/ Money, Shopping

Would you be happy to pay more for the same thing?

price discrimination

We all get excited when we get a good deal on something we buy. But what if other customers are being charged more for no good reason?

Like many of us, I love a good deal.

I also happen to be from New Zealand, so (while I enjoy living in the UK) I’m always looking out for a reasonably priced trip home.

Late last year, I was incredibly excited to discover flights from London to Auckland for just £415 return departing in March. Typically, I’d consider £600 ‘cheap’. Of course, I quickly snatched them up and am still feeling pretty chuffed with my luck.

But I’ve recently checked the prices again and discovered that passengers next to me could have paid more than three times as much to make exactly the same journey. This is a fact I’m sure they’d be far less impressed with. I guess I should let them have the middle arm rest?

One product, two different prices

This isn’t unique to flights, of course – it’s everywhere.

And economists have a name for it: price discrimination. Broadly, it means people paying different prices for the same thing.

The charges have to differ for reasons going beyond the basic costs of supply – if you get charged more for something because the cost of raw materials has risen (for example), then that’s not price discrimination.

But sometimes retailers charge different amounts for other reasons, such as the demand for their product is higher at particular times of day.

Sometimes price discrimination can be good – such as with pensioner discounts. But it can also be hidden from consumers.

How price discrimination works

So what is price discrimination like in practice? Here are a few examples of the different methods retailers can use, which, depending on your point of view, could be seen as good or bad.

  • Demand: cinemas and theatres charge more for you to attend on weekends and taxi-competitor Uber charges ‘surge’ prices during busy times, such as on New Year’s Eve. With the latter, this will mean that more drivers come on to the road, so you’re more likely to find a cab to take you where you want to go.
  • Location: pricing can change based on suburb, city or country – one example we came across was a Eurostar trip from Brussels to London in Business Premier which cost £245 on the UK site but €330.50 (around £280) on the Belgian version.
  • Convenience: we explored how much convenience supermarkets charge when compared to the nearest equivalent supermarket. We picked a basket of goods and found it was up to 7% more expensive at a convenience supermarket.
  • Personalisation: if retailers have access to information about you, it’s possible this could be used to affect pricing. A basic example is loyalty cards, which can lead to you being offered discounts on certain products.
  • Loyalty: mobile phone, subscription TV and broadband providers will often give exclusive offers to loyal customers to try to keep them. For example, if you call to cancel, you may find you get offered a discounted rate.

Can you think of any price discrimination you’ve spotted recently? Are there examples you’ve felt were good and fair, or does it always feel like you’re on the unlucky side of things?

Comments
Member

Part of this is the Supply and Demand ‘law’ that permeates our society. It’s the same reason as holidays are cheaper if you book them out of term time or train tickets cheaper if you book them well ahead. That latter can be tricky, however; the big train companies are not always crystal clear about when you can book. They quote 13 weeks, but to get the best deals and the best reserved seats you need to start monitoring the train website from the 13 week mark, and the best offers will appear between then and 10 weeks ahead. Even the staff are never quite sure when it will happen.

Last week they were offering all-inclusive ten-day holidays in a five star hotel in Turkey for £230 pp. Great if you have the time to monitor the offer sites, but not so good for those in full-time employment or busy elsewhere .

Member

I can understand the convenience store basket price you mention. It is often more difficult to supply and run these places and we buy less from them in one visit. We are in fact paying for the convenience of local shopping, sometimes from stores which don’t belong to the large chains. As Ian says, supply and demand, especially in the travel and holiday industry is used to vary prices for the same product/journey. What is sad is that it is now financially impossible to turn up at a train station and buy a ticket, something we could do in the past without breaking the bank. Thus the various web sites trade tickets and hotel rooms and forward planning is essential. Using the car one knows exactly what the journey will cost every time though we usually ignore the background costs associated with running a vehicle when calculating this. Where supply and demand is unfair is when a company makes a massive profit, because it can rip off its customers. In that case, those foolish enough to buy ruin the chances for the rest of us and both customer and supplier are guilty of ripping off the public.

Member

Yvette – You say “we explored how much convenience supermarkets charge when compared to the nearest equivalent supermarket. We picked a basket of goods and found it was up to 7% more expensive at a convenience supermarket”. It is not clear what you mean by “the nearest equivalent supermarket”. Do you mean another convenience store operated by the same company, another convenience store operated by a different company, or a large supermarket operated by the same company but possibly in an out-of-town or edge-of-town location so not necessarily convenient? Although they sell a wide range of goods, convenience stores are not usually regarded as supermarkets. The picture is further confused by stores like Aldi, Lidl and the Co-op which are bigger than convenience stores but are not full supermarkets. Another complication is that some large supermarkets are categorised as superstores because they are much larger and also sell clothing, homewares, tech products, etc and offer a range of other services.

I presume you are referring to the Big Four supermarket operators [Asda, Morrison, Sainsbury’s and Tesco] which often have a ‘mini’ version within a mile or two of a major store and there is a price differential between the two.

