A Fair Price and Your Price
What is the "right" price to pay for something and
should we all pay the same price? Is it fair for a business to
charge some people more for a product or service than they charge
others? Questions like these are interesting, and worthy of discussion
according to the ethical issues raised. For example, if a pharmaceutical
company invests millions in developing a life-saving drug, and
then start producing the drug for a cost $1 per dose, they might
in theory make a marginal profit at a wholesale cost of $1.50,
except that they have to recover those millions spent on research
too. One way they can do this is to charge people in wealthier
countries a lot more than those who live in poor countries. Charging
according to what people can afford seems like an ethical arrangement
which generates the revenue necessary to recover initial investments
and provide a decent profit.
But what if the point is to simply charge each customer as
much as possible using any techniques available? Is that fair?
It is a tough question, but it is also a practical challenge
for companies, and thus we have what is sometimes called "dynamic
pricing." Most people have not heard the term, but many
of the largest retailers have been using this kind of pricing
for years now. It's also called "price discrimination,"
and in some ways it's the holy grail of pricing strategies for
businesses. It's a way to get the most profit for a product or
service by charging different amounts according to how much each
customer is willing to pay at any given time in any particular
circumstance. One online dictionary defines it as "Commerce
offering goods at a price that changes according to the level
of demand, the type of customer, or the state of the weather."
Yes, umbrellas can be sold for more during a patch of rainy weather,
but the concept goes much, much beyond simple examples like this.
Dynamic pricing has been around for a long time in various
forms. For example, the typical "happy hour" at places
where people gather to drink is based on this concept. Later
in the evening, when a pub is full and has people waiting at
the door there is no reason to charge low prices for drinks.
A frugal customer is simply taking space that would otherwise
be occupied by someone willing to pay more for drinks and food.
But during slower times it makes sense to try to attract those
frugal people by lowering prices.
It would be wonderful (for businesses) if there was always
a way to get people to pay as much as they are willing to pay
for what they buy, but over the years it has been a difficult
idea to implement in most industries. However, now this strategy
of charging different prices to different customers has become
much more common online. Before I get to how to deal with this
as a consumer, let's look at the basic concept and how it works
from the perspective of the business owner.
We start with a basic dilemma in pricing a product or service.
Suppose, for example, that me and some other customers are willing
to pay $46 for a particular brand of jeans. The store might pay
a wholesale cost of $16, and so make a gross profit of $30. But
what if sales are slow? They could sell the jeans for $26 and
perhaps sell many more pairs. The gross profit is only $10 per
pair, or one-third as much, but if they sell four times as many
they make more total profit.
But of course they hate to lose that $30 profit they could
have had from me and others willing to pay the $46 price. What
they would prefer is to sell them to some customers for $26,
and to others for $46, as well as at prices in-between, according
to how much each customer is willing to pay. They would love
to be able to practice such "price discrimination,"
but it's difficult to do with jeans. One way it has been done
by some retailers is to have expensive products in their high-end
stores while selling the same jeans at their discount stores.
To some extent, then, the customers self-segregate themselves
and pay accordingly. Those who try to pay the least for everything
will go to the discount stores, after all, while those who are
willing to pay more will shop and buy their jeans where the selection
and service is better, or at least where it is believed to be
Of course, it would be a dream-come-true for retailers if
they could have dynamic pricing in the same store. If they could
just read people's minds as they walked in the door, and then
have the prices each one sees change as they walk up to the displays,
that would mean squeezing the most possible profit out of each
customer. But how likely is that?
Actually, the internet has made this possible to some extent.
Huge quantities of information are gathered as we surf the net,
and now when we buy a few expensive products, the cookies in
our computers can tell the next site we visit to show us the
page with the higher prices, while others who go to the same
website will see lower prices. We no longer really know if we
are seeing the same page and same prices as other people.
As a consumer, one way you can deal with this is to clear
the cookies in your browser before you go shopping. Since doing
this is different for each browser, I will forgo the instructions
here and send you the following site:
That will not always resolve the problem though. If you have
previously shopped at a website they may track your IP address
and buying habits and market to you accordingly. If you suspect
this is happening, you can always go to the site from a computer
at a friend's house, a public library, or from your laptop at
a coffee shop -- after clearing the cookies again. You also can
use one of the many proxy servers online, so your IP address
will not be known by the vendor. When you arrive, note whether
everything looks the same and the prices are the same.
More About Dynamic Pricing and Fair Prices
The concept of dynamic pricing is not in itself nefarious.
It's just another way to market and sell products and services.
If you market to rich people you would naturally try to sell
your product or service for more since they can afford to pay
more and usually will. Meanwhile, you might offer discounts to
customers who can't otherwise afford your product, as long as
you can still make a profit at the lower price. A plumber, for
example, might use this strategy to keep his business viable.
If that means he can pay higher wages or hire more employees,
we might look at it as something like "a market theory of
Recently I was subject to dynamic pricing in one of the more
common forms. Specifically, I upgraded to faster internet. I'm
fairly sure that to give me 30 mbs or 18 mbs download speeds
costs the cable company the same. Most likely they purposely
slow down the lower-cost service, so those who want to pay less
will still buy their service, while those (like myself) who need
the speed and can pay the price will do so.
This is more common than you might think. Many companies offer
slightly different products so that the customers segregate themselves
and pay according to affordability. And yes, there have been
numerous cases documented where they effectively sabotage the
product in order to sell a lower-priced version without losing
the higher-priced sales, even if that means it costs more to
produce the version they sell for less. That's been a method
of dynamic pricing for decades.
Is it fair? It's not really easy to say. The example I started
with, of a drug being sold for less to those who are poor and
more to those who can afford it, doesn't seem that wrong ethically.
But, on the other hand, it's sad to think that a business would
purposely sabotage a product or service just to be able to sell
the un-sabotaged version to a different market segment. If a
particular economic system results in the destruction of value
in order to boost profits, perhaps there is something
wrong with that system. In any case, be aware that whatever others
pay, your price might be different.
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