Blogs | October 10, 2018

Unfair outrage on price

Companies can charge different people different prices for the same goods or services, but is that fair?


Imagine you bought tickets for yourself, an adult and two children to see a film at the local cinema. You then discover you could have paid nearly half the amount in a different location.

It doesn’t seem fair, but this type of price difference is increasingly applied by businesses when they can offer a different online price to different customers.

Lack of competition
A lack of competition can mean different prices can arise for essentially the same products. While the cost of putting on the film in each of the two cinemas isn’t likely to be very different, the cinema is of course keen to charge as much as possible for the tickets.

If in one location there are many other cinemas, they might have to reduce the ticket price to encourage people to pick them. This isn’t the case when there are few competitors.

Would you travel a long way to another cinema to save on the ticket price? This would typically depend on the price difference and the distance you needed to travel.

But it would also depend on whether you knew the movie was showing for a lower price somewhere else. We don’t usually have all the information we need when making decisions such as whether to buy movie tickets. This also influences whether a cinema chain can get away with charging varying prices.

This can all be OK. We might be happy to pay more for an extra-comfy seat, or a convenient central location. But other times it might not seem fair – especially when you don’t want to pay extra or cannot benefit from the cheaper alternative.

So what’s fair?
Fairness is a tricky concept, especially when it comes to pricing. And of course, there have always been businesses that will do anything to increase their returns.

A classic example from behavioural science is the local hardware store that hikes up the price of snow shovels during a blizzard – just when people need them most. People consider that unfair.

But if the hardware store needs to buy new stock to meet a surge in demand, increasing prices as a result, that might be considered fair.

When people know more about why they are asked to pay a specific price, they may have a better idea of whether they consider it fair.

Prices we expect
In some cases we get used to how much things generally cost, and this becomes what we expect to pay and what we consider to be the fair price.

For example, many people are prepared to pay the same amount for goods at a national supermarket chain in a provincial town, even though commercial rents for the store are much lower than in a major city.

We don’t expect to pay less for groceries when we buy them out of town, even though we might know the business is making more profit when their operating costs, including rent, are lower. And this might be the only store in a small town.

Technology and fairness
Technology, too, can change what we consider a fair price. For example, a cinema might realise that a film being shown soon isn’t full. In order to sell the last few seats they could lower the price. Airlines do this a lot.

Companies with platform approach, such as Uber, may also change their prices swiftly in response to demand.

For example, if it starts raining and more people want taxis, increasing the price might encourage more drivers to stay on the road instead of going home because they have already made the amount of income they need that day.

When does it go too far?
In some cases, people might be willing to pay more for the same goods or services – or they don’t really have a choice if there is only one shop in town – but more often than not, paying a different price is considered unfair.

This is especially the case for online purchases, where the price could be determined by data that companies receive from internet searches or social media activities.

SpendingMoney

Jessica Exton
Jessica Exton

Behavioural scientist at ING
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