The Price of Everything - Eduardo Porter [17]
It’s a profitable tactic. A study of thousands of pop acts from 1992 to 2005 found that concerts that offered different ticket prices for different sections earned 5 percent more revenue than those that didn’t, drawing a more lucrative mix of fans with cheap tickets in the nosebleed section and expensive seats in the front rows. Discrimination works better in cities that are richer and for artists who are older because they generate a more diverse audience: older and wealthier fans who have followed the band since the early days and young new ones who will go hear a band of old-timers provided tickets are cheap. It is now the norm: In 1992 more than half of all gigs sold all seats for the same price. By 2005, only about 10 percent did so.
Some schemes to charge consumers according to their willingness to pay don’t work. In the late 1990s Coca-Cola experimented with a vending machine that would automatically charge more for a Coke on warm days. But when Coke chief executive Doug Ivester revealed the project in an interview with the Brazilian news magazine Veja, a storm of protest erupted. The Philadelphia Inquirer slammed the idea as the “latest evidence that the world is going to hell in a hand basket.” An editorial about the idea in the San Francisco Chronicle was titled “Coke’s Automatic Price Gouging.” Pepsi saw the opening and announced it would never “exploit” its hot customers. Ivester defended the plan. He told Veja, “It is fair that it should be more expensive. The machine will simply make this process automatic.” Still, Coca-Cola dropped the idea.
The Internet is likely to bring price discrimination into every corner of our lives. In September of 2000, Amazon.com was caught offering the same DVDs to different customers at discounts of 30 percent, 35 percent, or 40 percent off the manufacturer’s suggested retail price. Amazon said the differential pricing was due to a random price test. It denied that it was segregating customers according to their sensitivity to price, which could be gleaned from their shopping histories recorded on their Amazon profiles. But ever since the incident, consumer advocates have warned that the reams of personal information that people give away when they search, shop, and play on social networking sites online will allow companies to finely tune their prices to fit the profiles of each customer. The less price sensitive, for instance, would be offered pricier versions of articles at the top of a search list. Bargain hunters could be presented with cheaper alternatives first.
The practice isn’t evil. Companies prone to economies of scale in competitive businesses often depend on it to raise their average unit price in line with their average unit cost. If they sold everything at the marginal price—the price it cost to make the last single unit—they would not be able to cover their fixed costs and would go out of business. And it can be beneficial to consumers. If Cokes were all sold at the same price, a consumer who would have appreciated a Coke on a mild autumn day if it had been slightly cheaper won’t buy it, forgoing what, for him, would have been a profitable acquisition. Allowing Coca-Cola to charge more on hot days and less on mild days would allow more consumers to indulge their taste for a Coke.
Still, price discrimination alone cannot rescue a flawed business model. Airlines prove that it does not even guarantee profitability. For all their efforts at price management, competition