There are many wonderful aspects of online shopping. As someone who has placed 203 Amazon orders this year, I should know. You can do it in your pajamas in the middle of the night, the store is rarely out of what you want and the resulting shipping boxes make great toys. But there is one serious downside: You can’t see what you are ordering before you buy it.
So how can you tell what’s a better product? Usually the economist’s answer would be price: The more expensive thing is better. The logic, very roughly: If it weren’t better, the guys who sell it couldn’t get more for it.
Yet on Amazon, at least, they are sold for very different prices. A few examples:
I Can Be Magician Barbie: $12.99, I Can Be Chef Barbie: $15.99, I Can Be Doctor Barbie: $32.91.
Based on the descriptions of these items, it’s hard to find any obvious differences. But before we discard the “more expensive is better” rule, we have to consider whether we are overlooking something: Maybe Doctor Barbie comes with a whole lot of extra accessories — a doctor bag complete with pill bottles and stethoscope. Maybe she comes with an acceptance to the medical school of your choice?
But alas, she does not. Doctor Barbie comes with a doctor bag; Chef Barbie comes with cooking implements and food. Both offer a code for “career-themed online content.” In fact, it seems a lot more likely that the answer lies in the concept of price discrimination. People are often willing to pay different prices for the same products, either because they have more money to spare, or because they really like the product more. Companies know this, and would like to take advantage of it. If they can just identify those consumers who will pay more, and charge them more, it’s good for their bottom line.
This may seem tricky to implement, but companies actually do it all the time. Think about an airline. They know that, on average, business travelers would be willing to pay more for the same basic service of flying them from New York to Chicago. But it’s hard to just charge them more for the flight; for one thing, it’s hard to see who a business traveler is from the other side of the computer.
The airline would like to find some way to identify these business people. One way to do that is to find something they value more than the leisure traveler and sell that for a premium. Business travelers are more likely to value space to work on the plane, and the ability to sleep before a big meeting. Business class is born.
The airline charges the extra cost of the nice seat and nice meal, but they effectively also charge them more for the basic flight.
How does this explain the Barbie pricing? Richer people, on average, are going to be willing to spend more for a Barbie. Knowing this, Barbie’s distributors would ideally like to base the price of any Barbie on the buyer’s income. Therefore, stores can effectively charge richer people more by charging more for these particular Barbies.
Once you are aware of this kind of pricing scheme, you see it everywhere. Purchasing your movie tickets online? That’ll be a $1.50 “convenience fee.” Seems odd when you think about it: The person for whom this is really convenient is the owner of the movie theater, who now doesn’t have to pay a teenager to sell you a ticket. But the movie theater owner has figured out that people who are willing to pay more also tend to be less willing to wait in line, partly because they see their time as worth more.
Steeped as I was in thinking about price discrimination, I figured that the more expensive one was really no different, maybe it just came in a nicer color, designed to lure in people for whom money was no object. I clicked “Buy” on the $14.49 one, congratulating myself at having avoided throwing my money away. That is, until the package arrived and I realized that while $69.99 would have gotten me a car seat sled, $14.49 got me a strap that I could use to tie my car seat to a roller bag.
Back to the computer for Amazon order No. 204.
Emily Oster is an associate professor of economics at the University of Chicago Booth School. Her forthcoming book is “Expecting Better: How To Fight the Pregnancy Establishment With Facts.”