I was thinking about this only the other day when we were passing a Tesco Express and stopped to pick up a few things and I noticed that a packet of Tesco biscuits was 65p whereas in their major store the same product was 60p. There is therefore an 8.5% ‘premium’ for shopping in a ‘local’ or ‘express’ convenience store. My immediate thought was that there had been a price movement between my previous purchase and this one, or that the quantity/weight was bigger for the small shop packet, but I have subsequently checked and it is a true like-for-like comparison. I have not done a price comparison on the other items we bought.

In some villages and suburbs the only grocery retailer is a convenience store operated by a major supermarket operator and much of the fresh produce is supplied from their nearest large supermarket acting as the mother ship. One alternative to shopping there is a journey [possibly several miles] to the large supermarket so in terms of cost there might be little difference or it might actually be cheaper to use the convenience store if it sells all you want. On-line ordering and home delivery is another option which brings the full choice of goods at the large supermarket prices but might not be so convenient as it requires a degree of planning and organisation. The third alternative might be an independent or franchised street-corner mini-market type of shop that might have a more limited choice of products and almost certainly higher prices than a major supermarket’s local version.

Some people use convenience stores to avoid the temptations of a large store and to keep within a tight budget. To some extent they are paying more than they could but they achieve their primary objective. For some shoppers, time has a value and justifies the speed and convenience of local shopping, especially for top-ups.

I should be interested to know how sensitive the local branches of the Big Four are to price competition from discounters like Aldi and Lidl if they are within a mile or so – this is now quite commonplace as the discounters have invaded territory previously regarded as their own by the Big Four’s little brothers.

My overall conclusion is that convenience comes at a price which might or might not be worth while – it is up to each customer to make that assessment based on a range of factors including time, distance, choice, and total price for a basket of groceries and provisions. I happen to think the big boys are milking it and, as Ian says above, it’s a result of supply and demand and what the market will bear.

I think this particular aspect of price discrimination would justify an article on its own taking in the whole spectrum of shopping provision and the different economics, including competition, that apply to it.

A final thought – do the products supplied to the convenience branches of the Big Four have different bar codes to those in their large supermarkets, or is the bar code recognition system in each branch tuned with a set of prices unique to that branch? If the latter, is that done locally at branch level or is it controlled and implemented remotely from head office [including shelf-label management]? I can only imagine there is a considerable hidden infrastructure supporting this operation with checks on prices in other competitive shops in the vicinity and sophisticated yield analysis of on what and by how much price differentials can be applied. This all feeds into the pricing and makes you wonder whether it is worth it.

Member

I’ve now added in a link, which may clear up some of your queries, John.

Member

That’s helpful, Melanie – thanks. The word “equivalent” still makes a strong appearance in the linked article, however, and in most instances I feel “counterpart” or “same company” would be less confusing.

A clarification I would also make is that many of the major supermarkets’ local convenience stores are not in high streets [as exemplified in the article] where alternatives often abound but in more isolated locations like villages and suburbs where they have wiped out many individual traders like grocers, butchers, bakers, greengrocers, and so on, who supplied local produce at economical prices, so the convenience store customers now have to put up with almost stale “fresh produce” sold at high city prices.

Member

This concept of “freshness” would be useful to explore. My usual supermarket sells most produce with sell by/use by dates, and is wrapped, often in a protective atmosphere, to keep it fresh. Some fruit is marked ripe and ready to eat – which it is.

I wonder how fresh independent shops produce really is? Our butcher displays meat in the window open on trays, undated. What happens to the unsold meat? I doubt it is thrown out; probably keeps reappearing until bought. Our local farm shops display pies and bread unwrapped; presumably returned to stock when unsold at the end of the day. I’ve just walked through our local market – bread and pies again unwrapped on display. A stall with fish sitting on ice in the open, unprotected; what happens to it at the end of the day – saved for the next market?

I was brought up on food from traditional greengrocers, bakers, butchers and fish shops and lived to tell the tale. Unknown freshness, undeclared contents of sausages and pies. But I would hazard a guess that supermarket food is kept better and is fresher. But we pay for that of course. I place considerable importance on the freshness and quality of food, primarily because I like to enjoy what we eat, and am prepared to pay for that.

Maybe we could investigate just how fresh different outlets are and how well looked after is the unsold stock. Maybe we would get a nice surprise?

Member

I am sure that, in general, the national supermarkets have better food-chain management than independent shops and keep and present food responsibly to protect it and maintain its condition. Good butchers with a top hygiene rating will also maintain the highest standards; unsold meat might be safely reprocessed for human consumption and eventually goes to meat renderers.

My reference to “almost stale ‘fresh produce’ at high city prices” was in respect of things like bread, cakes, fruit, and vegetables that are exposed for sale in Tesco Express or Sainsbury’s Local stores and those of the other major supermarkets. They get just one delivery a day early in the morning and sometimes the produce looks distinctly unappealing for a range of reasons. I am satisfied that it is stored and presented safely although I worry about the way some of it is handled by other customers when it is lying in open racks or trays and there is no shopworker present to oversee it.

I must admit I prefer everything to be wrapped and sealed properly according to its characteristics and am happy to meet the cost but even in the major supermarkets we still select loose fruits and vegetables as the pre-packed ones are not always what we want or contain too many units.