes a mere alibi for luxuriating in the retail world, where flattery and fantasy blend and become more salient to us. Shopping becomes an escape from conflict.


Hence, we have become more comfortable shopping with fixed prices, but retailers typically require prices to be less sticky in order to make a profit. They need to increase margins wherever and whenever they can. So there is constant tension between broadcasting a price to draw consumers in, and masking prices to charge consumers according to their class. Several strategies have evolved to address this: They can routinely reprice goods (easier now with automated systems), they can use various menu tricks to get consumers to choose more-expensive options (i.e., offering a ludicrously expensive option to make the second-most expensive option seem reasonable), they can offer loss leaders, they can bury additional fees in the fine print, they can sell the same crap with different labels to different customer classes, they can advertise a discount but not register it at checkout.


I encountered a blend of all this when I bought a TV this past weekend. I first went to P.C. Richard in College Point, in Eastern Queens, and tried to wrap my mind around the profusion of makes and models, all of which seemed largely the same, except for screen size and resolution. Various bells and whistles seemed tacked on to certain brands, but the flat-screen TV basically seems like a commodity to me—any one would do, and I’d feel best about the one I selected once it was separated from all the others and began to become mine. Still I couldn’t bring myself to simply buy the cheapest one on offer. The sale price for a particular model by a brand I have heard of was prominently displayed. I made a note of it, then went to Best Buy, where similar models were far more expensive (Best Buy is not always the best buy, apparently; they seemed to be banking on their mere reputation as a bargain retailer at this point.) So I went to the P.C. Richard in my neighborhood, and was baffled to find that the same sale model from the College Point store was priced $100 higher. I asked about it, and the salesman immediately matched the price I had seen at the other store. Then he tried to sell me a set of cables for $50. (It turned out I needed the cables to connect my laptop to the set, but you can get them on Amazon.com for under $20.) I was also buying a humidifier that was advertised on the showroom floor at $19, but when it was rung up, it defaulted to $25. I had to look over the salesman’s shoulder at the register to notice this and have him correct it.


My point is that the TV purchasing process was riddled with opportunities for me to be lazy and get charged more as a result. My need for perpetual vigilance is no less than it would have been had I been required to haggle for it, only the illusion of stable prices was there to discourage me from worrying about anything. Should I yearn for a return to a haggling economy? Should I feel like I beat the system, or is that just more ideology reconciling me to the system? Should I point to the metaphoric scoreboard and celebrate the “bargain” I received at others’ expense? Should I shop exclusively at flea markets and bazaars? Can any sort of regulatory intervention stop deceptive practices, or will retailers always find a new loophole or semi-deceitful practice to differentiate customers and dupe them according to their ignorance? Was it me? Was it you? Questions in a world of blue.


Corporations seem designed to maximize profit by exploiting every possible opportunity in a depersonalized economy. Any accommodation a big company happens to give a customer is the probably result of a probability calculation modeled on an analyst’s spreadsheet. The message that corporations “care” about us is cooly manufactured in marketing departments as a sales tool and is blended with efforts to expedite price discrimination, to separate us into a million individuals cutting our own deals with that much less collective bargaining power.


If all competitors in an industry de facto collude to make customers miserable, so much the better—just look at major U.S. airlines and cell-phone-service providers, or at the banks and credit-card companies. And look at health care, in which pricing transparency does little to contain costs. (“The evidence suggests the benefit of transparent pricing is limited, particularly when insurance companies are involved.” Hmm—I guess that’s probably coincidental.)


Mike Konczal’s recent post about businesses preying on the “cognitively weak” looks at some of the antisocial incentives of financial firms. Imagining himself an evil bank executive, he surmises he might be thinking along these lines, targeting old people whose brain function is fading:


Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source. Indeed, someone who forgets what they were doing between reading “Bullshit Surcharge: $40″ on their statement and calling the customer support number to complain is our ideal customer—it’s the person who will be most profitable to us going forward.



To hard-liners free-marketeers, who tend to argue that companies are ethically bound to take advantage of their customers’ foibles when they can get away with it, this is just price discrimination working its magic. The weak are punished, and the wise are thereby subsidized. It’s financial innovation at its best. As Konczal explains,  those who


are excited about how the current financial service industry excels because it punishes the ignorant and irresponsible: on what specific grounds could you not have to embrace, much less oppose, the Evil Rortybomb Plan above? I got a sense of proportionality in those arguments, that the most ignorant should have to pay the most. I don’t think anyone would argue against the idea that those suffering from dementia will be the most ignorant of their actual situations and most irresponsible in the sense that they aren’t capable of being responsible. The extra fees and traps they pay will in part also go to those enjoying extra bonuses and continued free financial services. It’s a win-win from this point of view, no? One must be consistent.


It doesn’t take much for price discrimination to become plain old discrimination. Businesses want prices to differentiate the smart from the foolish to maximize the exploitative potential in society, whereas the rest of us want prices to indicate the social value of things so we can make more of what we need and stop making stuff we don’t want. The result is a war over the meaning of prices, played out in the medium of information. Companies use disinformation and marketing to conceal beneficial or money-saving information from consumers, resulting in prices that can’t be relied upon to mean much of anything.

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