Written by: Peter Martin Economics correspondent View more articles from Peter Martin
Have you heard about the trick they use in fruit shops? If they want to make money from a large load of lettuce, they divide it into two. They put half in a “bargain bin” and charge something like $3 a kilo. They put the other half at the quality end of the store and charge $6. The well-heeled and uncertain pay $6. Those with less money and keener for value pay $3.
It earns the shop much more than if it had just charged $6 (if mightn’t have been able to shift all the lettuce) and much more than if it had just charged $3 (rich folks would have kept the extra $3 in their pockets). It also makes more than if the shop had just charged a single price somewhere in between, such as $4.50. Well-off customers would have still hung on the extra dollars and some needy customers would have still been priced out. The technique is called price discrimination. It may be retail’s most clever invention, and it’s everywhere.
Arnott’s once made a near-identical but cheaper brand of biscuits called Sunshine. It placed the packs at the bottom of racks where the well-heeled wouldn’t look but the bargain hunters would.
Some restaurants in Manly quietly ask whether patrons are locals before offering cheaper prices. They don’t want to scare off locals looking after their dollars but they do want to get the most out of visitors primed to spend.
The trick in price discrimination is to hide what you are doing. And to let someone else do the work of sorting your customers.
Sometimes they’ll do it themselves. Computer manufacturers offer ”cash-backs” with expensive machines. Money-conscious buyers send in the certificates (it’s one of the reasons they buy the machines). Well-off buyers don’t bother.
Banks offer discount or honeymoon rates to customers who switch but not to those who stay. They figure those who don’t move don’t much mind paying more, unless they threaten to leave in which case they are quickly looked after. Phone companies are masters at this.
General practitioners are in a very good position to assess for themselves the paying potential of their patients. In a just-published study of 267,000 medical records, Meliyanni Johar, of the University of Technology, finds low-income patients are typically bulk billed while high-income patients are charged 15 per cent more.
New technology is being applied to the task. This newspaper has reported that Australian web-based retailers charge higher prices to customers from wealthier suburbs. Amazon has experimented with charging its regular customers more. The online customers don’t know it’s happening: they are only presented with one price (which is sometimes a higher price if they are accessing the web from an Apple machine).
One of the easiest ways to divide up your customers is to let the government or an educational institution do it for you. Cinemas don’t charge less for students out of the goodness of their hearts. They do it to fill cinemas without cutting everyone’s price. If they are at risk of filling their cinemas with full-paying customers they often suspend their discounts. McDonald’s offers a seniors’ discount. It does it not because it is partial to seniors but to free-ride on the work the government has already done issuing cards to price-sensitive customers.
The easiest way of all to price discriminate is to brand an entire country. DVDs are region-coded in part to make it hard for Australians to take advantage of the cheaper prices in the United States and Indonesia. Nescafe attempted to cut off supplies to Aldi when it had the temerity to import lower-priced Indonesian jars labelled ”For sale in Indonesia only.” For many years Australian music companies succeeded in making it illegal to import legally produced cheaper versions of their own songs. These days, although it is legal to import music at overseas prices, iTunes won’t let you. If you’re from Australia it’ll charge $20.99 for an album. If you’re from the US it’ll charge $12.99. If you make the mistake of getting an Amazon Kindle delivered to an Australian address each eBook you buy from then on will cost more than if you had had it delivered to the US.
The consumer group Choice says one of the Microsoft software development packages is so expensive here it costs $8,500 less to buy it in the US. It is worthwhile paying someone to fly to the US, buy it and fly back.
(Except you would have to pay Australian prices for the flight, often double the price of tickets bought overseas.)
Why would international commerce discriminate against an entire nation? ”Willingness to pay” is one of the answers the Treasury comes up with in its submission to Parliament’s IT pricing inquiry, due to report soon. Affluent and not too concerned about value, we’re globally classified as soft touches.
At home, there’s always the risk we’ll see through the ruse of someone selling the same product for two prices. So retailers will often roughen the product up, perhaps punching and bruising half the lettuces so they are genuinely worse than the other half. In the US white goods retailers are said to take hammers to some of their fridges so they can sell them as ”shop soiled”.
These practices offend our sensibilities. But, appallingly, they are what our own government’s new $37 billion national broadband network is planning in the prices it charges retailers. It wants to hobble the speed for ordinary users and have no block for users who pay a higher price.
The constraint is artificial. There is nothing to stop it giving all Australians the truly phenomenal speeds of which it is capable. If it wants to charge for usage it can charge for data.
Former Telstra economist John de Ridder has told the Competition Commission its thinking is mired in the past. It is imposing scarcity where none exists, ”building a motorway and then only using one lane”.
Unless we are given what we have already paid to build, most of us might never know what it’s truly capable of.
Peter Martin is economics correspondent. Ross Gittins is on leave.