1. Summarize in a few sentences what Ayers found about pricing strategies in car markets.
2. Do you think that this is a profit maximizing strategy? Do you think this is an appropriate and reasonable strategy for businesses to undertake it it increases their profits?
3. Can you think of other goods or services that could be - or are - priced the same way? Check out the article on discrimination in coffee shops "Waiting for Good Joe" for some inspiration, also in the assignments section. Explain.
The “I” in the following is Gladwell.
In Blink, I tell the story of a study done by the law professor Ian Ayres. Ayres put together of group of young men and women--half white and half black--and sent them to 242 car dealerships all around Chicago. All were attractive, well dressed, and well-educated. All had the same cover story: that they were professionals from a wealthy part of Chicago. All pointed to the lowest-priced car on the floor and said--"I'm interested in buying this car." Ayres's question was--all other things being equal, how does skin color and gender affect the initial price quoted by a car salesman? His results: white men, on average, got quoted a price $725 above invoice, white women got quoted a price $935 above invoice, black women $1195 above invoice, and black men $1687 above invoice. Ayres’ work deals with exploring non-traditional sources of discrimination—that is, the discrimination that persists because of some flaw or condition of the marketplace in which it is operating. For example, Ayres points out that McDonald’s can’t charge Hispanics more for hamburgers than white people—even if they thought that Hispanics would be willing to pay more for hamburgers—because a Hispanic standing in line behind a white person would quickly discover what was going on. Transparency is the great antidote to discriminatory behavior. So is competition. If a fast food restaurant tries to over-charge Hispanics, then another restaurant can open next door, and make a lot of money treating Hispanics properly. Once again, knowledge about an offending behavior has the effect of correcting the wrong. But are there cases, Ayres wondered, where there isn’t enough transparency and competition to correct discrimination? If I don’t know I’m being treated differently, for instance, I have no incentive to take my business elsewhere. The literature showing how much longer black men wait for taxi cabs falls into this category. It’s hard for a black man to figure out, exactly, how differently he’s being treated, and if he does, he has limited opportunity to take his business elsewhere because (at least in New York City) the number of taxicab licenses is limited by law. This is the context for Ayres’ study of car salesmen. Cars are high-ticket items with an awful lot of discretion built into their price—and because of a variety of cultural and historical quirks in the car marketplace there isn’t a lot of freely available information about who paid what for what. (Imagine, for example, if we bought cars the same way we bought real estate. You would ask the salesman about the Passat, with the sport package and the leather interior, and the salesman would give you “comparables” for every Passat sold in the United States in the past six months with the sport package and the leather interior. End of story. But for the inability of car dealers to join the 21st century, we wouldn’t be having this discussion about price discrimination). So Ayres sent a group of black and white men and women, with identical cover stories, to hundreds of car dealerships around Chicago. Then he noted the opening prices quoted by salesmen to each gender and racial group. He wanted to create some “comparables” for the purposes of measuring price discrimination. And lo and behold he finds that black men are quoted prices about $1000, on average, higher than white men. My initial response to that study was simple: it’s wrong to try and charge someone more for something because of his or her gender and skin color. Reading the comments to my earlier posts, I was somewhat surprised to learn that for some people that is a controversial position. males. Oh well. A good deal of the commenters made the point that the behavior of the car salesmen was rational. This was the position of Judge Richard Posner, who gave “Blink” a spanking, when he reviewed it in the New Republic two years ago. Posner wrote: It would not occur to Gladwell, a good liberal, that an auto salesman's discriminating on the basis of race or sex might be a rational form of the "rapid cognition" that he admires. If two groups happen to differ on average, even though there is considerable overlap between the groups, it may be sensible to ascribe the group's average characteristics to each member of the group, even though one knows that many members deviate from the average. An individual's characteristics may be difficult to determine in a brief encounter, and a salesman cannot afford to waste his time in a protracted one, and so he may quote a high price to every black shopper even though he knows that some blacks are just as shrewd and experienced car shoppers as the average white, or more so. Economists use the term "statistical discrimination" to describe this behavior I am not one, ordinarily, to take issue with Judge Posner, who knows a great deal more about economics—and most everything, I suspect (except maybe the Buffalo Bills)—than me. But let’s take a little closer look at this idea: is it really in the economic self-interest--is it really rational-- of car salesmen to draw inferences about individual car-buyers from the group to which those car buyers belong? When I was reporting Blink, I talked to a number of car salesmen about this very question. They were all top salesmen—99th percentile—since it struck me that it wouldn’t be terribly useful to quiz mediocre salesmen about their strategies. (One of the salesmen I interviewed, Bob Golomb is quoted extensively in the book). They told me three things. First, that one of the things you quickly learn, in selling cars, is that your ability to draw inferences about individuals’ buying preferences based on surface characteristics of race, gender, dress, age, hairstyle or manner isn’t nearly as good as you think it is. What I heard, over and over again, was that what a good salesman can do is draw useful inferences about an individual’s personality—that is, are they nervous? Do they need their hand held? Are they best given time and space?—and come up with better ways, as a result, of giving the customer the kind of help he or she needs. But drawing accurate inferences about an individual’s likelihood to buy is a completely different—and vastly more complicated--matter. Second, that price discrimination—quoting a higher price to one customer more than another—is a risky strategy, because if it backfires you lose the sale. If you quote a black man a price $1000 higher than you quote a white man—all things being equal—the black man may be less inclined to buy the car. Cars are not, after all, price inelastic goods. And three—building on point two—that the incentive structure of car salesmen, in recent years, has changed. It used to be the case that a salesman made his money on the profit margin of each car he sold—so the more above invoice the customer paid, the more the salesman took home in commission. Increasingly, though, the real money in selling cars, I was told, was in meeting and exceeding certain manufacturer sales quotas. You are better off, in other words, selling lots of cars at a low profit margin than a few cars at a high profit margin. The point is this. Even if you don’t agree that price discrimination on the basis of race and gender is reprehensible, I think you should at least consider the possibility that it’s a bad business strategy. December 12, 2006 | Permalink
1 Ayer found price discrimination was practicesed based on skin colour of buyers
2 It is not profit maximising study. The reason is one needs to have a fair view of elasticity of demand of two groups. The relevant category will be to which class customer belongs not color. Already cars are discrinated into luxury and ordinary models while as there is hardly any difference in them. I think it is more of a racism given the fact that profit depends on sales rather than on profit margin as mentioned in last paragraph. It is not reasonable strategy thus.
3 In every business where buyers have less information about what is charged to others. E. G some doctors often quote lower prices to their customers for surgery if they think they are poor but usually they come to this information based on only clothes customers wear
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