The Prices Are Right

The Prices Are Right

The most valuable purchase we make every month costs a few pennies per gallon — shipping included. Clean drinking water is a luxurious commodity, yet it carries a dollar-store price tag.

For most people, there is an enormous gap between what academics call our “willingness to pay” for running water and the price paid for it. This is true to a lesser extent for everything we buy. Most goods and services have a set price governed by the intersection of supply and demand, and the difference between our “willingness to pay” and the price we actually pay is known as our “consumer surplus.”

A single price for goods and services is the norm, but it may not be optimal for society. Businesses already seek to segment their customers where possible and capture a bigger share of what would otherwise be consumer surplus, but they are less aggressive in capturing additional money for societal benefit. Socially responsible investors can encourage businesses to get more creative on this front and measure their progress. 

One potential way for businesses to deliver a collective benefit, and potentially improve their own bottom line, is the use of progressive pricing for online transactions. Progressive pricing — where customers pay based on the value they receive — could directly tackle income inequality in situations where the customer feels they have gotten the much better end of the deal.

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. 

Income inequality has usually 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. In effect, these policies act like a regressive tax whose burden is most sharply felt by consumers with the lowest incomes.

Progressive pricing offers a more equitable approach. Those with greater means pay workers more through payments above the regular fixed price; companies merely facilitate. I argued previously that consumers are morally obligated to provide their own “hazard pay” to service providers if possible. To the extent companies can successfully collect higher prices for goods and services from their wealthiest customers, it would reduce dependence upon gridlocked democratic governments for just income redistribution 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. For example, in a series of field experiments by Ju-Young Kim and colleagues, 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. Other studies show similar tendencies for a minority of consumers to pay more than some typical price when given the opportunity.

Fewer field experiments have been conducted for bigger tickets. However, Pieter Gautier and Bas van der Klaauw present a distribution of prices for a pay-what-you-want hotel stay in Belgium or the Netherlands 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. A study led by Ayelet Gneezy demonstrates through field experiments that payments in a pay-what-you-want scheme are considerably higher when some percentage is allocated to charity.

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 consider seeking to recapture that “surplus giveback” and route it to the pockets of those whose labor contributed.

For business, the costs of implementing progressive pricing need to be weighed against the potential benefits to the company itself. These may include greater employee satisfaction and lower turnover and an enhanced customer reputation. Progressive pricing may not be a compelling proposition for smaller businesses, but for larger corporations it may be a win for both shareholders and society.

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