Save the price tag!

Among the innumerable ways in which life has got better for those of us living in rich countries over the past 200 years, one of the most easily overlooked is the price tag. In the early 19th Century, almost every purchase involved a process of haggling – very few goods or services had set prices. The development of department stores, which introduced the system of fixed prices in the US, is less of an eye catching innovation than electrification or the spread of the motor car, but Robert Gordon does not forget it in his account of the improvements to people’s standard of living between 1870 and 1940. Under the old system of clothes shopping, Gordon describes “constant tension between the rural customers and the merchants”, with customers perennially uncertain whether they were being ripped off. Food shopping was “time consuming” compared to today.

We don’t need to travel back in time to understand what such a system was like – it is still common in many poor countries. Bargaining with vendors is fun and novel for a couple of days, but it quickly gets tiresome and irritating (for me at least).

I say all this because I fear that some of the benefits of fixed prices are under threat. News reports last month suggested that UK supermarkets are considering the widespread use of electronic price tags that alter the price of goods in real time in response to demand. So, for example, the price of ice cream and chilled drinks would be increased on hot days and the price of readymade sandwiches raised during lunchtimes. Such a system is perhaps most familiar from the market for airline tickets, which can fluctuate on an hourly basis, or from taxi service Uber’s model of ‘surge pricing’.

In theory, such a system should benefit consumers, as well as boosting retailers’ profits. If supermarkets can charge more for ice cream on hot days, they can charge less for ice cream on other days, meaning that people that would otherwise have been put off by the price of ice cream will now buy ice cream on cloudy days.

Yet variable prices bring problems. Firstly, they make shopping a more complex, demanding and stressful process. To make sure we’re getting a decent deal, we will need to acquaint ourselves with dynamics of specific products and specific retailers. In the airline market, I know when to book tickets to fly home to my parents’ town and how much to expect to pay, having done it dozens of times. But I don’t have that knowledge for unfamiliar routes. I can’t imagine having to develop that understanding for hundreds of groceries – what to buy, when and where from. Some people won’t bother, and might be put off making a purchase. others will grit their teeth and pay over the odds. A lot of people will probably be left with the nagging feeling that they could have done better. Simple economic models presume perfect rationality and full information. Yet to understand the impact of moving to variable prices, we need to appreciate the psychological burden of acquiring information and struggle to determine the rational course of action.

Another issue is predictability. Particularly for those shopping on tight budgets, volatile prices make financial planning that bit tougher, and make unpleasant surprises in the supermarket that bit more likely.

A major concern is the distributional effect of variable prices. Some people will end up paying more for the same product than others, and it is clearly problematic if they are generally from poorer or more disadvantaged groups. It is easy to imagine the market dividing into more and less sophisticated consumers, where the younger and more educated know how to play the system and essentially have their products subsidised by the older and less educated. I take it that would be a bad thing. On the other hand, it might be that the only people to bother seeking the cheapest prices are the poorest scrimping to save every penny and those with time on their hands (students, the unemployed, retirees). This might be less problematic (though we should note that those in poverty often suffer from the greatest cognitive load).

Variable on-the-shelf prices are only one of a number of ways in which pricing complexity could be increasing. Big data allows for more individually tailored ‘personalised pricing’, which may involve cognitive manipulation as much as welfare-enhancing offers.

All of this poses some major challenges for government consumer protection. Most of us have grown up taking the benefits of fixed prices for granted. We should be extremely wary of giving them up too easily.


One comment

  1. […] one recurring theme of this blog (and a core idea of behavioural public policy) is that we often underestimate the […]

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