Is Price Discrimination Good for Buyers?

Buyers tend not to like the term “price discrimination”. After all, “discrimination” in the popular lexicon has more to do with prejudice than discernment. And when it comes to pricing, the term immediately makes people think they are paying higher prices than they “should.” Robert Frank, an economist at Cornell, wrote an interesting New York Times article last week makes the point that economists and pricing people understand quite well: properly done, price discrimination benefits everyone, buyers included.

One of the reasons people dislike price discrimination is the seeming arbitrariness of the “fence” between price points. The airlines’ Saturday night stay requirement is perhaps the canonical example. Electronics makers who charge different prices for the same part, off the same production line, depending on what specs the part meets during testing. A counterintuitive example is the pricing of drink sizes at fast food restaurants. The cost per fluid ounce goes down dramatically as you order larger sizes, almost daring you to get a “small.” This is because you’re not actually paying for the sugar water, you’re paying for the lease on the property, the wage of the person handing you the drink, and probably subsidizing the burger, as well. From the perspective of the restaurant manager, you’re paying a lot more for essentially the same thing (someone handing you a cup of carbonated sugar water).

The NYT requires free registration, but the article is worth the read. Try out some of Frank’s points on your customers and let me know how it goes.

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