Q and A: “The Price is Wrong!”

What’s this book about?
The point is that a fair price matters. It matters because it is an emotional response. When we decide that a price is fair, it is an emotional “yes” or “no.” Without emotions, we can’t make decision. Consumers deciding on a purchase have to think that they price is fair.

But how do we decide that a price is fair?
It’s fair when it meets with social approval…when it follows the social norms. For example, it’s fair to pay for meals at restaurants, but not at home. It’s fair to tip the waiter but not your mother-in-law. Those are the social norms.

Isn’t a fair price simply a cheap one?
That’s certainly one definition of a fair price. Our idea of fairness is biased in our self interest. So a cheap price is fair. But an expensive price can be fair if it follows the social norms. A nice example is Starbucks. Their coffee isn’t cheap, but it follows the social norm of equity. Equity says that what customers get has to equal or even surpass what they give up. Starbuck customers feel they are getting their money’s worth. That’s fair.

Can a cheap price be unfair?
Certainly, if it’s against the social norms. For instance, if women get cheaper drinks at a “Happy Hour,” that’s unfair. It’s against the social norm of equality, that everyone should pay the same price. It also happens to be illegal.

Isn’t it always illegal to charge different prices to different people?
Only if the discrimination is based on gender, race or religion. But not otherwise. If a seller wants to give a discount to people with blue eyes, that’s legal… but people will still think it unfair… at least those who are charged the higher price. We do tend to accept any price in our favor as fair.

How does this help the consumer?
The emotional response to an unfair price gives consumers power. When they think the price unfair, millions of customers, all acting on their own, find ways to punish the seller. In Italy, they recently had a day without pasta to protest high pasta prices. In the U.S., the elderly organize bus trips to Canada to buy pharmaceuticals.

Do consumer protests really have an effect?
Even though consumer reactions against an unfair price are uncoordinated, they have an effect. For example, the thousands of complaints of gasoline prices after Hurricane Katrina led to anti-gouging legislation. The high price of printer ink cartridges has led to Kodak now issuing a cheap version. Apple had to give early iPhone buyers a $100 rebate when they lowered the price too precipitously. That was unfair

What about the power of the seller? How does that affect fairness?
Powerful sellers can take advantage of consumers. This makes consumers particularly sensitive to unfair prices. For instance, customers are very leery of the pharmaceutical industry. In contrast, if consumers trust a company, they are willing to give them the benefit of the doubt. Even if they price is high, they’ll think it fair. An example is Johnson & Johnson which created trust decades ago when they recalled Tylenol. The fact that they were willing to forego profits to profit the customer created long-lasting trust.

What about the price of gasoline? How fair is that?
Gasoline is an example of the two sides of fairness: personal and social. It’s personally unfair because it’s higher than we expect. But it’s socially unfair because it breaks the social norms. OPEC has unfair monopoly powers. Oil companies make unfair profits. The CEOs get an unfair salary. The head of Exxon Mobil makes almost 150 thousand a day. The distributors use an unfair “zone” pricing. And the stations sell “hot” gas in the summer, charging the same price for gas that has expanded in the heat. So gasoline is socially unfair right down the line.

You mention the “just” price of the medieval churchmen. What was that?
That was in the thirteenth century, a fascinating time when money was just beginning to circulate. The churchmen, called Scholastics, hotly debated what made a price just or fair. I assumed they thought a just price was God-given, but that was not the case. They decided that a just price was one based on supply and demand or one that the community had agreed on. That was fair.

You end with a chapter on how sellers can price fairly. How can they do that?
With difficulty! Sellers have to provide a fair wage to employees, a fair return to investors, a fair return to suppliers, as well as a fair price to customers. That’s hard. But when they get it right, they do very well.

So how do sellers get it right?
They follow the social norms. That makes the price fair.

And how do they know how to follow the social norms?
They read the book.