If You Know the Cost of Everything, How Can You Know the Value of Nothing?

So . . . over the past few weeks various sports teams have announced that they will used demand-based pricing. This term simply refers to businesses allowing themselves the flexibility to change their pricing based on a number of factors. An example would be charging different prices based on who a team's visiting opponent was; it's likely that Raptors fans will pay more to see the Lakers or the Heat than they will the Hornets or the Timberwolves.

A more complex example would be the sort of pricing that airlines do. There are so many factors that affect price (time of day of flight, connections, time of year, day of week, other flights, to name just a few) that the average person would not be able to predict which flights would be more expensive, outside of a few rules of thumb. At the far extreme of variable pricing is stock market pricing or pricing for gasoline - the price floats relatively freely based on real or expected demand.

A lot of the research that I did early in my academic journey had to do with variable pricing, specifically research into how people would react to such pricing schemes. From a company's perspective, variable pricing is great. If you have a stock of something (e.g. concert tickets), being able to change your prices based on demand and supply works well, as you can get the maximum that the market will bear at any one time. But consumers may view things differently. We have become used to the notion that we may have paid more for our airplane seat than the person sitting next to us, but we aren't ready to transfer that to a lot of other contexts.

But the thing of it is that consumer decision-making tends to operate under the assumption that people are free to buy something or not; in other words, no one is holding a gun to our heads forcing us to buy. Therefore it is necessarily true that if we buy something, we ascribe to it at least as much value as its cost. If not, we wouldn't buy it. That value may not be tangible or measurable (outside of price), but it is no less real.

All of this makes it difficult to complain that we have been gouged by sellers. If you want to see a Leafs game, you still will have (somewhat) affordable options, but if you specifically want to see the Leafs play the Canadiens or Canucks, you'll probably have to pay more. And you'll only do that if seeing the game is worth the exorbitant price at the time you make the decision.

I'd go even further. Gas companies have us over a barrel - they could jack the price of gas up to $5 a litre tomorrow and would still have customers, at least in the short term. And would we willingly pay $250 to fill up our tank if that amount of money was worth more to us than the alternative (e.g. not getting to work, lack of mobility). Taking advantage? Sure. Gouging? Not so sure. Unfair? Definitely not - we're willing parties to the transaction.

When I was in my MBA program I did some tutoring on the side, and chose an unusual pricing scheme - I let my tutees (?) decide for themselves how much they wanted to pay once the tutoring was complete. I could have put a price on it, and might have done ok, but this way I did pretty well (averaging about what I would have charged anyway), and no one complained about the price, because they themselves chose it. Likewise, had I quoted a price and they paid it, they would have had as much basis to complain (i.e. none), but in that case I might have heard some grumbling.

Then again, forget what I said. By this definition, this blog has no value, because it's free.