The role of the price tag

Our daily lives as consumers are tied to the reality of buying various goods. Sometimes consumers negotiate prices and sometimes a price tag conveys a fixed price. Rarely do we realise that our behaviour as consumers is informed by our budgetary reality weighed against prices or that prices tend to neatly divide consumers based on income.

Tagging products with their prices is something relatively new to human history. Normally, buying a specific product involved a customer and a seller negotiating over the price of the product. This was classical economics in action: the price reflected a customer’s preference in terms of time and resources. It was difficult for a seller to sell at a higher price to a low-income customer, who usually had a lot of time on hand and little income. But it was completely different for wealthy customers who valued their time and abhorred prolonged arguments. The seller could charge them high prices, which they would pay without much fuss.

That was how the world worked, until a group known as the Quakers came along. Sellers belonging to this group would charge the same price for a product, without making any distinction between the income levels of the customers. They considered charging different prices for the same products morally abhorrent and unethical.

By the mid-1800s, as consumer products grew in number, it became increasingly unfeasible to remember the prices and haggle. Around 1870, some people decided to break with tradition and invented the use of price tags. The pioneers of this were two big retail stores: Massey’s and Wannamaker’s. In order to solve the problem of training clerks (which often took a long time), they came up with the innovative method of affixing a price to the product. They thought this would take care of long arguments over pricing and save on the cost of hiring and training salespersons. Now, they could just hire a person who could do basic math, sit at the counter and engage in a financial transaction, rather than argue with customers. In short, price tags made it less costly and less argumentative to do business.

This practice spread and gradually became a norm. It went on unquestioned till the early 1980s, when airlines in America became the first to buck this trend. In the airline business things can change pretty fast, which necessitated a change in the dynamics of efficient pricing. It was just not possible to be profitable by locking in prices and not changing them. The big jolt for the airlines came in the wake of the Arab-Israel war of 1973, when the price of petrol skyrocketed.

The practice of setting a single price per seat, per destination, etc, proved to be very unprofitable. Finally, Congress recognised the problem and allowed deregulated or differential pricing. This heralded a new era in which prices could change every hour or every day and according to the situation. No longer would a person booking a seat in an emergency be paying the same price as someone who had booked a seat a month in advance. Rather, the booking price could be lower or higher than that of the other passengers given the demand and supply dynamics.

Enter the 21st century and we have both practices (price tags and differential pricing) existing side by side. They do a neat job of market segmentation of consumers according to their income. The world over, there are upscale markets where the relatively rich shop and lower tier markets where the middle and poor classes shop. In Pakistan, this bifurcation between consumer categories by the pricing of goods can be observed in the case of cheap bazaars and upscale shopping areas.

In the cheaper markets, the normal sales practice involves negotiating and haggling over prices, despite the fact that a price tag is attached to most items. But one would hardly witness such haggling over pricing in relatively expensive shopping areas, where the majority of customers belong to either the upper or middle income levels. We can only guess at the differences in consumer behaviour that different places elicit.

The factors that affect consumer behaviour are diverse, but income is arguably the most prominent variable in this equation. The upper and upper-middle income classes do not face the same resource crunch as lower income or poor people do. They are conscious that haggling or arguing over prices would seem out of sync with their social status and is not worth their time or effort.

Why argue if you can easily afford a product, even if it is overpriced? Therefore, there is a tendency to avoid such behaviour. In contrast, the poorer classes have limited room to manoeuvre when it comes to choices. Their arguments over prices reflect their wish to get as much for every rupee of their earning as they can. Every rupee saved is precious, since it helps expand their buying power or increase their savings. In the language of economics, people at the lower tiers of income realise a higher marginal utility (or satisfaction) for every rupee saved. The relative utility of the same unit of currency saved is lower for the higher income classes.

What I have stated above in terms of the role and influence of prices in an economy is not limited to the bifurcation of consumers and the effects of prices on their behaviour. Prices actually have a much larger role to play in the economy. They are considered the most important economic markers by various groups of people – most importantly policymakers and investors. Take the example of the pressing issue of traffic congestion in our cities.

London had the same problem but one of its mayors came up with the brilliant idea of a congestion tax. In simple words, the city of London addressed the problem of congestion by pricing it out. Even if our policymakers were aware of the power of prices to alter a situation, they would never implement such a policy. And the reason is simple: pricing out congestion does not bring the same prospects of minting money as widening roads or building metros does.

The writer is a freelance contributor.

Email: shahid.mohmand@gmail.com

Twitter: @ShahidMohmand79