The Prices Are Right

The Prices Are Right

A single price for goods and services is the norm, yet more progressive pricing arrangements may prove to be a helpful tool in addressing inequality. It may seem odd to even consider another approach for everyday purchases apart from the few cases where haggling is expected or prices are charged on a fixed percentage of some reference value. Flat prices have simplicity and efficiency on their side, but they also inherently favor the wealthy. 

To illustrate the inequity of single prices, consider the analogous case of the FairTax. Initially proposed in the 1990s, it calls for replacing U.S. income taxes with a flat, national sales tax. The idea is that everyone pays taxes in proportion to their consumption rather than their income. The allure of the FairTax is the potential for (richer) individuals to keep nearly every penny earned.

Legislative efforts to enact such a tax have fallen flat (pun intended). The FairTax is as fair to most taxpayers as a civil war is a triumph of politeness. Flat taxes are regressive — they relieve the tax burden of the wealthiest citizens at the expense of everyone else. In a world where money has diminishing marginal utility, it runs counter to principles of utility maximization and fairness.

More liberal orthodoxy commits similar sins. Income inequality has largely been addressed with higher wage floors and more generous leave policies. This approach puts the onus of worker welfare on the employer, who in turn passes along any resultant cost increases to their customers in the form of higher prices. Such policies may differ in degree and name from a flat sales tax, but they are all of the same kind.

Progressive pricing offers a more equitable approach. Those with greater means should pay workers more through payments above the regular fixed price; companies should merely facilitate. I argued previously that consumers are morally obligated to provide their own “hazard pay” to service providers if possible. 

Premium payments could be collected at the point of purchase similar to tips common to the food and personal service industries. However, suggested “gratuities” should not be a percentage of the underlying price — this is no better than the FairTax method. Instead, any external reference prices for additional payment should be a function of the consumer’s own income or wealth. 

Let’s say I buy a shirt online with a regular price of $50. At checkout, I am given the option to pay any price I want that is at least $50. I could be presented with a table that indicates a suggested price based on my household income. For most households, the suggested price would be $50. However, the recommended price might be $60 for households with an income of $250,000, and households earning more than $1 million annually could be asked to pay $75. 

Any amount per shirt collected above $50 would go into a separate fund for the benefit of workers involved in the manufacture and sale of the item. 

In addition to redressing workplace hazards, a progressive pricing scheme could be a more politically efficient method of redistributing wealth. Redistribution of income and wealth is highly dependent upon political consensus. Although charity and tipping account for substantial sums, they pale in comparison to the transfer payments facilitated by governments. In the U.S., government social benefits amount to more than $3 trillion annually. This compares to annual charitable contributions of roughly $450 billion. The amount of tipping is more difficult to estimate; nevertheless, Azar (2011) put the figure for U.S. food service at roughly $50 billion. To the extent companies can successfully collect higher prices for goods and services from their wealthiest customers, it would reduce dependence upon poorly functioning democratic governments for just policy.

Will people actually pay more than they have to? Evidence from real world pay-what-you-want pricing arrangements suggests the answer is yes. Whether motivated by altruism or a sense of fairness, most people will pay something even when they have the option of not paying. 

More importantly for the prospects of progressive pricing, some people will pay more than the regular fixed price. In a series of field experiments by Kim et al. (2009), roughly 5% of participants paid more than the regular price for a movie theatre ticket, more than 10% paid a premium price for a restaurant meal under $20, and over 20% paid more than the typical price for a beverage in a deli. Similarly, Gneezy et al. (2012) find that more than 4% of payments were over 10 euros for a pay-what-you-want lunch buffet where the median payment was five euros. Christopher and Machado (2019) and Regner (2015) also provide evidence that more than 20% of users of an online music vendor paid more than the recommended price of $8 per album.

Does this seemingly illogical generosity extend to higher priced items? Fewer field experiments have been conducted for bigger tickets. However, Gautier and van der Klaauw (2012) present a distribution of prices for a pay-what-you-want hotel stay that shows a small percentage paid more than the regularly posted prices ranging from 80 to 120 euros. In that same study, 12% of involuntary participants in the pay-what-you-want price arrangement paid more than 90% of the usual price.

The stream of research combining pay-what-you-want with charity is even more encouraging. Gneezy et al. (2010) offer a new corporate social responsibility strategy of shared social responsibility (SSR), in which a company advertises that a certain proportion of the purchase price of an item will be donated to a named charity. They demonstrate through field experiments that payments in a pay-what-you-want scheme are considerably higher when some percentage is allocated to charity. Jung et al. (2017) investigate the effect of the degree of payment sharing with the charity on the amount paid in pay-what-you-want circumstances; they conclude that there is no significant difference between average payments under varying sharing arrangements as long as it is greater than zero — i.e., giving 1% or 99% percent to charity didn’t affect the typical payment.

Consumers may not equate the plight of workers and recipients of charity. Still, if even a small percentage of customers are willing to pay more than the regular fixed price for an item, businesses should be seeking to recapture that “surplus giveback” and route it to the pockets of those whose labor contributed.

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