Topic: Business & Commercial

The Price Change Dilemma
(8/30/2009)

I recently recalled one of the unpleasant incidents of my childhood that I had managed to nearly forget. I decided, at the age of 12, to renew my long-expired membership to the local Boys Club, and made a pilgrimage to the ramshackle building that had been the clubís local home since it was first established. I paid my ten bucks for a yearís pass to the hand-set bowling alleys, the arts and crafts classes and the basketball court, then returned home with my shiny new card, good for 12 months. A week later, I arranged to meet a friend at the club, but when I got there, it was closed...in fact, a sign announced that the old building would be torn down, and a new, modern, larger one would open in 18 months. The club had taken my money to renew a membership that was good for about twenty minutes!

I remembered this as I listened to my wife complain about buying a tank of gas only to see the prices change on the sign, becoming cheaper, as she left the station. Didnít the gas station, she asked, have an obligation to let her know that if she waited just a few minutes, the price would be lower?

This is a more difficult question than the one raised by my Boys Club debacle. I have had the experience of buying a suit at full price, only to learn later that a half-price sale began the next day. I have also had a the experience of being alerted by a salesperson that if I put off my purchase for a day or a week, I could get the same item at a substantial discount. Then there is the common situation of last minute discounts for commodities that others purchased earlier at full price. A subscriber to a theater, a loyal patron, discovers that the person sitting next to him paid half as much on the day of the performance as the subscriber paid weeks in advance. The parents of a student at an expensive private school are chagrined to learn that the school is attempting to fill its remaining class slots by offering them at a deep discount.

Is this right? Is it fair?

One thing for certain: price changes in response to changing conditions are unavoidable. At a 24 hour establishment, the prices will change during a period when customers are making purchases. Would it be more ethical for a gas station, for example, about to lower its price, to always wait until a set time every day to execute the change? You can see the problems with this: the station would be over-charging as it waited for the allotted time, and it would also be placing itself at a competitive disadvantage with stations that put lower prices into effect immediately.

Prices go up and down in response to supply and demand. Nobody buying shares in the stock market argues that itís ďunfairĒ that they bought 100 shares of General Electric stock at one price and, because the price fell, someone else could buy the same amount more cheaply a few minutes later. This is because they know thatís the way the stock market works. Airline passengers who buy full fare tickets donít feel cheated when stand-by passengers get tickets for less, because they are used to the system. But if someone right ahead of me in a supermarket line was charged $8.00 for a 1.6 pound steak and I got charged more because the price had gone up while I was in the store, I would feel cheated, even though I hadnít been. Unlike my Boys Club membership, I would still be getting what I paid for at the price I expected. Itís just that someone else seemed to be getting a better deal.

The dilemma reminds me of a situation that I have found perplexing whenever I have had to hire a staff. I would offer two similarly qualified candidates essentially identical jobs. I would have some flexibility in negotiating the salary package, and because I had a budget to meet, would begin salary negotiations by offering each the lowest, rather than the highest, salary within the range. What were my ethical obligations if Candidate A accepted the low figure---and seemed very happy with it, too---but candidate B insisted on more? Should I reject someone who was right for the job because another candidate was a poor negotiator? Thatís not right, or logical. Should I treat the two negotiations as entirely separate and end up with two employees with the same qualifications and duties but disparate salaries? What if the employee who negotiated the lesser amount was female, and the other male? What if the lower-paid employee was African American? Even though an employer has every right to negotiate the most advantageous contract with an employee as long as it is fair and reasonable, the inequality, if it was ever discovered, would look unfair, and even illegal. Eventually, I came to the conclusion that the most ethical course was to raise the salary of the lower-paid employee to that of the good negotiator.

This isnít an option in many of the price-change scenarios, because it would be financially disastrous. No menís clothing store would go back to its recent customers and offer a 50% refund because it had just launched a store-wide sale. No theater would tell its advance ticket purchasers that it would refund their money because it gave away the last 10 seats for a performance free of charge in order to have a full house, a practice called ďpapering.Ē There are competing concepts of ďfairĒ here. It is fair to hold someone to the terms of a transaction made in good faith on both sides. It is also fair that each customer or purchaser of the same commodity under the same conditions will get the same terms.

In these scenarios, the conditions are not the same. The wholesale price has gone down. A scarce commodity has suddenly become not scarce. The seller is faced with either getting half-price for a theater seat, an airplane flight, or a loaf of bread, or nothing at all.

It feels unfair to the person getting the worse deal, but it isnít really unfair. Is the gas station owner supposed to tell every motorist who comes in five minutes before a price change to wait until the price goes down? Then whoever comes in six minutes before the change will feel unfairly treated.

The closest thing to an ethical solution here is candor and education. If customers and purchasers know that prices are subject to change, that discounts and sales are going to occur, then they should not and will not feel cheated. They need to understand that part of the cost of purchasing a ticket in advance so you are sure to have a seat is not having an opportunity to get a potential discount by waiting until the last possible second. They need to accept the fact that prices can go up or down, and when they buy ay a given price, they are accepting the possibility that the price will fall in exchange for potential benefit if it rises. Price changes arenít unfair if everyone understands the system.

Iím still ticked off at the Boys Club, though.


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