Thoughts about pricing

From Amit’s Thoughts

I had thought that charging customers different prices for the same thing was unfair and the result of pure greediness. But Hal Varian explains why “differential pricing” might be better than fixed pricing, especially in industries with high fixed costs. One of the arguments boils down to: if some people are willing to pay more than others and the fixed costs are high, then you can end up in a situation where it is worse for the consumers (as a group) to all have the same price than to have different prices. The producer usually benefits from differential pricing, but in many (most?) situations the consumer does too. One case in particular is when the producer would go out of business without differential pricing; there is no benefit to the consumer of losing the opportunity of purchasing a product or service.

My sense of fairness says you should charge the same amount for the same thing, but the math shows that society is (overall) better off with less fairness.

I’ve also been thinking about fixed payments vs. charging for usage: road taxes vs. toll roads, unlimited vs. per-minute telephone charges, subscription vs. per-story newspaper fees, unlimited vs. micropayment for surfing the web, packages vs. pay per channel cable television. In all of these cases, I’m sure I would save money by having a choice to pay less (and get less), but I think the cost of thinking about each of the decisions would mean I’d end up less happy. I would have to question each phone call. I would miss out on some TV channels that I wouldn’t pay for if I had a choice, but occasionally offered something I want to watch. I would click on fewer links and view fewer web pages. I’d read fewer newspaper articles. I’d drive less, even at times when it’s worth it. I suspect (but have no good way of knowing for sure) that paying for use (which increases fairness, since everyone pays the “right” amount) would be worse for society than fixed payments.

When I started using gmail, I realized that over the years I’ve thrown away a lot of messages that I would’ve liked to have kept, because there is a cost of keeping it (exceeding quota, having to file them into folders, etc.). I have had to make thousands of tiny decisions (“do I keep this email?”) each day, and I sometimes I got them wrong. I probably would have been better off paying more, getting a much larger quota, and keeping everything. But at every email, there was no reason to pay for a larger quota.