What’s a fair price?
My readers may be interested to know that I am currently composing an acceptance letter to be on the board of Goldman Sachs.
Not that they’ve offered it, but Felix Salmon was kind enough to suggest me for the job yesterday and I feel like I should get a head start. Please give me suggestions for key phrases: how I’d do things differently or not, why I would be a breath of fresh air, how it’s been long enough having the hens guard the fox house, etc., that kind of thing.
But for now, I’d like to bring up the quasi-modeling, quasi-ethical topic (my favorite!) of setting a price. My friend Eugene sent me this nice piece he read yesterday on recommendation engines describing the algorithms used by Netflix and Amazon among others, which is strangely similar to my post yesterday coming out of Matt Gattis’s experience working at hunch. It was written by Computer Science professors Joseph A. Konstan and John Riedl from the University of Minnesota, and it does a nice job of describing the field, although there isn’t as much explicit math and formulae.
One thing they brought up in their article is the idea of a business charging certain people more money for items they expect them to buy based on their purchase history. So, if Fresh Direct did this to me, I’d have to pay more every week for Amish Country Farms 1% milk, since we go through about 8 cartons a week around here. They could basically charge me anything they want for that stuff, my 4-year-old is made of 95% milk and 5% nutella.
Except, no, they couldn’t do that. I’d just shop somewhere else for it, somewhere nobody knew my history. It would be a pain to go back to the grocery store but I’d do it anyway, because I’d feel cheated by that system. I’d feel unfairly singled out. For me it would be an ethical decision, and I’d vocally and publicly try to shame the company that did that to me.
It reminds me of arguments I used to have at D.E. Shaw with some of my friends and co-workers who were self-described libertarians. I don’t even remember how they’d start, but they’d end with my libertarian friend positing that rich people should be charged more for the same item. I have some sympathy with some libertarian viewpoints but this isn’t one of them.
First of all, I’d argue, people don’t walk around with a sign on their face saying how much money they have in the bank (of course this is become less and less true as information is collected online). Second of all, even if Warren Buffett himself walked into a hamburger joint, there’s no way they’re going to charge him $1000 for a burger. Not because he can’t afford it, and not even because he could go somewhere else for a cheaper burger (although he could), but because it’s not considered fair.
In some sense rich people do pay more for things, of course. They spend more money on clothes and food than poor people. But on the other hand, they’re also getting different clothes and different food. And even if they spend more money on the exact same item, a pound of butter, say, they’re paying rent for the nicer environment where they shop in their pricey neighborhood.
Now that I write this, I realize I don’t completely believe it. There are exceptions when it is considered totally fair to charge rich people more. My example is that I visited Accra, Ghana, and the taxi drivers consistently quoted me prices that were 2 or 3 times the price of the native Ghanaians, and neither of us thought it was unfair for them to do so. When my friend Jake was with me he’d argue them down to a number which was probably more like 1.5 times the usual price, out of principle, but when I was alone I didn’t do this, possibly because I was only there for 2 weeks. In this case, being a white person in Accra, I basically did have a sign on my face saying I had more money and could afford to spend more.
One last thought on price gouging: it happens all the time, I’m not saying it doesn’t, I am just trying to say it’s an ethical issue. If we are feeling price gouged, we are upset about it. If we see someone else get price gouged, we typically want to expose it as unfair, even if it’s happening to someone who can afford it.