Why Price Discrimination Is (Sometimes) Legal
Nasir Pasha & Matt Staub

Why Price Discrimination Is (Sometimes) Legal [e195]

Nasir and Matt discuss the topic of price discrimination and how businesses are able to legally charge more to different customers.

Transcript:

NASIR: All right. Welcome to our podcast where we cover business in the news and add our legal twist to those business news articles that we cover on this podcast. My name is Nasir Pasha.
MATT: Terrible, and my name is Matt Staub.
NASIR: I’m trying to be descriptive to the thing that we’ve been doing for the past year and a half now.
MATT: That was straight up typical attorney talk right there – just way too many words to a conclusion.
NASIR: I fall into that trap too in my contract drafting, depending upon my mood. Sometimes, I want to try to impress with my writing skills.
MATT: Yeah, I always remember, if anyone’s seen your art of contracts presentation, how you take a huge paragraph and boil it down to like a couple of words, more or less.
NASIR: That’s classic.
MATT: Yeah, I enjoyed that. You know what I don’t enjoy is price discrimination though.
NASIR: I hate price discrimination!
MATT: Yeah.
NASIR: We should talk about that.
MATT: Yeah. Well, I guess we can talk about it. People might be surprised that, in some cases, what they would label price discrimination might be acceptable. I guess it just depends on what their definition of price discrimination is but there is a way it can be seen, I guess, as legal. Really, this is getting back to my economics courses that I took many years ago. We’re looking at perfect versus imperfect price discrimination.
NASIR: What does that mean?
MATT: It’s basically, if you’re a business and someone comes to you, whatever price they’re willing to pay is what you should feasibly charge I guess is how I look at it.
NASIR: Oh, I got you, yeah.
MATT: Yeah, and imperfect is going to be what’s seen as acceptable that, for different locations for example or different ages, you can charge different prices. In an ideal world, as a business owner, you would like to see perfect price discrimination or pure price discrimination because you’re just getting the maximum amount of money someone’s willing to pay but that’s not seen as acceptable. It’s the imperfect price discrimination meaning charging different prices based on some sort of differentiation is going to be seen as acceptable.
NASIR: Basically it’s somewhat similar to – what’s it called – supply and demand, right?
MATT: Yeah, that’s what I was getting at.
NASIR: Why didn’t you just say that? I’ve been waiting here for so…
MATT: I mean, it is somewhat supply and demand but I think one way to look at it is charging different prices based on, you know, San Diego, for example, they’re going to charge higher prices than somewhere in rural Utah and different ages. If you go to the movies, you and I might be charged the highest price. There might be children or seniors that get charged a lower price.
NASIR: That’s messed up. That’s discrimination.
MATT: That’s messed up?
NASIR: An example of this price discrimination so-called is that Staples, what they do with their online prices, if you, as a consumer, are shopping from a location that has a lot of competitors – you know, Office Depot, et cetera – then your prices may be lower. You know, if you’re in a location, maybe a rural area that doesn’t have as many competitors. And so, that’s the kind of price discrimination we’re talking about. You know, in general, I think it’s been accepted that price discrimination is legal. Whether it’s ethical or not, I mean, to me, it’s the aspect of charging as high of a price you can for those that can afford it. You know, I think everyone’s in that kind of boat – you charge as much as you can – but it just depends upon what you’re selling. If you’re selling bottled water to people that are trying to leave a disaster area, that’s one thing. Or gas prices. Or if you’re just providing some service where you want to charge as much as you can because you’re really good at what you’re doing, then that’s a different thing.
MATT: Yeah, and I think I have a problem with the word “discrimination” because, on the imperfect side of it, on the imperfect price discrimination, I mean, yeah, you’re charging different people different prices but you’re not necessarily discriminating against them in the general sense.
NASIR: Yeah. Like, in the Staples example, you’d be discriminating against maybe their location. When it comes to the legalities of this, in general, obviously, if you’re discriminating based upon any of protected class and it’s the same aspects of discrimination of every other analysis- race, religion, things like that – obviously I think everyone understands and that’s pretty easy to grasp that that’s illegal. But what happens when Google is collecting all this information on you and now, because they know somehow that you as an individual can afford or are more likely to pay a higher price because of your age, because of your location, because of your spending habits, because of what things you like on Facebook, is that type of price discrimination okay?
