When I like to be discriminated against
Fri 24 Feb 2012 by Matt Nolan.

While standing in an unnamed retail store shopping for various aimless accessories my eyes came across a sign saying "lowest price guaranteed".   Having seen these types of signs a million times before I was ready to ignore it and continue shopping, until I realised that this was an example of what economists call price discrimination.

A lowest price guarantee often work as follows.   If you go out and find a cheaper deal for a product you can get the retailer to cut their price to this new lower price.   As a result, before heading down to the store you can hunt around mailers for a cheaper price, or just relax and have a cup of coffee.

As all consumers are different there will be some who are very willing to go hunting out a lower price, and others who really can’t be bothered.   By setting a lowest price guarantee a retailer can get the consumers who like to hunt for the cheapest deal to turn up with their competitor’s mailer to buy the good off them.   At the same time, they can charge people who can’t be bothered searching around through mailers and other stores a higher price.

Price discrimination is a lot more common than this though.   Concession movie tickets, discounted multiple bus fares, student deals at fast food restaurants – these are all examples of price discrimination.

Although the idea of discrimination sounds like a bad thing, price discrimination does not have to be.   Unlike many other forms of discrimination, which are based on prejudice and intolerance, price discrimination is when firms admit that people value products in different ways and charge them on that basis.

Take the example of concession tickets for movies.   If firms could not price discriminate, movie tickets would be a little bit cheaper – however, for students, children, those on benefits, and the elderly, tickets would be more expensive.

Importantly, when a firm is able to adjust its price based on the knowledge that different, observable, groups are willing to pay different amounts, they are often willing to provide more of the good or service then they would have otherwise.

The main complaint about price discrimination is that firms that are able to charge different prices to different types of people may set prices that are too high relative to what we think is fair.   But in truth this isn’t an issue with price discrimination – it is an issue of competition.   If there are a number of firms competing to serve people, discriminating in terms of price and service in so far as people want different things and are willing to pay different amounts, then we will have a situation where things are great for consumers.

The ability to change the product, service, and price associated with a good, based on the individual characteristics of the consumer involved is the way society is evolving.   After several decades where manufacturing concentrated on producing large numbers of similar goods in order to take advantage of economies of scale, the inherent benefits of specialisation and customisation are becoming more important.

As a result, price discrimination is likely to become a bigger part of how businesses and consumers interact.

We can already see this with technology, specifically computers.   Computer retailers offer different packages, that different consumers will value in different ways.   However, by adjusting the prices of different packages, they can also price discriminate between consumers.   Software manufacturers and retailers create "student" and "home" and "business" packages for their software – not because the packages are especially different, but because these groups have a different willingness to pay for the same underlying product.

Furthermore, the internet already allows price discrimination between countries.   For example the cycling gear tends to charge a higher price when selling labelled goods to New Zealanders, even taking into account the exchange rate and shipping costs.

The ability to price discriminate gives overseas retailers the incentive to enter the New Zealand market, competing with domestic retailers and lowering prices overall.   Through time, companies will be able to gain a greater amount of information regarding your personal willingness to pay and what you value through your interactions on the internet – leading to further price discrimination and tailoring of products to your individual desires.

So although the term "price discrimination" sounds like an unpleasant one, as long as there is competition in retail markets this is the sort of discrimination that will in fact make a lot of people better off.

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