Online Sales and Differential Pricing.

Written by Neil Levy

When it was revealed (more than a decade ago now) that Amazon was charging different consumers different prices, based on information that suggested either that they had higher incomes or a greater willingness to pay for a specific item, there was widespread outrage. Amazon quickly backed down and Jeff Bezos apologised. Today, Amazon says that it does not charge people different prices based on the personal data it collects about them. Many other online retailers make no such promises, and canny shoppers check prices using incognito mode on their browsers, using a VPN, and/or deleting cookies.

The outrage is understandable: people think they’re being taken for suckers if they’re charged more for a product or service than another person would be charged. But is it justified? It is, of course, discriminatory (in fact, this kind of behavior is sometimes called price discriminationby economists), but discrimination is not always wrongful. We think we should discriminate in favour of people in some contexts. Think of affirmative action as a tie breaker between equally qualified applicants, or (even) less controversially of giving a job to a better qualified applicant rather than a less qualified one.

We don’t usually call these kinds of actions discriminatory, but that’s only because we usually reserve the word for wrongful discrimination. It is a kind of sleight of hand to point to the fact that some kind of behavior is technically discriminatory – it distinguishes between people on the basis of some fact about them – and conclude from that that the behavior is wrongful. Engaging in this kind of slippage from technically discriminatory to wrongfully discriminatory (without argument)  would be deceptive.

We can see the move in the wild, as it were in the submission of the Institute of Public Affairs (a right wing think tank) to a recent Australian senate inquiry into personal income rates. The IPA wrote that different tax rates for different people was discriminatory:

Other forms of discrimination, such as by skin colour, race, or ethnicity, are rightly abhorred, yet the income tax system openly discriminates against people by income.

The question isn’t whether it is discriminatory. Of course, it’s (technically) discriminatory. So is giving Christmas presents to your children and not the neighbors, paying a salary to someone who works for you and not someone who doesn’t, or voting for one candidate and not another. It’s treating people differently on the basis of facts about them. The question is, of course, whether it is wrongful discrimination.

So pointing to the fact that retailers charge different prices to different individuals is discriminatory doesn’t address the question whether it is justified.

It is noteworthy that we accept differential pricing by reference to willingness to pay quite pervasively. Outside of retail, that kind of pricing is the norm. Wholesalers may charge different prices to different customers, based on their willingness and ability to pay. Doctors and other providers of essential services have sometimes offered free or cheap services to poorer patients: a blatant form of price discrimination! Most obviously, auctions discriminate against buyers based on their ability (and willingness) to pay.

So is the outrage justified? That depends on further facts. Most obviously, it depends on the characteristics of individuals that serve as a basis for discrimination. Wrongful discrimination paradigmatically discriminates against individuals on the basis of their identity (race, gender, ethnicity, sexuality) or beliefs. Price discrimination on these kinds of grounds is illegal in many jurisdictions. This kind of discrimination is wrong, and seriously wrong when it prevents people from accessing, or significantly burdens their access, to goods, especially essential or important goods.

But charging those with a greater capacity to pay more for their goods doesn’t usually have these kinds of effects, since they can afford to pay more and because they usually have more in the way of alternatives and information. Price discrimination against those with a greater capacity to pay doesn’t seem seriously wrong. It may not be wrong at all.

It is much more problematic when it is targeted at those the retailer knows, or has good reason to suspect, are willing to pay more (as revealed by their previous history) but who have little capacity to do so. For most consumer goods, however, we think that consumers are price sensitive: if prices rise to the extent that they face burdens for consumption, they will change their behavior in response. So again, it doesn’t seem seriously wrong to charge those with a greater willingness to pay a higher price (matters are different if the good is the kind of thing to which people may become addicted).

Price discrimination could even be morally good, rather than neutral. It might play a role in bringing about a slightly more equal society. Indeed, one response to the claims of those who worry about price discrimination, and to the silly claims of the IPA, is to point to the difference between the absolute and the relative value of money. Due to the diminishing marginal value of money – the fact that one extra pound in the pocket of wealthy person matters less than to them than one pound in the pocket of the low income individual – differential prices may be requiredfor effective equality between purchasers.

I would prefer redistributive taxes as a mechanism for ensuring that inequality does not continue to grow. In our political climate, however, the drift is away from redistribution of incomes through this kind of mechanism. Differential pricing can never fill the gap, because the income it generates does not (except very indirectly and to a very small extent) fund public services. Nevertheless, in many cases it does not seem wrong to charge those who are willing and able to pay more a higher price than those who are less wealthy.