Imagine that a dermatologist sells Botox at a lower price to male than to female customers. Similarly, imagine that a major pharmaceutical sells AIDS drugs at a lower price in Rwanda than in the US.
This example raises two questions:
- Is price discrimination morally okay for certain goods and not for others?
- If it is moral to price discriminate (at least for certain goods), then what kind of discrimination is permissible? Is it moral to discriminate among consumers using certain criteria, like geography, and not others, like sex?
I believe the answer is a clear “yes” to both questions.
1) John Tiernstra makes a strong argument in his article “Price Discrimination and Fairness” that price discrimination should be considered immoral unless there are other overriding factors at play.
One of these factors is that sometimes price discrimination leads to an increase in total welfare. If our moral standard is “maximize total welfare,” then price discrimination which increases welfare is allowable. However, if total welfare does not increase with price discrimination, then (using this standard only) the price discrimination is not moral.
However, there are other moral concerns beyond total welfare. In particular, price discrimination raises the question of neglect vs. exploitation. In the case of price discrimination for Botox, women are exploited because they are forced to pay a higher price than Botox would command in a single-price market.
Similarly, AIDS patients in Rwanda would be neglected without price discrimination, because they wouldn’t be able to afford medication if it were priced the same around the world (the pharmaceutical firm would set the single-price close to the US price since most profits are from the US market).
In general, exploitation is preferable to neglect. In the case of the AIDS drug, this is certainly true, because those with AIDS in Rwanda are extremely necessitous, while those who would be exploited (AIDS patients in the US) are not as necessitous. However, in the case of Botox, neither men nor women are necessitous for the procedure. Thus, in the case of Botox, I believe that price discrimination, which leads to exploitation of women, does greater moral harm that a one-price system, which neglects men.
Thus, the morality of price discrimination depends on the goods in question
2) Even if price discrimination is permissible, that doesn’t mean that sellers can discriminate based on any factors they choose. Instead, the morality of discrimination using certain factors must be weighed against the advantages gained from price discrimination.
Price discrimination for the AIDS drug depends on a geographic criterion, while price discrimination for Botox depends on sex. I believe that a geographic criterion is morally defensible, while the morality of discrimination based on sex depends on circumstance.
Sex-Based Price Discrimination
Undoubtedly, sex-based pricing is contentious. Ladies’ Nights have come under attack in certain states and localities, and courts in Europe ruled last year that insurance premiums cannot depend on the gender of the customer.
The decision to price discriminate on the basis of sex is ethically dubious and potentially illegal. I believe that the ethics of price discrimination depend on how sex is related to the product on sale.
- If there is a biological basis for why sex determines a consumer’s demand [that is, if there is causation], then some form of price discrimination on the basis of sex may be ethically justifiable.
- If, however, sex is only a statistical proxy [that is, if there is only correlation] for demand, then price discrimination is wrong. In this case, individuals are categorized due to arbitrary physical attributes—attributes not of their own choosing—and are charged a different price for a product. Price discrimination based on only statistical correlation and no other factors violates an individual’s expectation of being treated fairly by the seller.
Many US localities have banned this second type of price discrimination. Nature made this same argument in an editorial about European insurance premiums:
“Nature is a vocal and staunch supporter of evidence-based policy-making. Yet it is important to distinguish between policies that ignore the evidence and those that consider it but do not give it the deciding vote.… In this case, [reversing] practices that survive as a legacy of centuries of inequality and discrimination against women is right to trump the cold logic of the statistics. Besides, it is far from clear how insurance firms translate the sex differences to quantitative hikes in premiums…”
Age-Based Price Discrimination
A quick note: discrimination based on age, though, is not the same as sex or race; although individuals don’t have a choice over age, individuals were once students and will one day be senior citizens. Thus, individuals either benefited in the past, are benefiting now, or will benefit in the future from age-based discrimination. Thus, to the extent that price discrimination is permissible (see the first part of 1F), then age is a reasonable criteria for discrimination.
If some group of consumers is willing to pay more for a given good, then why shouldn’t they be allowed to? Women may value Botox injections more than do men?
In short: if you want to pay more for a given good than retail price, then of course you can. No one is going to stop you from paying more for a Botox injection than you have to.
However, just because some group of people has high demand for Botox does not mean that a dermatologist can price discriminate against all people who may be in that group. What if I were a woman but happen to have the demand function of a man for Botox? There is nothing wrong about a buyer offering to pay more for something, but there is something wrong about a seller (who has some kind of monopoly power) demanding a higher price simply because someone may be a high-demand customer.
Another concern is that money is not always the best indicator of need. Usually, those who would pay extra have more economic use for a product than someone else. In certain situations, though, society will decide that there are people who cannot pay as much as you, but who have higher need. The Rwandan AIDS patient is an example of a necessitous individual who has low ability to pay. Similarly, individuals cannot use money to indicate need for organs; instead, in the US need is defined by an individual’s position on a list.
In the cases when money is not the best indicator of need, allowing certain individuals to pay extra creates an incentive for suppliers to sell goods to them rather than to individuals who are more necessitous. In such cases, then, individuals must be prevented from paying extra.
