Price discrimination – or price differentiation – is a commercial policy. A seller may want to sell identical goods at different prices to different classes of customers in order to increase market shares, reach otherwise unreachable groups of customers or profit from customers’ willingness to pay.
The question is whether we should treat this type of discrimination like we treat other types. In other words, should we label price discrimination as something that is morally reprehensible, and should we also make it illegal (which are two different things – lying is often reprehensible but only rarely illegal)?
The answer is: it depends. Some forms of price discrimination are morally neutral or even praiseworthy. Offering students or poor people discounts for museum tickets or public transport has some moral benefits. Other forms, however, are clearly reprehensible:
[O]ne field experiment examined discrimination against disabled people in the context of car repairs, finding that disabled customers received higher quotes than the non-disabled customers. To get at the nature of this discrimination, the authors first conducted a survey, which revealed that “mechanics believe the disabled approach 1.85 body shops for price quotes while the non-disabled approach 2.85.” In a second field experiment, the authors instructed participants to say the phrase, “I’m getting a few price quotes.” This significantly changed outcomes — disabled participants received much lower offers: “Importantly, the lower offers received by disabled testers after signaling a willingness to search are not statistically different from those received by the abled,” write the authors. (source)
This is an example of so-called third degree price discrimination, which is in fact a form of statistical discrimination because the price is differentiated on the basis of an attribute of a customer segment (in this case disability), and this attribute is taken as a proxy of the customers’ ability or willingness to pay (in this case, the disabled are willing – or believed to be willing – to pay more because they can’t or won’t be troubled with shopping around).
Clearly, not all third degree price discrimination or statistical discrimination is wrong (student or senior discounts are cases of third degree price discrimination), but in this example it is wrong. Offering the disabled higher prices simply because they are disabled and hence less likely to shop around, is clearly immoral, even if it’s not based on animus against the disabled. It aggravates the disadvantage that nature has imposed on the disabled, and it’s a typical case of exploitation.
Exploitation occurs when one party in a voluntary exchange between two (or more) partners gets an unfair price for the goods or services exchanged, and when this party enters the exchange from a disadvantaged position. A price is unfair when it is below what it would have been in a fair auction. It is beyond doubt that a fair auction would have allowed the disabled, who enter the exchange from a disadvantaged position, to pay less.
More posts in this series are here.