Price Discrimination

Price discrimination occurs when a seller charges different prices to different customers for the same product. Such unequal treatment raises questions of fairness. Under certain circumstances, price discrimination may violate the Robinson-Patman Act's prohibition against predatory pricing.

Price discrimination may violate our ethical intuitions. Behavioral economics teaches that people are highly sensitive to perceived attempts to exploit or price-gouge them. In a famous experiment by Daniel Kahneman and coworkers, 82% of subjects considered it to be “unfair” or “very unfair” for a hardware store to raise the price of snow shovels after a large snowstorm. Similarly, Coca-Cola was the subject of snide editorials and columns when it was rumored that the company had begun testing a vending machine that could automatically raise prices for its drinks in hot weather. Customers complained when the Mets baseball team introduced variable pricing—from $8 to watch the Mets play the Brewers on a weekday up to $16 to see Barry Bonds on Saturday. New Jersey's top civil rights official has determined that ladies' nights (where a bar offers women a lower price of admission or free drinks) illegally discriminate against men, and many states prohibit the practice. Wal-Mart has been accused of driving mom-and-pop stores out of business by selectively lowering prices in stores that compete with them.

Sellers don't want to provoke a customer backlash. Accordingly, they are hesitant to engage in practices such as off-peak pricing. Ski operators are reluctant to boost holiday prices, and hotels are reluctant to charge a market-clearing price for hotel rooms. The Cornell economist Robert Frank quotes a ski industry consultant as saying, “If you gouge them at Christmas time, they won't come back in March.” Afraid of growing public anger, Coca-Cola quickly slapped down rumors about its weather-sensitive vending machines.

Nevertheless, in the economist's lexicon, price discrimination is a term of art and does not necessarily have any pejorative connotations. This entry assesses claims that price discrimination is unfair or illegal.