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The Ethics of Free Pricing (Part 2)

It seems that this objection to free pricing is equivalent to saying that the price should not depend at all on the circumstances of the buyer.

  • Timothy D. Terrell,
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In part one of this article, we examined the idea that the Golden Rule forbids "price gouging," and concluded that it cannot. I want others to "do unto me" in a manner consistent with their God-given abilities — and ignoring prices arrived at in free negotiations between buyers and sellers amounts to a pretense to omniscience. To most opponents of free pricing, however, there is not much in part one that is likely to be convincing. An extended e-mail exchange I had with another Reformed Christian about this topic illustrated to me the common, unswerving dedication to the idea that the normal price has a moral virtue of its own. The seller, he said, does not have the ethical right to raise the price of a product when temporary circumstances (e.g., a hurricane) would allow him to successfully obtain that amount.

It seems that this objection to free pricing is equivalent to saying that the price should not depend at all on the circumstances of the buyer. I pointed out that this occurs very frequently in ways that are not considered immoral at all. Colleges make standing offers of scholarships to students who can show that their financial circumstances do not allow them to pay the standard tuition. A Christian bookstore may offer a book to an obviously poor customer for free, or at a steep discount, while another customer who is able and willing to pay more is charged the standard price.

The answer given me was that the colleges and bookstores have lower prices and normal prices, not normal prices and higher prices. Yet this seems only a matter of perspective. The fact is that there are at least two sets of prices, and what one chooses to call them matters little. At one college where I taught, very few students paid the full tuition. Most students received substantial discounts through scholarships. This is common at colleges. Are colleges taking unfair advantage of those who do not receive scholarships? Legitimizing two price lists when they are called "discounted" and "regular" and de-legitimizing them when they are called "regular" and "higher" is arbitrary and can provide no moral guidance.

Furthermore, the objection to this common practice of charging a higher price to customers who are apparently willing to pay more is subject to a significant inconsistency. The inconsistency arises because of the focus on the price paid instead of the value received by the buyer. The focus is understandable, for the price is easily observed while the value, as noted before, is not. However, charging equal prices to different customers does not mean that the different customers receive equal value. People find fault when the seller obtains more benefit from those who are willing to pay more than from those who are willing to pay less. Yet the same people who raise this objection do not see a problem with customers who have a higher demand for a product obtaining the same product at the same price as those who have a lower demand.

Suppose I have a consulting business. Suppose it costs me the same in time and materials to provide consulting services to company A as it does to company B. Because I provide the services, company A is able to increase their profits by $10,000 a month, and company B is able to increase their profits by $1,000 a month. Company A gets 10 times the value from my services as company B, or 10 times the value per dollar that B receives. Why would it be unfair for me to ask a higher price of Company A?

The response might be to argue that the cost to me of providing the services was the same in both cases, so that the price should also be the same. Yet basing a "just price" on the cost of production is problematic at the very core. The true cost to me of selling any product is the highest-valued alternative that I forego in order to provide that product to the customer. If I sell a service (as I in fact do), the highest-valued alternative might be the value of the leisure time I forego in order to provide that service. Or, it might be the value to me of the salary that another employer might be willing to pay me for those same services. Thus, cost is not objective — it depends upon the alternative uses of my time, or the alternative uses of the goods I offer for sale. Selling my consulting services to company B for $500 a month might be prohibitively costly to me if company A stands ready and willing to pay me $5,000 a month for the same time commitment.

The canonist Cardinal Hostiensis, writing late in the thirteenth century, recognized this idea of cost. In setting out conditions under which the usual usury prohibitions should not apply, he argued that the lender should be allowed to charge interest on a loan to compensate the lender for foregoing alternative investments. He called this fee lucrum cessans ("profit ceasing"). Later, other theologians (such as Conrad Summenhart and Martin de Azpilcueta Navarrus) expanded the lucrum cessans loophole. Reformational thinkers, such as John Calvin and the Dutch Calvinist Claude Saumaise, turned the numerous loopholes in the usury prohibition into a more general legitimacy for the charging of interest.

Another way of addressing this opposition to free pricing is to remember that the customer is actually a seller, too, in a sense. The customer is selling dollars. The goods vendor is buying dollars. Objecting to a high dollar price because of some perceived injustice to the customer is equivalent to asking the goods vendor to pay more in goods for each dollar obtained. A low dollar-price on goods is the same as a high goods-price on dollars. Why should we not object that there is an injustice being done to the goods seller whenever the price drops below the "fair" price?

Again, we are back to this idea of the "fair" price, and have attached an unwarranted virtue to the "normal" price. Only this time, we see that there must be not only an upper bound to the dollar price, but a lower bound. Earlier in this series, I pointed out that free pricing provides information to market participants, without which we would be left groping in the dark for the best allocation of goods and services. Here we see again the impossibility of making good allocation decisions in a complex economy unless we have prices. Who can know the value received by a buyer, or compare the value per dollar received by multiple customers? Who can know the highest-valued alternative of the seller, and thus the cost he incurs in providing the good or service? Who can claim to be well-informed enough to set upper and lower bounds of moral prices? When faced with these questions, we must assume an attitude of humility. Identifying the fair price as the normal price does not answer these questions, and puts morality up to a majority vote.

See Part 3

  • Timothy D. Terrell

Timothy Terrell is associate professor of economics at Wofford College in Spartanburg, South Carolina. He is assistant editor of the Quarterly Journal of Austrian Economics and is an Associated Scholar with the Mises Institute.

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