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 wouldn’t be able to 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 (all Amazon Prime eligible, of course):
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 actually 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. Relative to leisure travelers, those on business 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, warm nuts, a chance to board first and lord it over the rest of us. But this doesn’t actually 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.