While standing in an unnamed retail storeshopping for various aimless accessories my eyes came across a sign saying"lowest price guaranteed". Having seen these types of signs a million timesbefore I was ready to ignore it and continue shopping, until I realised thatthis was an example of what economists call price discrimination.
A lowest price guarantee often work asfollows. If you go out and find a cheaper deal for a product you can get theretailer to cut their price to this new lower price. As a result, beforeheading down to the store you can hunt around mailers for a cheaper price, orjust relax and have a cup of coffee.
As all consumers are different there willbe some who are very willing to go hunting out a lower price, and others whoreally can’t be bothered. By setting a lowest price guarantee a retailer canget the consumers who like to hunt for the cheapest deal to turn up with theircompetitor’s mailer to buy the good off them. At the same time, they cancharge people who can’t be bothered searching around through mailers and otherstores a higher price.
Price discrimination is a lot more commonthan this though. Concession movie tickets, discounted multiple bus fares, studentdeals at fast food restaurants â€“ these are all examples of pricediscrimination.
Although the idea of discrimination soundslike a bad thing, price discrimination does not have to be. Unlike many otherforms of discrimination, which are based on prejudice and intolerance, pricediscrimination is when firms admit that people value products in different waysand charge them on that basis.
Take the example of concession tickets formovies. If firms could not price discriminate, movie tickets would be a littlebit cheaper â€“ however, for students, children, those on benefits, and theelderly, tickets would be more expensive.
Importantly, when a firm is able to adjustits price based on the knowledge that different, observable, groups are willingto pay different amounts, they are often willing to provide more of the good orservice then they would have otherwise.
The main complaint about pricediscrimination is that firms that are able to charge different prices todifferent types of people may set prices that are too high relative to what wethink is fair. But in truth this isn’t an issue with price discrimination â€“ itis an issue of competition. If there are a number of firms competing to servepeople, discriminating in terms of price and service in so far as people wantdifferent things and are willing to pay different amounts, then we will have asituation where things are great for consumers.
The ability to change the product, service,and price associated with a good, based on the individual characteristics ofthe consumer involved is the way society is evolving. After several decadeswhere manufacturing concentrated on producing large numbers of similar goods inorder to take advantage of economies of scale, the inherent benefits ofspecialisation and customisation are becoming more important.
As a result, price discrimination is likelyto become a bigger part of how businesses and consumers interact.
We can already see this with technology,specifically computers. Computer retailers offer different packages, thatdifferent consumers will value in different ways. However, by adjusting theprices of different packages, they can also price discriminate betweenconsumers. Software manufacturers and retailers create "student" and "home"and "business" packages for their software â€“ not because the packages areespecially different, but because these groups have a different willingness topay for the same underlying product.
Furthermore, the internet already allowsprice discrimination between countries. For example the cycling gear websitewiggle.co.uk tends to charge a higher price when selling labelled goods to NewZealanders, even taking into account the exchange rate and shipping costs.
The ability to price discriminate givesoverseas retailers the incentive to enter the New Zealand market, competingwith domestic retailers and lowering prices overall. Through time, companieswill be able to gain a greater amount of information regarding your personalwillingness to pay and what you value through your interactions on the internetâ€“ leading to further price discrimination and tailoring of products to yourindividual desires.
So although the term "price discrimination"sounds like an unpleasant one, as long as there is competition in retailmarkets this is the sort of discrimination that will in fact make a lot ofpeople better off.
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