MATT: I don’t think that’s okay but, like I said, I still don’t view that as discrimination but that’s kind of what’s happening –or not “kind of” – that is what’s happening. For example, I need to fly somewhere so I look up a flight and I don’t end up booking anything. A week later, I look it up again. There is the data stored into the cookies or things like that keep my previous search and somehow it quotes me a higher price because it knows that, oh, I must be serious about it if I’ve come back and searched it a second time which is pretty unfortunate and something I oftentimes forget because, just the nature of me booking flights, I go on there and, if I see a price that’s good, I just do it and don’t think about it. That’s probably the reason I accidentally booked a flight on my recent trip that I ended up not even getting to go on because I got the day wrong.
NASIR: Yeah, and I guess they tell you to clear your cache or go from a different computer, don’t log in and all that stuff – to check the prices first. You know, a lot of times too, the differences are slight. It’ll be like $10 to $15 – sometimes more. It’s not going to be something crazy – at least from my personal experience. I’m sure there’s bigger examples but it’s that same thing, you know, when you go to the grocery store and they may overcharge you a dollar here or a dollar there but, in the bigger scheme of things, it may not be a big deal but then that adds up in the aggregate. Frankly, I mean, that’s all about data mining and the use of big data and I think that’s why Google is in the forefront of this kind of controversy and I think also why the FTC and similar regulatory bodies are trying to move towards what are called clear transparency – I have it right here – algorithmic transparency.
MATT: I don’t think it’s “clear” transparency because then you’re cancelling each other out.
NASIR: I think it’s “oblique” transparency or “clouded” transparency. No, the concept being is that, okay, if you have this algorithm or whatever, at least be a little transparent with it. But, I mean, the FTC can say that but where’s the rub? Where’s the actual illegal act? Is treating one consumer differently than the other consumer allowed? So far, the law pretty much allows that unless it’s a discriminatory reason. In fact, the only times that price really is regulated are things when it gets too anti-trust or anti-competitive activities. For example, if you’re a distributor, you guys have experienced this where setting minimum prices or even the prices between multiple distributors is somewhat regulated if the reason for the price adjustments is to kind of cut out the competition. That’s not what’s going on here though.
MATT: Or like price collusion where you have a group of gas stations, for example, and you all agree to charge a higher price together and the customers suffer – or undercutting. I like that stuff. It’s pretty interesting but that’s not the same thing that’s going on here and flights or movies, that’s one thing, but this data usage, big data, that’s a whole other subject and I think it’s going to become a pretty… it already is kind of a big story. I think it’s going to come to the forefront in terms of an even bigger story and charging higher prices to people who can pay those higher prices in terms of the data usage.
NASIR: That’s right.
MATT: That’s why the FTC has gotten involved and, when that happens, it’s usually something bad.
NASIR: Yeah, I can definitely see the FTC getting more involved and legislation coming down the way. Luckily, from a small or medium-sized business perspective, a lot of them aren’t working with big data except, since technology is so accessible nowadays, especially on the web, you can easily set it up so that, if you’re selling something online, you have different prices for different things whether you’re people that come from Facebook, you can automatically increase the price versus somebody that goes directly to your site. It’s very easy to kind of track those kinds of things and it’s not a coincidence that Google has a chief economist and that’s who’s kind of communicating or being quoted in some of these price discrimination articles – him basically saying there’s nothing wrong with trying to get the best price for somebody. From Google’s perspective, it’s their data that they’re trying to sell and trying to utilize for third-party vendors.
