Do the standard seats on Ryanair and in Odeon cinemas need to be so uncomfortable? Do the website canvases of Weebly and SquareSpace need to be so basic, unless you pay the premium?
"Yes, they do", I say, putting my economist’s hat on.
In economics there is a concept of price discrimination, and contrary to what it may sound like, it is good thing, both in terms of efficiency and fairness.
Price discrimination is simply selling different units of the same product at different prices. First-degree or perfect price discrimination is when each unit is sold for the maximum price an individual consumer is willing to pay. Imagine Apple selling each iPhone at different prices to Tom, Dick and Harry! Perfect price discrimination is rare but it still exists. For example, business mentors sometimes let entrepreneurs pay as little as they can afford for a start-up coaching session. This is better for both the mentor (who still gets something for her time) and for an entrepreneur (who has access to a service he would otherwise not be able to afford).
You’ll be more familiar with the second-degree price discrimination, when the same product is sold at different prices, depending on how many units you buy. Think “3 for 2”, "buy 1, get 2nd half price” deals in supermarkets or buying 10 personal training sessions at bulk discount. Consumers ‘self-select’, according to their preferences, and businesses maximise their profits by offering ‘deals’.
Now imagine that we swap the word ‘quantity’ with the word ‘quality’. Here businesses must come up with the ways to induce those, who can afford it, pay more for premium services, such as better cinema seats, more attentive stewardesses and fully integrated e-commerce of website canvases. The trick here is to reduce the quality of the ‘standard’ product, so as not to cannibalise sales at the high end.
Economy class needs to have narrow seats, screaming babies, atrocious service and inedible food so that business travellers and wealthy individuals are never tempted to travel in Economy. This quality discrimination has been a feature of transportation services for hundreds of years, as commented on by a XIX century French economist Emile Dupuit (this translation featured in an article by R.B. Ekelund “Price Discrimination and Product Differentiation in Economic Theory: An Early Analysis” in Quarterly Journal of Economics in 1970):
It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches… What the company is trying to do is prevent the passengers who can pay the second-class fee from travelling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich… And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second-class ones, become lavish in dealing with first-class customers. Having refused the poor what is necessary, they give the rich what is superfluous.
"Yes, they do", I say, putting my economist’s hat on.
In economics there is a concept of price discrimination, and contrary to what it may sound like, it is good thing, both in terms of efficiency and fairness.
Price discrimination is simply selling different units of the same product at different prices. First-degree or perfect price discrimination is when each unit is sold for the maximum price an individual consumer is willing to pay. Imagine Apple selling each iPhone at different prices to Tom, Dick and Harry! Perfect price discrimination is rare but it still exists. For example, business mentors sometimes let entrepreneurs pay as little as they can afford for a start-up coaching session. This is better for both the mentor (who still gets something for her time) and for an entrepreneur (who has access to a service he would otherwise not be able to afford).
You’ll be more familiar with the second-degree price discrimination, when the same product is sold at different prices, depending on how many units you buy. Think “3 for 2”, "buy 1, get 2nd half price” deals in supermarkets or buying 10 personal training sessions at bulk discount. Consumers ‘self-select’, according to their preferences, and businesses maximise their profits by offering ‘deals’.
Now imagine that we swap the word ‘quantity’ with the word ‘quality’. Here businesses must come up with the ways to induce those, who can afford it, pay more for premium services, such as better cinema seats, more attentive stewardesses and fully integrated e-commerce of website canvases. The trick here is to reduce the quality of the ‘standard’ product, so as not to cannibalise sales at the high end.
Economy class needs to have narrow seats, screaming babies, atrocious service and inedible food so that business travellers and wealthy individuals are never tempted to travel in Economy. This quality discrimination has been a feature of transportation services for hundreds of years, as commented on by a XIX century French economist Emile Dupuit (this translation featured in an article by R.B. Ekelund “Price Discrimination and Product Differentiation in Economic Theory: An Early Analysis” in Quarterly Journal of Economics in 1970):
It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches… What the company is trying to do is prevent the passengers who can pay the second-class fee from travelling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich… And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second-class ones, become lavish in dealing with first-class customers. Having refused the poor what is necessary, they give the rich what is superfluous.
Image credit: http://mappingbirmingham.blogspot.co.uk
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