Progressive Pricing: The Ethical Case for Price Personalization

Abstract

Price discrimination is widely considered unethical/unfair by consumers, as has been borne out by decades of psychological research and mainstream press reporting. However, little academic work has been done to investigate the ethics of price discrimination. The work that has been done to date concludes that while price discrimination is not unethical, despite widespread lay perceptions, it is at best morally neutral. We argue price discrimination is more ethical than unitary pricing, when done ‘progressively,’ meaning firms charge customers as a function of their willingness-to-pay. We introduce this specific kind of price discrimination as ‘Progressive Pricing’ and demonstrate it ethically outperforms a ‘Unitary Pricing’ scheme (where everyone pays the same price, regardless of their willingness-to-pay), at least within a broadly consequentialist framework. We do this by comparing a Unitary Pricing scheme to a Progressive one, analyzing them through the lenses of four different consequentialist ‘Social Welfare Functions’ (Utilitarian, Egalitarian, Prioritarian, and Leximin), which are used by welfare economists and philosophers to rank the distributions of different social outcomes, concluding that Progressive Pricing is preferred regardless of which Social Welfare Function(s) one finds most plausible.

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Notes

  1. 1.

    Alice’s surplus is 0.1 utility gained—[log(25,000) − log(24,980)] = 0.0992; Bob’s is 0.05 utility gained—[log(2500) − log(2480)] = 0.0420.

  2. 2.

    Alice’s surplus is 0.1 utility gained −  [log(25,000) − log(24,965)] = 0.0986; Bob’s is 0.05 utility gained −  [log(2500) − log(2495)] = 0.0480.

  3. 3.

    Unitary Pricing: Utility before for Alice was log(25,000) = 10.1266. After her net utility increases from her subscription, this increases to 10.2258. This priority-weighted change is log(10.2258) − log(10.1266) is 0.00975. For Bob, utility before is log(2500) = 7.8240. After his net utility increases from his subscription, this increases to 7.8660, for a priority-weighted change of log(7.8660) − log(7.8240) = 0.0054.

  4. 4.

    Progressive Pricing: Utility before for Alice is the same, 10.1266, as is Bob’s 7.8240. With the $35 price, Alice’s utility after the subscription decreases slightly to 10.2252; with the $5 price, Bob’s utility after the subscription increases to 7.8720. The priority-weighted change for Alice is log(10.2252) − log(10.1266) = 0.00969; Bob’s is log(7.8720) − log(7.8240) = 0.0061.

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Correspondence to Jerod Coker.

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Coker, J., Izaret, J. Progressive Pricing: The Ethical Case for Price Personalization. J Bus Ethics (2020). https://doi.org/10.1007/s10551-020-04545-x

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Keywords

  • Price discrimination
  • Progressive Pricing
  • Leximin
  • Egalitarianism
  • Prioritarianism
  • Utilitarianism
  • Social welfare function
  • Willingness-to-pay
  • Price personalization
  • Dynamic pricing
  • Consequentialism