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  • Writer's pictureJean-Manuel Izaret

An open dialog on price discrimination

Discrimination has become a virtual synonym for racism and prejudice in civil society. Two recent examples - the Supreme Court case Masterpiece Cakeshop, Ltd vs. Colorado Civil Rights Commission and Sarah Huckabee Sanders’ visit to the Red Hen restaurant – focused on discrimination in the world of commerce.

Because I’m known as the “pricing guy”, many people have asked me some simple questions on these cases: what if the baker in Colorado had quoted a very high price instead to the same-sex couple? Would that have been legal? If the price is high enough, is that tantamount to refusing service? Similarly, could the Red Hen have informed Sarah Huckabee Sanders and her family that they would be charged higher prices than those that appear on the regular menu?

These hypothetical questions are important, and the answers are complex. Many people are surprised to learn that price discrimination can also be a force for social good, e.g. by opening markets. Without getting into too much detail or into the emotions these questions evoke, I would like to share a few thoughts on the legality, viability, and fairness of price discrimination. As you read through my points and examples below, please keep in mind that I am not advocating any solution. I’m just exploring what is possible, because I feel strongly that we all need to think more deeply about how we view price discrimination.

Is it legal?

Whether price discrimination makes sense ultimately gets decided in the court of law, the marketplace, and the court of public opinion. Let’s start with the legal side. Many people are surprised to learn that many forms of price discrimination are legal. Gene Zelek, an expert lawyer on pricing, confirmed the big picture for me. The Robinson Patman Act of 1936 (RPA) prohibits price discrimination on products sold to B2B customers that compete with each other, unless costs-to-serve or competitive quotes justify the price differences. These exceptions are so pervasive that in practice, B2B prices for products vary widely. But RPA does not apply to B2B services, which gives businesses even more leeway for price discrimination. As for consumers, most price discrimination is permitted by the law, except for protected consumer categories and certain industries. For example, banks may vary interest rates based on the credit risk of consumers, but they must ensure that their algorithms do not have an explicit or implicit bias against certain races or protected categories. The same applies to insurance companies.

Most consumer price discrimination involves discounts and rebates based on class membership (e.g. seniors, children, students, tourists, loyalty clubs, etc.). But there is nothing in the law which precludes a business from implementing surcharges. Could a hotel charge newlyweds 20% more than other guests? Legally speaking, yes, it could. Likewise, there is no legal barrier to the Red Hen’s adding a notice to its menu which states that all White House employees and their families will pay a 100% surcharge to standard menu prices if the restaurant staff recognizes them.

Is it viable?

In short, both discounts and surcharges are legal forms of price discrimination. But legality is only one hurdle. In practice, the main barriers to price discrimination are market forces, psychology, and perceptions of fairness. In that context, surcharges just don’t “feel right.” That explains why most businesses implement price differentiation (i.e. price discrimination) as discounts or rebates which confer preferential prices to a few select categories, while most others pay the same price. When customers become aware that other customers pay different prices, and feel that this discrimination is unfair, they will either demand an alignment of prices (usually to the bottom) or decide not purchase at all.

But we can imagine situations where a business can use psychology and public perceptions to alter that common pattern and make surcharges a viable approach. The heavy politicization in the US and the geographical concentration of people with similar political views beg a question: what happens if a restaurant in the Washington, DC area advertises a policy of higher prices for the members of the current administration who are public figures, i.e. sufficiently known that the restaurant staff recognizes them? Right now that policy would likely discourage any Republican from dining there, and would also generate a lot of publicity. The restaurant may become a preferred location for activist or liberal-leaning customers. Dining at that restaurant could become a symbol of resistance to the Trump administration, the same way dining in expensive restaurants can become a status symbol for well-to-do bankers. The same logic would apply, of course, if a Democratic administration were in the White House.

Is it fair?

The final question is one of fairness. Any form of discrimination is usually viewed negatively; even cases of positive discrimination (e.g. university admissions) leave mixed feelings. This negative reputation has rubbed off on price discrimination, and now I am going to share a personal opinion: I don’t think that’s right. Price discrimination does not deserve that reputation. It can have a positive benefit for society.

Airlines practice a form a price discrimination known as yield management. They use different fare classes and restrictions to extract the higher willingness to pay of business customers, while offering lower prices to many consumers that could otherwise not afford to travel abroad or visit friends and family. Over the past 30 years, this practice has driven the enormous growth of long-distance travel while maintaining a very competitive market with relatively low margins and levels of return. In other words, price discrimination has clearly expanded access to air travel without the rampant gouging or profiteering some people fear.

What do you think?

Price discrimination is indeed a complex topic from a legal, commercial, and ethical standpoint. All three aspects matter. For this reason, I can only encourage people to seek legal advice specific to their industry and geography if they plan to implement any form of price discrimination.

What are your views on price discrimination?

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