Price discrimination is poorly understood. Some, including me, think it gets a bad rap. I actually like it. The layman’s definition is charging people different prices for the same good or service. To economics uber nerds, you might hear it described as “taking advantage of different elasticities of demand for the same goods by charging different prices relative to marginal cost.”
Love it or hate it, price discrimination happens quite frequently — more so than most expect.
The first and most important factor in why people don’t like price discrimination is the term itself. Usually, nobody likes being on the receiving end of discrimination — unless it benefits them. Economist types prefer much less harsh terms for the practice, calling it “dynamic pricing” or “price customization.” Thomas Sowell, in his book Applied Economics, makes a very important point here:
Prejudice, bias, and discrimination are too often confused with one another. Each requires careful definition before discussing substantive issues, if those discussions are not to get hopelessly bogged down in semantics.
On the web today, many many pixels were devoted to Amazon and their new “Amazon Mom” program that gives a discount to mothers. The debate was whether people should lie to Amazon to get that discount — since they weren’t “verifying” if your baby was real.
Thought leader Touré shared this pearl of wisdom with us: “If a lie is told to a corporation, it’s not really a lie.” You can play this game at home, like former DC City Council member Kwame Brown did, by lying about his income to a bank. He went to jail, and so could you. Corporations are people, my friend. Vengeful, vengeful people.
If Target can find out people are pregnant through data wizardry, it’s safe to assume Amazon can probably do that even better. Heck, if you’re not buying baby items, I’m sure they’ll notice pretty quickly. I have no dog in that fight, except that I am happy to support price discrimination. Though, you probably won’t go to jail for lying about a fake baby — you’ll just be as bad as people who fake pregnancies.
There is a liquor store I go to in Washington, and because I go there with some frequency, I get special pricing. You, however, pay full price. I go to this store because I liked the pricing and selection before, and even more so now. Unlike Virginia, where my outgoing governor who promised to privatize our horrible liquor delivery system but failed to do so, these stores have decent selection. And because there is competition, you can actually get good prices on booze.
My shopkeeper seems to understand the pricing mechanism quite well. Cleveland’s finest — Great Lakes Christmas Ale — goes for $25 a six pack. Given its scarcity, he knows people will be willing to pay more for that premium product. And because he does this, it stays on the shelves. There was a six pack there this evening. A few years ago, before the secret got out in Washington, my sister and I scooped up five cases of the stuff at a reasonable price. At $25 a six pack, today, our little haul would cost $200 more.
Now, before you conclude that I like discriminatory pricing because it results in me getting cheap liquor, I’ll switch to a few more important examples.
To truly understand the usefulness and benefits of price discrimination, you should try to imagine a world without it.
At Business Insider, Josh Barro observes:
“Discrimination” has negative connotations, but there’s nothing immoral about price discrimination. In fact, it can be an economically useful mechanism. If airlines had to charge the same price to every flyer, a lot of flights would become uneconomical to operate, making both the airline and the passengers worse off.
Indeed, Barro cites but one of many examples where price discrimination serves a necessary function. Without price discrimination, would there be as many flights as there are now? As many routes? Would you be able to afford them? What about $1 Megabus rides, certain types of discounts, or coupons?
Thankfully, we probably won’t have to find out because price discrimination isn’t likely to disappear from the marketplace anytime soon.
Josh Wright writes that “discrimination is likely to result in lower prices, higher output, and increased innovation.” And he would be correct. Without price discrimination, airline output would be markedly lower.
He also concludes a fantastic blog post with this:
“one lesson of the price discrimination literature that is ignored is exactly how unusual uniform and linear pricing is in the modern economy! The ability and incentive to price discriminate, which requires only the absence of perfect substitutes, is ubiquitous. It is a power held by every restaurant, landlord, corner gas station, supermarket, and small firm in the economy. Because price discrimination is profitable, we can expect firms in our modern economy to invest substantial resources not only in product differentiation, but also in finding methods to price discriminate. These provide no reason for competitive concern. Indeed, I think one could make a plausible argument (though I won’t in this post) that the absence of price discrimination is more worthy of regulators’ attention than its presence.”