There are many wonderful aspects of online shopping. As someone who has placed 203 Amazon orders this year, I should know. You can do it in your pajamas in the middle of the night, the store is rarely out of what you want, and the resulting shipping boxes make great toys. But there is one serious downside: You can't see what you are ordering before you buy it.
So how can you tell what's a better product? Usually the economist's answer would be price: The more expensive thing is better. The logic-very roughly: If it weren't better, the guys who sell it couldn't get more for it. If this were all that was going on, figuring out quality online would be a snap.
But then there is the Barbie Paradox, which my fellow economics professor Matt Notowidigdo formulated when he was looking to illustrate a particular pricing phenomenon for his class. Mattel makes a line of “I Can Be” Barbies, in which Barbie takes on various jobs (nurse, president, Olympian, etc.) Other than the details of their clothes and accessories, the “I Can Be” Barbies appear to be identical.
Yet on Amazon, at least, they are sold for very different prices. A few examples:
I Can Be Magician Barbie: $12.99
I Can Be Chef Barbie: $15.99
I Can Be Doctor Barbie: $32.91
Based on the descriptions of these items, it's hard to find any obvious differences. But before we discard the “more expensive is better” rule, we have to consider whether we are overlooking something: Maybe Doctor Barbie comes with a whole lot of extra accessories-a doctor bag complete with pill bottles and stethoscope. Maybe she comes with an acceptance to the medical school of your choice?
But alas, she does not. Doctor Barbie comes with a doctor bag; Chef Barbie comes with cooking implements and food. Both offer a code for “career-themed online content.” In fact, it seems a lot more likely that the answer lies in the concept of price discrimination. People are often willing to pay different prices for the same products, either because they have more money to spare, or because they really like the product more. Companies know this, and would like to take advantage of it. If they can just identify those consumers who will pay more, and charge them more, it's good for their bottom line.
This may seem tricky to implement, but companies actually do it all the time. Think about an airline. They know that, on average, business travelers would be willing to pay more for the same basic service of flying them from New York to Chicago. But it's hard to just charge them more for the flight; for one thing, it's hard to see who is a business traveler from the other side of the computer.
The airline would like to find some way to identify these business people. One way to do that is to find something they value more than the leisure traveler and sell that for a premium. Business travelers are more likely to value space to work on the plane, and the ability to sleep before a big meeting. Business class is born.
Yes, business class gives you more: a bigger seat, a chance to board first and lord it over the rest of us. But this doesn't cost the airline that much-it's certainly not enough to justify a price five- or 10-times higher. What's really going on is that offering a fancier seat on the plane is a way to identify those who are willing to pay more. The airline charges the extra cost of the nice seat and nice meal, but they effectively also charge them more for the basic flight.
How does this explain the Barbie pricing? Richer people, on average, are going to be willing to spend more for a Barbie. Knowing this, Barbie's distributors would ideally like to base the price of any Barbie on the buyer's income. But they have the same problem the airline does: From the other side of a computer, or even a cash register, it can be hard to see people's income.
But the sellers can use price discriminate just like the airlines do. Imagine that some kinds of professions are more attractive to people with higher incomes-doctors, for example, or teachers. This could be because the richer people themselves have those jobs, or because they care more about their children aspiring to those jobs. Barbies with those professions attract a richer segment of the population. Therefore, stores can effectively charge richer people more by charging more for these particular Barbies.
This works even if everyone values higher paying jobs more for their children. All it requires is that richer people care relatively more about that aspect of the Barbie. And there is no way for the richer people to get out of paying more by pretending they are poor: Since they want the Doctor Barbie, they have to pay the premium.
Of course, there could be other explanations for these price differences-maybe it costs more to manufacture those little doctor bags for some reason. But it's telling that the most expensive Barbies tend to be the ones with the highest income jobs: doctor, computer engineer, paleontologist. To my inexpert eye, Doctor Barbie and Magician Barbie certainly look almost exactly the same. You are just paying an extra $12 to avoid your child aspiring to a career in magic.
Once you are aware of this kind of pricing scheme, you see it everywhere. Purchasing your movie tickets online? That'll be a $1.50 “convenience fee.” Seems odd when you think about it: The person for whom this is really convenient is the owner of the movie theater, who now doesn't have to pay a teenager to sell you a ticket. But the movie theater owner has figured out that people who are willing to pay more also tend to be less willing to wait in line, partly because they see their time as worth more. You can't just charge them more for the ticket, but you can offer them something that they find especially valuable, and charge them for that.
You do have to be a little careful, however. After pondering whether I should actually buy a paleontologist Barbie for my daughter ($21.35!), I remembered I was supposed to buy a car seat sled to drag our car seat around the airport at the holidays. I searched “Car Seat Travel” on Amazon and looked at the first two things that came up. The pictures looked the same, but one was $14.49 (“Traveling Toddler Car Seat Accessory”) and one was $69.99 (“Roll and Go Seat Transporter”).
Steeped as I was in thinking about price discrimination, I figured that the more expensive one was really no different, maybe it just came in a nicer color, designed to lure in people for whom money was no object. I clicked Buy on the $14.49 one, congratulating myself at having avoided throwing my money away. That is, until the package arrived and I realized that while $69.99 would have gotten me a car seat sled, $14.49 got me a strap that I could use to tie my car seat to a roller bag.
Back to the computer for Amazon order No. 204.