MATT: Do you view that as worse or the same as charging people different prices based on location?
NASIR: I mean, just kind of looking at it from a client’s perspective, especially in the service industry, right? Just think of something simple. When you have a carpenter that goes to a home, a person that’s in a wealthy area and a wealthy home, even if it’s the same thing, it’s expected that they’re going to raise the price a little bit because they can afford it. Now, the question is some people may say that’s unethical. I’m not sure if I’m one of those persons but, if you have no problem with that, then you shouldn’t have any problem with that expanded elsewhere in the sense where you discriminate based upon location, based upon this and that. At the end of the day, I see it as, well, you’re not increasing it but you’re giving a break to those that can’t afford it and so you’re actually lowering the price for others rather than you’re saying you’re raising the price for others. What do you think?
MATT: That’s an interesting way to look at it.
NASIR: If you’re selling something that is part of a necessity, whether it’s health care or – like I said – water and gas, you have to be careful with that because, if someone needs it, then there’s an option of exploitation, especially in the service aspect, I think price, you know, supply and demand has a play into that and, you know, you’re trying to do business.
MATT: You must be a big fan of Robin Hood – stealing from the rich and giving to the poor.
NASIR: I’m actually more of a Sheriff – what’s his name – Nottingham?
MATT: That’s Peter Pan, right?
NASIR: No, that’s not Peter Pan. But I’m more of the sheriff guy. I like just taking money from everybody and keeping it.
MATT: Yeah, we all know. We all know that’s the case.
NASIR: And discriminating when they ask to buy stuff from me.
MATT: Like I said, I don’t like the word “discrimination” in this sense. It’s like pricing strategy or just economics is how I see this.
NASIR: Yeah, you’re right because discrimination implies that you’re discriminating – that it’s wrong. Look, I can see the argument from an ethical perspective that you have one set product and you have to sell that product to everyone equally but, to me, that doesn’t make sense. You know, at the least, most people would agree that, if you sell a hundred products versus one product to one person, you would lower the price because there’s economies of scale. But the reason is why can’t you do the same thing for other factors as well?
MATT: Yeah, I mean, I’m with you on that. There’s precautions in place for when pricing is illegal, like we mentioned before, and I’m definitely fine with that too. But, if a business wants to charge two people different prices based on something, like you said, that’s not a necessity like water or food, then there’s bigger fish to fry.
NASIR: To me, it’s just about exploitation. You know, a common thing that I think is wrong is, for example, in the subprime market of what happened in 2007 and before or even kind of mortgages, when lower class poor individuals are routinely being offered products that are inferior for the same credit scores as other people and yet they’re not having access to those same products, that’s a problem, right?
MATT: Yeah.
NASIR: Statistically, they’ve shown that. They’ve shown in areas where you have Person A in one neighborhood of a certain race and Person B in another neighborhood of a different race, same credit score, same everything on paper yet they’re offered an inferior product and a more expensive product, that’s going to be a problem because that’s a clear sign of exploitation, right? I mean, I think there’s some leeway there. Obviously, everything can be taken into an extreme.
MATT: Yeah, I agree with you on that.
NASIR: I’m pretty sure you’re just like another sheriff like me.
MATT: I’m Robin Hood.
NASIR: Sheriff Rotting… Nottingham, I think it is. I think Rottingham was the parody on Robin Hood: Men in Tights, right? Nottingham? I don’t know, anyway… Someone can correct me.
MATT: Robin Hood. I think I was thinking of Never Ever Land for Peter Pan when you said Nottingham.
NASIR: Yeah, that is definitely Peter Pan.
MATT: Nottingham.
NASIR: Nottingham.
MATT: Yeah, okay.
NASIR: Is it? Sheriff of Nottingham.
MATT: You were correct.
NASIR: That’s who I am so, of course, I’m correct. I should know.
MATT: Good job.
NASIR: Okay. That’s our price discrimination piece for the day so we decided not to price discriminate, right?
MATT: Oh, we’re charging people different prices to listen to this episode so, at the end of the day, we did.
NASIR: Yeah. If you got it for free, you’re one of the lucky ones.
MATT: Keep it sound and keep it smart.

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