Brand Afficionados Favor Quality Over Discount

IF I fly to Chicago from Ithaca, N.Y., later this month, Northwest Airlines will charge me $565 if my trip does not include a Saturday night stopover, but only $410 if it does. Similarly, if I order Apple's new MacBook laptop, the company will charge me $1,499 for a machine in black, but only $1,349 for an identically configured one in white.

As economists use the term, price discrimination means charging some buyers more than others for essentially the same product or service. Is it a bad thing? Buyers paying the higher prices understandably resent the practice. They might thus be surprised to learn that it often enables them to enjoy both lower prices and higher quality than would be possible if sellers charged the same price to everyone. Even more surprising, price discrimination often metes out rough justice among buyers, requiring those who are responsible for a greater share of sellers' costs to shoulder a greater share of the burden.

The upshot is that pricing schemes that enable companies to attract more buyers reduce the average cost per buyer served. And that frees resources that can be used to support higher quality — more frequent flights for travelers and more sophisticated laptops for computer buyers.

From the seller's perspective, the perfect hurdle is one that price-sensitive buyers can jump without difficulty but that other buyers find impossible to jump.

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Of course, discount hurdles do not apportion costs among buyers with precision...On balance, however, there appears to be at least rough justice in these and other hurdle schemes. The buyers who care most about quality tend also to be those who are least willing to jump over discount hurdles. To the extent these hurdles work, business travelers and buyers of black laptops have little grounds for complaint.

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To that point, Sony Corp chairman Howard Stringer admitted recently that the electronics icon had taken a gamble with the high price of its new PlayStation 3 but predicted the console would still trump its rivals.

"The price of the PS3 is high ... but you're paying for (its) potential," Stringer told a press conference.

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