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« What Is It Worth for You to Have Flexible Work Hours/Work at Home? | Main | Below the Line Tax Deductions »

October 11, 2007


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Yep, this works!

Businesses just count on us timider folk to pay the whole price.

So-called "senior discounts" used to be common; the Yellow Pages even had a special logo advertisers could use. Today, these discounts seem far fewer but some still exist.

This gave me an idea for a "working poor" discount. Why should a rich person get a discount on the sole basis of age? How about a similar discount for people who work for low wages and probably won't live long enough to qualify for a senior discount? What do you think?

There is a poor discount, or a rich surcharge, depending how you look at it. It's called price discrimination.

In any business, there is some price point where it's still worthwhile to make a transaction, but you don't make much money. On the other hand, many consumers are willing to pay much more than that price. There is some price between the most a few consumers are willing to pay and the least a business can accept that optimizes profits. That's the basic model you learn on day one of a micro econ class.

But what if there were more than one price? The business figures out how to get every person to pay as much as they're willing to. The problem, if you're the business, is how do you get people to truthfully tell you how much they're willing to pay? After all, they'd rather pay as little as you're willing to charge.

It turns out that price discrimination happens in the real world all the time, despite the difficulty. The results aren't perfect, but they're better than not trying. Airline tickets are cheaper with a Saturday stay, and cheaper still with flexible departure times. Senior citizen and student discounts are offered because many seniors and students have less money. It's not a perfect correlation, but at least it's easy to enforce. If senior discounts are less common now than before, it's because seniors now have a greater willingness to pay than they used to. I would also argue that simply asking for a discount is a way to signal that your willingness to pay is lower than most people.

I bet the service industry would LOVE it if the government started issuing discount cards to the working poor based on their tax returns. It would give them an even better way to discriminate and increase profits. It's still not perfect though, because income doesn't perfectly predict willingness to pay for a particular service.

I have long been fascinated by theory and practice of pricing. I don't feel comfortable haggling so I just shrug and say to myself, "that's one more item I can't have".

I wouldn't want government to distribute cards but I haven't figured out how the private sector might do it without seeming too intrusive. A number of municipal utility systems have some sort of "low-income discount" and there is a low-income program which waives the misc telephone taxes, but these programs are essentially limited to welfare recipients, thereby excluding the working poor whom I would like to reach, plus I'm not aware of any similar private program.

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