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Thread: Is it unfair to charge different people different prices for essentially the same good or service? In earlier pieces, I have argued that the practice is often not only fair but also efficient. 
See, for example, “Tesla’s Tiered Pricing Is a Hurdle, But a Fair One” nytimes.com/2017/10/27/bus… ...
…and “How Much Is That Laptop? It Depends on the Color of the Case. And That’s Fair.” nytimes.com/2006/07/06/bus…...
…and “Pricing the Ballgame”
nytimes.com/2002/12/04/opi…
nytimes.com/2002/12/04/opi…
Now @tbarson49 notes that most consumers actually view differential pricing as deeply unfair. Won’t that view, he asks, limit firms’ ability to engage in the practice? And shouldn’t it?
Barson is clearly right about consumer views. And those views have definitely constrained firms’ pricing latitude. But in many cases, the perceptions of unfairness are misguided.
Suppose someone said, for example, that it’s unfair for a grocer to charge twice as much for a 10-pound of rice as for a 5-pound bag. We’d think that the author of that statement simply didn’t understand English.
Yet a similar price-cost link characterizes each of the cases I’ve discussed: The customers who end up paying higher prices are in most cases the same ones who are responsible for a larger share of the seller’s cost of serving them.
One of the clearest illustrations of misperceptions of fairness is time-of-day pricing for electricity, under which consumers pay higher rates when a utility’s generating equipment is fully utilized. Consumers reliably condemn this practice as unfair.
But it’s not unfair. To serve additional demand at peak times, a utility must install and maintain additional generators. In contrast, serving additional demand during off-peak hours requires no additional equipment costs.
Charging more for electricity during peak hours is therefore just as fair as when a butcher asks a customer who buys two steaks to pay twice as much as a customer who buys only one.
The same principles are at work, albeit less transparently, when a firm markets a product that entailed heavy development costs. For the seller to survive, some buyers must defray those costs. Yet not all buyers are equally responsible for them.
Sellers know that their wealthier buyers are generally willing to pay than others to enjoy a product’s advanced features. And it is also precisely those buyers who are most likely to jump the hurdles that confer eligibility for discount prices.
If wealthier buyers are responsible for the lion’s share of the cost of developing a product’s most advanced features, it is completely fair that they end up paying higher prices than others.
Or so I argued in my recent thread on the logic of scratch-‘n’-dent appliance sales:
Whether or not consumer perceptions of unfairness are misguided, however, sellers sometimes ignore those perceptions at their peril. A case in point is Coca-Cola’s attempt to charge higher prices for soft drinks delivered by vending machines during hot days.
A seller incurs two main costs when delivering soft drinks from a vending machine: the cost of the drink of itself, and the cost of installing, maintaining, and powering the machine. The cost of the drink itself is of course independent of outside temperature.
But responsibility for the cost of the machine is not independent of temperature. Since peak demand for drinks occurs during hot days, sellers could have installed smaller, cheaper machines except for the need to serve demand during such days.
So it is totally fair that consumers who buy drinks on hot pay higher prices. But that’s of course not how consumers saw things. Many were so outraged by what they saw as Coca-Cola’s unfair pricing practice that the company was quick to abandon it.
That doesn’t imply, however, that we should celebrate Coke’s retreat in the name of fairness. Far better would be for economists to do a better job of explaining why such pricing schemes are no less fair than charging twice as much for two steaks as for one.
