While in a small roadside stall yesterday, I agreed to buy two bananas for 20,000 đồng. I collected my bananas, paid for them and went on my way. As I did, the shopkeeper called me back and gave me a third banana with a mischievous smile.
I’d paid too much for two bananas. In fact, I’d paid too much for three. I knew this, but I also knew 20,000 đồng is roughly equal to 1 USD. That’s about two minutes work for me as an Australian or two hours work for him as a Vietnamese national1.
The Ultimatum Game
A well-known experiment in economics and consumer psychology is the Ultimatum Game. In this two player game, player one is given an amount of money, usually $10 and told to offer a portion of it to the second player. If the second player accepts the offer, both players receive their portion of the $10, if the second player rejects the offer, both players get nothing.
The rational argument goes that an offer of $1 gain acceptance from the second player as it’s better than nothing. But the game often produces offers of 50% and offers less than 20% are often rejected.
These results show how strongly most of us feel about fairness in pricing.
Equal Price does not Equal Fair Price
This demand for fairness manifests itself in a common traveller tale. Many Westerners returning home from time in poorer parts of the world retell incidents of being “ripped-off” by being charged higher than the local prices.
In my mind though, this narrative gets it wrong. Price equality is not price fairness. I understand the perception of being “ripped off” when paying a higher price, but there is a critical difference between paying a higher price and being ripped off – the price is agreed. There is an element of dishonesty as often a foreigner won’t know the local price and the salesperson is capitalizing on that information asymmetry. On occasion, the story also involves duress, which makes it more like theft. Generally speaking though, the foreigner is paying the price they are willing to pay.
Fairness Through Price Descrimintation
Returning to my opening anecdote, to negotiate half the price, I would have 1 minute before it becomes poor use of my time. The shopkeeper on the other hand could negotiate for an hour. It’s actually cheaper for me to pay a higher price.
I love this price discrimination and think it creates a fairer price. Unfortunately for the shopkeeper and the millions of others like him in the developing world, I don’t think this attitude will catch on.
1 Loosely based on the mythical 40 hour work week using 2008 GDP per capita.