Monday, August 18, 2014

"Praying In Public" Discount & Why Price Discrimination Is Not Inherently Evil

In North Carolina, there was a diner that recently had a peculiar pricing practice: provide a 15 percent discount to those who prayed in their diner. The Freedom from Religion Foundation (FFRF), which is a non-profit organization promoting atheism and separation of church and state, put legal pressure on the diner, at which point the diner discontinued the pricing practice. Aside from grinding an anti-religious axe, why did the FFRF do what they did? They thought the practice of offering such a discount was discriminatory, and should thus be stopped. Is this sort of outrage against this specific example, as well as price discrimination in general, justifiable?

Before providing an answer, let's ask ourselves what price discrimination entails. Price discrimination is the practice of a producer selling the same product to different individuals at different prices not based on production costs, but willingness to pay. First-degree price discrimination is extremely rare because the probability of a business knowing the willingness to pay for every single customer is nigh impossible, not to mention that the vast majority of businesses do not have the monopolistic power required. Second-degree price discrimination is typically done with quantity discounts (e.g., bulk buyers pay less per unit). Third-degree price discrimination deals with a price variation based on location or some other customer segmentation. These degrees are not necessarily mutually exclusive from one another. That being said, let's get into some examples of price discrimination:

  1. Flying on an airplane. Just because you fly from Chicago to New York doesn't mean you're going to pay the same price as everyone else. Someone in the business class pays more [due to inelastic demand] than someone in the coach class [who has a more elastic demand]. The reason for this is business travelers have a higher willingness to pay than pleasure travelers. Additionally, airlines will charge different amounts based on how far in advanced the flight is booked, day of the week and time of day of the booking of the flight, as well as other discounts and fees that come along with booking a flight.
  2. Coupons. Coupons are an advertising gimmick to get customers to buy their good who otherwise would not. The differentiation is that the customer who is willing to collect coupons has a higher price sensitivity than the one who is not on the hunt for coupons. A similar argument can be made for those who decide to stand in long lines on Black Friday. 
  3. Haggling. Negotiating for a price "on the spot" has been a common form of price discrimination practiced for centuries. Some countries still practice it quite frequently. In the United States, however, you only really come across it when negotiating the price for something like an automobile or a house. This type of negotiating is decidedly a form of price discrimination because the producer or broker is trying to assess your willingness to pay for a good.  
  4. Financial aid for university. Every student is offered the same base price, but incentives in the form of financial aid are offered so the student can afford it (as a tangent, that's probably just the feeling one gets. Odds are that it actually fuels tuition inflation). This form of price discrimination is based on individuals from lower-leveled socio-economic status being able to afford a college education.
  5. Student and senior discounts. You see these sort of discounts crop up when the operating costs for places like the movie theatre or museum are primarily fixed costs. The marginal cost of another attendee is next to nil, which is why using an incentive to bring in more attendees with lower willingness to pay, such as students or senior citizens, is such a good marketing tool.  
  6. Bulk purchasing. You notice how when you buy more of a certain good in a larger quantity, you tend to get a better deal? That's the producer utilizing economies of scale. The reason why buying a large coffee at Starbucks is cheaper per unit than buying a smaller cup the output per unit decreases with increased scale. That is the joy of "three-for-two" offers and buying in bulk at Sam's Club or Costco. 
Although I could provide more examples, the point is that we do not live in a world of uniform pricing, nor is that optimal from the standpoint of maximizing revenues or consumer surplus. When people capriciously say that such price discrimination is unfair, like they do with price gouging (see my analysis here and why government setting prices in general makes for lousy economics and detrimental policy), these individuals tend to have good intentions while lacking the basest understating of the economic ramifications of their decision. 

So let's go back to the diner in North Carolina. There are certain individuals who are offended or feel coerced because not praying would mean having to pay an extra 15 percent in comparison to those who decided to pray. Let me point out a few things in response. Article 1, Section 10 of the Constitution guarantees that no one impairs the obligation of contracts. What is implicit is that you are not required to enter a contract unless you are a willing party. This is an important cornerstone of a lawful society based on respect for economic freedom, which not-so-incidentally means the protection of property rights, and by extension, letting businesses operate with whichever pricing mechanisms, provided that they do not violate the nonaggresion axiom.   

In a liberalized economy, an exchange takes place between a willing buyer and a willing seller. That is the beauty of a capitalist society. No one is legally obligated to sell a certain good or service at a given time. With the possible exception set by the Supreme Court's idiotic ruling on Obamacare, no one is obligated to buy a good or service. In a market economy, people voluntarily exchange goods because both seek a benefit in the transaction.

If you don't like the fact that Mary's Gourmet Diner in Winston-Salem gives a 15 percent discount for those who decided to pray during their time there, you have a few options. You could stop going to that restaurant. Winston-Salem alone has over 500 other restaurants to choose from. Finding a restaurant that has a different pricing system is not that difficult. The vast majority of industries in general are competitive marketplaces. Going to a competitor means that the other business loses out on revenue because of their poor business decision. If you like the restaurant, you could alternatively pretend to pray to get the discount or simply pay the extra amount because you like the food. It depends on your willingness to pay (and in this case, your willingness to pray). In the improbability that you don't have a lot of other restaurants in the area, you can either make the drive to a larger town or city, or you can simply eat at home. It's not as if restaurants are the only source of food, and it's not as if the producer has some obligation, legal or otherwise, to provide you a dining experience without such a discount. Economists call this phenomenon the substitution effect. Once again, it depends on your willingness to pay to go to a restaurant that has a public prayer discount. You are able to assess your willingness to pay, adjust your consumption patterns accordingly, and make voluntary economic transactions based on your consumer preferences.

This is the essence of economic liberty. Producers have the freedom to produce whichever good or service with whichever pricing mechanism they like. Consumers have the freedom to consumer whichever good or service that suits their fancy. We shouldn't implement arbitrary, deleterious rules simply because someone is offended. Pricing discrimination is fair and just. If an establishment providing a certain pricing mechanism really bothers you that much, it's really quite simple: use your economic freedom and go elsewhere.

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