Sunday, 31 January 2016

Why are women charged more than men?

Evidence (albeit somewhat anecdotal) suggests than women are being asked to pay considerably more than men for almost identical consumer products. This seems to apply to clothing, toiletries, toys, even pens. Why? It is hard to believe that it costs more to produce products for women than men. So, I think we can safely discount the idea that the difference is being driven by costs. The far more likely explanation is price discrimination.
      To illustrate consider a very simple example. Imagine you are the owner of a company making jeans. It costs £25 to produce a pair of jeans and you are currently selling them at £50 a pair. At this price you sell 100 a week to men and 50 a week to women. The key question you have to consider is what would happen to sales if you increase (or decrease) the price? Suppose that at a price of £55 a pair you estimate you would sell 80 to men and 45 to women. On the male side this is a bad deal because profit falls from (50 - 25)(100) = £2,500 to (55 - 25)(80) = £2400. But on the female side you do well because profits increase from £1,250 to £1,350.
       In this example it clearly pays to charge women a higher price than men. But note that this is because women are less sensitive to price than men. This is different to saying that 'women are willing to pay more than men'. After all, you were selling less jeans to women than men. Generalizing from this example, optimal pricing is always driven by how sensitive a market will be to changes in prices. So, if firms are charging lower prices to men it would seem that men are more likely to react to price than women. This, though, is not the end of the story.
       The story so far is one of 3rd degree price discrimination - different categories of consumer (namely male and female) are being charged a different price for an identical product. Textbooks will tell you that 3rd degree price discrimination can only succeed if there is no potential for arbitrage. In other words it must not be possible for women to buy from the male market. There appears, however, little to stop that happening. This suggests, therefore, that women, as well as being less sensitive to price, are also reluctant to shop around.
         Arbitrage, though, is not just about buyers' willingness to shop around because someone else could do the shopping around for them. If, for instance, identical products sell for £5 in one location and £10 in another an enterprising individual can buy the product at £5 and sell it for £8 at the other location. There is simple money to be made. That this has not happened would suggest the firms involved have significant market power. Enough market power that no one can steal their market. This is unlikely to change any time soon.
        But, the recent news may lead to more women shopping down the male aisle of supermarkets. Ultimately arbitrage should win through and lower the price gap between male and female products. Unless, that is, the price differential is actually being driven by something different. If, for instance, the products compared are not actually identical, and a pink pen is not really identical to a blue one, the price differential can persist. So, don't expect arbitrage to eliminate all of the gap between male and female prices.