Price Discrimination – and the Economics of Smaller Magazines.

In the pilot episode of NBC‘s self-referential 30 Rock, the new boss accurately stereotypes a member of middle management after meeting her just thirty seconds before.

Jack:  Sure, I gotcha… New York, third-wave feminist, college-educated, single and pretending to be happy about it, over-scheduled, undersexed, you buy any magazine that says “healthy body image” on the cover, and every two years you take up knitting for… a week.
Pete:  That is dead on!
Liz:  What, are you gonna guess my weight now?
Jack: You don’t want me to do that…
Pete: That knitting thing is uncanny.  How do you do that?
Jack: Market research, my friend.  Years and years of market research which led to my greatest triumph: the Trivection Oven.

Parody?  Undoubtedly.  Is it a thing?  Yes, it’s a thing.

The Art – and Science – of Price Discrimination

Price discrimination is the practice of setting different prices for different segments of the market.  At heart, it uses information asymmetry (and the varying demands of individual consumers) to charge different customer demographic groups a different price for an item or service.  While in a competitive market where everyone has the same access to information and motivation price discrimination could not exist long (due to arbitrage), in our imperfect world this allows different prices can be charged to different people.  TYet even with a name like ‘discrimination’, a lot of the discrimination tends to be done by us – the consumer.

You see, a lot of the behaviors which lead to price discrimination are self-imposed.  To wit: if you have a propensity to get drunk at sporting events, it’s easier to charge you $8 for a beer or $6 for a water.  If you battle to purchase tickets to concerts and events when the box office opens (or Ticketmaster or Live Nation releases them), you can be charged much higher costs than those who wait for tickets to be resold (like our friends at Control Your Cash).  If you purchase premium consumer products (like, say, our friend Len Penzo and his Macintosh) perhaps you’ll also pay more when you travel.  In the ultimate example, institutes of higher education in the US can check your assets and dictate a price which you will pay to send your kids to college – using loans, grants, and scholarships to entice you to take the plunge.  All of these examples show price discrimination at work.

Now, price discrimination need not be discriminatory on the provider side.  Take coupons, for example.  Coupons reveal to a retailer the reserve price of some of their customers – customers who wouldn’t pay full price for an item will still buy an item at a price where the retailer (and supplier) make money, while maintaining the higher price for consumers who don’t care or know to save.  Airline tickets are the same way – last minute business travelers have less price sensitivity than your kids flying back home after a semester at the institute of higher learning mentioned above.  Try that last one out – ask your neighbor on your next flight what he or she paid.  I bet you it isn’t the same as you…

What Do Small Magazine Have to Do With It?

How about I show you:

I guess size does matter?

Yes, you’re looking at two copies of the latest issuance of the Crate & Barrel teaser magazine.  They were both delivered to our house on the same day.  The larger copy on the left was addressed to Mrs. DQYDJ, while yours truly received the smaller one on the right.

Now, the copies themselves are exactly the same other than the perhaps 30% shrinking of the ‘right’ copy.  But, and here’s the salient point, market research determined that it is best to send women a larger Crate & Barrel magazine than men.  I risk the ire of my female readers, but I assume that most purchases at Crate & Barrel are driven by someone possessing a double X chromosome.  Maybe, then, the larger format leads to more tear-outs of ideas on pages?  The larger pictures lead to more spur of the moment purchases?  Whatever it is… the same process that determined that Mac users would pay more on Orbitz determined men should have smaller Crate & Barrel magazines.

So – a tiny change in the supply or type of information and you’ve got an interesting thing to consider… whether (or why) your prices are different, or the advertising you receive has changed.  Maybe now you understand why your various online profiles are such a huge deal to companies?  It also means it pays to comparison shop – even a change in the time of day can reveal new prices.

You said it, Jack.  “Market research, my friends.”

Where have you experienced price discrimination lately?  Do you clip coupons?  How much would you spend on water if you were thirsty at a concert?  How much do you think your Facebook profile is worth to a company?