Price Discrimination - Get Used To It
Every time the media catches a company using price discrimination as a tool (for instance the recent hubbub about Orbitz showing Mac users higher-priced hotel rooms than PC users) there is a great deal of sound and fury - followed by political grandstanding.
But in this online age where consumer preferences are so widely shared and available, price variation - and discrimination - is going to become more common and widely-used than ever. The incentives are simply too powerful, and the tools are too good.
This post from Chris Dixon explains why in a very straightforward, easy-to-understand manner.
After you have chosen the right price, the only way to make the area under the curve greener is to charge different customers different prices. The theoretically optimal way to do this is to look at each notecard and offer to charge each student, say, 10% less than the prices he or she bid. In real life you can’t do this (although Priceline has gotten close by asking customers to enter their willingness to pay). Some companies – most famously Amazon - have attempted outright price discrimination, but this tends to anger customers and can even run afoul of the law.
So the goal of pricing is to capture as much area under the demand curve as possible. In practice, the best way to do this is to find proxies for willingness-to-pay that are easy to observe and that customers will accept.
For example, airlines know that business customers will pay more than vacation travelers. They therefore look for acceptable proxies to segment business and vacation travelers and capture more of the area under the demand curve.
Read the whole thing here.
Pricing is increasingly based on not so much what a product ‘costs’ or is ‘worth’ - but what you will pay. Most consumers will reflexively recoil (and the media & politicians will whip up those emotions) - so expect sellers to be very subtle about how they implement these strategies. However, none of that changes the fact that price discrimination is happening and we should expect much more of it going forward.
Get used to it.
