Price discrimination – in more ways than one

In all matters dealing with economics and the method of applying economic thought, great care should be taken to disambiguate terms and concepts. This means to remove all possible alternative meanings other than one. In other words, one needs to carefully define terms in a manner that their meanings mean the same thing to two people. Or two economists at the very least.

Price discrimination is a noteworthy term in this context. I often tell my student to “taste” the term – which is basically looking through the cobwebs of similar terms to arrive at what a given economic term must mean in a given context. For example, “GDP deflator” would be done in Matt-speak by way of  “…a mathematical concept to deflate a balloon called GDP that has been pumped up by air…”

Taste the term “discrimination”. Rather distasteful no? It easily conjures up images of signs put up on a South African beach in 1980 reading “Whites only” or a sign in a 1930’s shop window in St Louis Missouri reading “Help wanted – no Irish”. (I hasten to add for all you young people out there that both of these examples are true!)

In economics we have a very clear definition of price discrimination: a good sold at different prices to different groups of consumers is price discrimination. Adding some depth to the concept, one should also point out that these groups must a) be distinctively different and identifiable along a given metric (such as age, sex or occupation); b) have different price elasticities of demand (PED), and; c) be separable in order to hinder re-selling. So, if my students get a rebate on train travel then they will have to produce an ISIC card to purchase it in order that old economics teachers don’t cheat the system.[1]

Thus, “discrimination” in a wider sense of the word could be “…no women allowed in to the club…” while price discrimination means “…the price for men is USD25 and women get in free…”[2]

However (this is economics – there is always an “however”), there is a…how might I put it…disconcerting overlap between the more unappetising usages of discrimination and the purely economics version. Many of you will recognise that there are indeed discriminatory practices against foreigners/tourists that skirt the margins of the more unsavoury types of discrimination. It also bears mentioning that one, as a visitor, can be on both the receiving and paying end of the scale! Take note of what the discriminatory variable is here – i.e. how does a seller identify a group with a PED that is different to that of others?!

My first encounter with this particular aspect of price discrimination – and, to be fair, ultimately in my favour – was in Mexico. It seemed that popular tourism spots – often the incredible ancient Aztec, Toltec, Zapotec, Mayan ruins – charged non-Mexicans more than Mexicans. This makes sense in economic terms; someone who has paid a few thousand dollars in flights, hotels and buses to get to Uxmal is not really going to walk away from the world famous archeological sight in seeing that he/she pays twice what Mexicans pay; their PED will be lower!

It turned out, however, that teachers in Mexico get into any and all archeological sights and museums for free. In fact, all the expat teachers at my school were issued with official teacher ID cards. The problem is, if one happens to look distinctly un-Mexican, shows up at Teotichuacan with the ID card and demands free entry, the guards still want money. Whatever the reason, the guards never accepted the ID card without a good deal of arguing – or, in my case, bellowing and calling my girlfriend who happened to be a federal judge. (I take the opportunity of thanking my mate Rob for saving me from serious Mexican jail time by physically hindering me from fetching the axe I always kept in the car.)

Frankly, I still consider the teacher ID card one of the most brilliant forms of price discrimination. Not because it worked in my favour but because of the positive externalities. This system clearly incentivised teachers to visit historical sites and museums…and, naturally, often with students. Yes, we are back to education and the positive spillover herein.

Another example, that I now see on a weekly basis here in Shanghai, is the prevalent pricing structure of “No price and then let’s see”. In other words, one bargains. It took me a good three weeks of looking around and haggling to find a tailor who wouldn’t charge me over the top – literally.

Now, I’m Swedish. For single-shop perusing, we don’t bargain. We look at the price. Ask about the good. Say thank you and either buy it or walk away. The Shanghainese method is for the buyer to ask the price. The seller scopes you out – key variables being a) foreigner or Chinese; b) male or female; c) young or old; d) suit or jeans; and, much to my chagrin, the quality of one’s watch.

I think I hold the record for ticking every single wrong box! I am a foreign, male, middle-aged, well dressed person wearing a Rolex. It got to be a joke with my wife Lady Bell. We started doing a paired comedy for our own entertainment; I’d walk in, pick up a good, ask for the price, walk out, tell Bell…and she’d then go in and ask about the same good. On average, she got an initial asking price half of that offered to me. For example, I picked up a couple of fake Mont Blanc pens and the asking price was USD50 each. I looked at the man in silence, turned on my heel, walked out, sent in the heavy artillery (Bell) and she came out three minutes later with her purchase. Price; USD5. For both.