A Brief Note on Price Discrimination

Part of what bothers people about price discrimination is that, in ethical terms, that’s not how the market is supposed to work. Commerce seems to come with a set of implicit moral commitments: everyone’s money is equal, each transaction is characterized by mutual respect, deals can be complete in themselves and don’t create long-term relationships, prices are honest expressions of value. Collectively, they define a way for buyers and sellers to treat each other with respect and dignity even in an impersonal marketplace where everyone is trying to strike the best deal they can for themselves. The depersonalization is actually part of the moral code; it’s a promise not to act on illiberal (and personal) values like racism.

Price discrimination undermines that ethos by putting the personal back into the picture, and not in a nice way. It’s not about the chef sending out an extra little something for a favorite customer, or about having a long conversation with the hotel clerk. No, it’s about a company deliberately treating some of its customers worse than others by identifying and acting on their personal characteristics. It breaks the moral frames of commerce. Say all you want about efficiencies and distributional gains, it just feels wrong to many people, and that intuition will not go away easily.

None of this is original; it’s just that a few different lines of thought finally clicked together for me.

I might agree, if I thought that price discrimination was in some sense rare and hence worthy of being singled out. But every time you step onto a used-car lot and chat for a few minutes with the salesman, he is looking for a way to get a few more bucks out of you. That is price discrimination.

The picture you draw is of a certain idealized American commodity market. Your picture doesn’t accurately describe what I understand about Middle Eastern bazaars, where everyone haggles over prices at all times. What is haggling if not one customer getting a different price from another customer for the same good?

And lots of people hate buying used cars for precisely that reason: the deceptive, manipulative, haggling. We don’t haggle at the supermarket; bribery isn’t a part of our imagined commercial culture. That “idealized American commodity market” exerts a strong hold on the imagination. There are other possible ways to construct an ideology of commerce.

I can see people getting annoyed if price discrimination is hidden: if, for instance, companies secretly charge some people more than others, for whatever reason. But I actually think most people are fine with fully transparent price discrimination. That’s how I see things like hardcover vs. paperback books, pre-ordering video games vs. buying them used, orchestra vs. mezzanine seats, and all sorts of discounts and coupons.

Most of Steven’s examples can be validated on the ground that the people who pay more are getting something more. Both the paperback buyer and the hardback buyer understand that the higher hardback price gets you a physically nicer (if less portable) book and gets you it sooner. Although the purpose of this differentiation may actually be to separate the two buyers by their willingness to pay, the optics of it are fine, because they can both see themselves as freely choosing among two options both of which are respectful. Shifting airline seat prices, though, and behavioral targeting, and used car haggling all violate one or more elements of the norm of respectful impersonality I described.

If there is such a norm of respectful impersonality, it’s honored in the breach. You can come up with any number of examples beyond Steven’s and mine. E.g., Apple habitually releasing products at a high price, then waiting a few months and drastically cutting the price of that product. That is transparently price discrimination.

Again, I think you’re focusing on a norm of fairness that exists within particular Western industrial democracies in the market for certain commodities. There’s no universality to this claim, which makes me skeptical that there’s any deep ethical principle here.

And if people really cared all that much about this norm, we’d expect more companies to address customers’ concern. But we really don’t. There is, so far as I know, one care company that has ended haggling; that company is Saturn. I’m curious, in fact, whether Saturn still does that.

Steve, when Apple cuts the iPhone’s price dramatically a few months after its release, it confirms my theory in two ways. First, it was still product differentiation, in which Apple could with a straght face say (and consumers could with a straight face tell themselves) that early adopters were paying a premium to be early. And second, Apple did take shit for it. Not so much that it was a bad move, or that that companies won’t keep on doing exactly the same thing. But people were upset, and my theory explains why. These moral norms aren’t strong enough to override the other reasons why companies use various market segmentation techniques to price discriminate, or why consumers accept those techniques much of the time. But they are strong enough for people to get angry about visible breaches, and to drive companies into product differentiation and windowing and other such techniques, rather than more irksome ones like haggling. (Cars remain the exception, not the rule.)

I’m not claiming that this is a universal principle. I called it “ideology” in a comment above; it’s a particular norm tied to particular cultures at a particular time that serves particular ends. I do think it’s a fairly widespread attitude that pervades most Western consumer markets, but I don’t think of it as innate or universal.