Would you surrender your train seat to a woman carrying a baby? Most of you probably said yes. But would you give up your train seat to a woman carrying a baby if you had paid to sit in a first class compartment and she hadn’t? That might have prompted a little more reflection.
A similar question was posed last week in a carriage on a train somewhere between London and Brighton during the plague of strikes on the Southern Rail network.
The results were captured on a mobile phone and the video has gone viral. For some of the compartment’s passengers, the answer to the second question was no: the mother had no right to a first class seat because she didn’t have the appropriate ticket.
This reaction left other passengers – and many online commenters – disgusted by the lack of common decency displayed (although someone in the carriage eventually gave her a seat).
Those disgusted by the scene may wonder why we have first class carriages on trains any longer. Aren’t these relics of a bygone, class-obsessed age? And if they lead people to behave in such an uncivilised manner, as we saw in that video, wouldn’t we all be better off abolishing them?
Perhaps. But let’s also consider why they exist. In the world of economics, phenomena such as first-class compartments on trains are called “price discrimination”.
This is where different prices are charged for goods and services that are actually pretty similar. A first class cabin doesn’t get you to your destination any faster. And you listen to the same concert and watch the same game of football, regardless of whether you’re in the cheap seats or in some exclusive box.
Yes, there is more comfort in first class and little perks such as free coffee. In the exclusive box you will get a better view and free champagne. But the perks are not enough to really justify the considerable price differential between the standard and the premium package.
What price targeting is mostly about is enabling firms to maximise their revenue. Imagine you were selling a certain service. Many rich people would not bat an eyelid at paying rather a lot for that service. But poorer people are, for obvious reasons, price sensitive.
If you, as the business, price the service at the level that the rich people would bear, many of the poorer folk won’t be able to afford it and you will sell less than you otherwise would.
But if your firm prices the service at the level affordable for the masses, the rich people will be able to get it for much less than they otherwise would have been prepared to pay. In both scenarios you are failing to maximise your revenue.
The solution of some firms is to have one price for the rich and one price for the rest. If that sounds too good to be true – or if you think no rich people would fall for such a transparent ruse – remember those first class train carriages. They exist because enough people really are prepared to pay more.
But why should consumers care about the crafty way companies boost their bottom lines? One answer is that there are times when we all benefit from the possibility of price discrimination.
Long-haul airlines tend to make little margin from their economy class seats, despite them taking up most of the room on a plane. The bulk of their profit comes from business or first class passengers, who can stretch out on those fancy flat-bed seats.
And if airlines lacked the ability to charge more to the rich – if there was no scope for price discrimination – those of us who have never turned left upon boarding a plane would probably have to pay more if we wanted to fly long-distance.
Entire routes might even shut down because they would be uneconomical for the airlines. What we see here is the rich effectively cross-subsidising the rest of us.
There are also times when there is popular pressure for price targeting for humanitarian reasons. Many of us would be appalled at the idea of pharmaceutical companies demanding rich world prices for their life-saving HIV drugs in the developing world. We feel big pharma should make these drugs available cheaply enough so that even the desperate poor of those countries can buy them. Anything else would be profiteering at the expense of the vulnerable.
And this is generally what happens. The drug companies do sell at a lower price in Africa and Asia, on the condition these cheaper drugs cannot be re-exported to the West. But, of course, this is price discrimination by the pharmaceutical industry. And in this scenario, we in the rich world are cross-subsidising the poor of the developing world. There’s a similar cross-subsidisation process at work when museums and cinemas offer special discounts for students and the disabled; it’s a price most of us are happy to bear.
It’s not price discrimination itself that’s responsible for uncivilised behaviour, it’s us. If we behave unkindly towards each other, we only have ourselves to blame.
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