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Mar 13

“Unfair Pricing” is Sometimes Quite Fair

LysanderSpoonerUniversity2[1] (2)

From the book, “Roads in a Market Economy” by Gabriel Roth (1996, page 63):

A more modern example of efficient but’unfair’ pricing . . . was related by P.F. Amos at a conference in 1979:

Having taken a bus to the Nepal-India border from Kathmandu, and being first through customs, Mr. R.G. Bullock . . . was advised that the bus to Gorakhpur would be delayed by at least two hours until all the other passengers had been processed. He was then approached by an Indian who was in a similar predicament, but in a greater hurry, who asked if he would share the one taxi which was available, going halves on the 60 rupee taxi fare to Gorakhpur. Mr. Bullock was willing to pay only 15 rupees. The Indian decided that he himself wasn’t prepared to pay more than 30 rupees so he canvassed other travelers as they came through customs. He found one prepared to pay 10 rupees and another prepared to pay 3 rupees.

They all asked the taxi driver if he would take them to Gorakhpur for 58 rupees, and the driver agreed on condition that he could pick up other passengers en route to try to make up the other two rupees. The travelers agreed to this condition provided they all shared any extra rupees made in excess of the two. They drove to Gorakhpur, picking up and dropping off several short-distance passengers, making 6 rupees in total and sharing 4 of them, as agreed.

So all the passengers paid prices that reflected the intensity of demand; the driver received his fee, capital equipment (the taxi) and labour (the driver) were fully utilized, and all received compensation for a somewhat slower and less comfortable journey due to the stops on the way.

A great story which illustrates an important economic point. “Unfair pricing” is not always unfair; it can meet the needs of divergent players quite well. Today in most pockets of the U.S., such negotiated cab fares would be entirely illegal. Taxi companies are heavily regulated and licensed by the state.

This story is also illustrative of the folly of enforcing “fair” pricing (meaning identical pricing for all players in all circumstances). (This idea was recently mentioned as one grounds for the FCC’s takeover of the internet under the auspices of “net neutrality.”) It is far more fair to allow those needing urgent goods and services to negotiate this demand by price adjustments.