What’s the price?
Internet companies are playing with charging different prices for the same thing depending on who you are. Is that a problem?
Prices are a funny concept. We unthinkingly treat them as if they are a physical attribute of an item — like the weight or the height. To some extent that is not even so crazy. Even if we know that they can be a bit fuzzy, we’ll have an approximate idea of what something costs (certainly for stuff we buy regularly), and so what we’re prepared to pay. Or do we?
In his 1983 paper Transaction Utility Theory, behavioural economist Richard Thaler describes a thought experiment that goes something like this. You’re on the beach on a hot day with only iced water to refresh you, and for the last hour you’ve been imagining a nice cold bottle of your favourite beer. Your friend next to you gets up to make a phone call (this is 1983!) and offers to bring you a beer from a place close to the phone box. But of course, beer at the beach might be expensive, so he asks you the maximum price you’re prepared to pay, and promises to only buy you a beer if it costs no more than your limit (which economists call the reservation price). What would you be willing to pay?
