Discrimination is a dirty word. Rarely a day passes in which we are not confronted with news of alleged discrimination in employment, law enforcement, or some other setting. And each time, the news arouses intense emotion from the accuser, from the accused and from those who sympathize with either party. Regardless of which side of a particular case you identify with, I bet we can all agree that if — when — discrimination happens, it is bad.
Economic theory generally agrees with our moral compass. Discrimination based on characteristics such as race, gender, or religion causes inefficiencies in markets and overall economic losses to society. This is an important result, and maybe one day I will write more on this.
This week, though, another kind of discrimination is on my mind — a good kind of discrimination. Discrimination in its literal sense is not always bad. For example, for those of us who will find ourselves in retail stores or shopping online this Friday, discrimination could be very good. Let me explain.
Price discrimination is the term used to describe a situation in which a firm charges different prices to two or more groups of consumers who purchase an identical product or service. The idea is that if the firm is able to figure out which customers would not buy their product at higher prices, they offer them a deal to entice them to buy, but they maintain higher prices for customers who are willing to pay more. The result is that consumers — especially those with lower incomes — have greater opportunity to purchase the good or service, and firms are able to sell more and generate higher profits. Both consumers and firms benefit from good discrimination.
As we discussed this idea in class last week, a student pointed out that Black Friday sales are a good example of this type of discrimination. Those who are willing to fight crowds and stand in long lines pay lower prices for the same products others will buy for higher prices closer to Christmas.
Parents of young children know all about this. Last holiday season, the hottest toy on the market was the Hatchimal, one of several “species” of egs that hatches into a trainable stuffed animal when appropriately nurtured by its human. Wal-Mart’s 2016 Black Friday add promised Hatchimals for $48.88, as much as a 20 percent discount off the regular price of the toys. Of course, supplies were limited, and the toys flew off shelves, leaving many to buy the toys later at full price, or worse — from resellers for as much as double the regular retail price.
On its surface, this example may not make price discrimination seem all that good. After all, Black Friday discounts just lead to empty shelves and frustrated customers. But, the good in price discrimination is what keeps us coming back every year after the Thanksgiving turkey has been put away. The good is in the opportunity for the deal — an opportunity over 154 million Americans took advantage of in 2016. Even if most parents left last year frustrated by empty shelves, many were willing and able to purchase Hatchimals later at higher prices. And some parents who may never have been able to pay the resellers’ prices had the opportunity to make their children happy because of Black Friday price discrimination.
Reg Murphy Center