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Soft touches pay the price

Date

Retailers know an easy target when they see one and, unfortunately, that's us.

Illustration: Matt Davidson.

Illustration: Matt Davidson.

HAVE you heard about the trick they use in fruit shops? If they want to make money from a large load of lettuce they divide it into two. They put half in a ''bargain bin'' and charge something like $3 a kilo. They put the other half at the quality end of the store and charge $6. The well-heeled and uncertain pay $6. Those with less money and keener for value pay $3.

It earns the shop much more than if it had just charged $6 (it mightn't have been able to shift all the lettuce) and much more than if it had just charged $3 (rich folks would have kept the extra $3 in their pockets). It also makes more than if the shop had just charged a single price somewhere in between, such as $4.50. Well-off customers would have still hung on to the extra dollars and some needy customers would have still been priced out.

The technique is called price discrimination. It may be retail's most clever invention, and it's everywhere.

Arnott's once made a near-identical but cheaper brand of biscuits called Sunshine. It placed the packs at the bottom of racks where the well-heeled wouldn't look but the bargain hunters would.

Restaurants in a bayside suburb quietly ask whether patrons are locals before offering lower prices. They don't want to scare off locals but they do want to get the most out of visitors primed to spend.

The trick in price discrimination is to hide what you are doing. And to let someone else do the work of sorting customers.

Sometimes they'll do it themselves. Computer manufacturers offer ''cash backs'' with expensive machines. Money-conscious buyers send in the certificates (it's one of the reasons they buy the machines). Well-off buyers don't bother.

Banks offer discount or honeymoon rates to customers who switch but not to those that stay. They figure those who don't move don't much mind paying more, unless they threaten to leave in which case they are quickly looked after. Phone companies are masters of the manoeuvre.

General practitioners are in a very good position to assess the paying potential of their patients. In a just-published study of 267,000 medical records, Meliyanni Johar of the University of Technology, Sydney, finds low-income patients are typically bulk-billed while high-income patients are charged 15 per cent more.

New technology is being applied to the task. This newspaper has reported that Australian web-based retailers charge higher prices to customers from wealthier suburbs. Amazon has experimented with charging regular customers more. Online customers don't know it's happening: they are only presented with one price (sometimes a higher price if they are accessing the web from an Apple machine).

One of the easiest ways to divide up your customers is to let the government or an educational institution do it for you. Cinemas don't charge less for students out of the goodness of their hearts. They do it to fill cinemas without cutting everyone's price. If they are at risk of filling their cinemas with full-paying customers they often suspend discounts. McDonald's offers a seniors' discount. It does it not because it is partial to seniors but to free-ride on the work the government has already done issuing cards to price-sensitive customers.

The easiest way to price discriminate is to brand an entire country. DVDs are region-coded in part to make it hard for Australians to take advantage of the lower prices in the US and Indonesia. Nescafe attempted to cut off supplies to Aldi when the supermarket chain imported lower-priced Indonesian jars labelled ''For sale in Indonesia only''. For many years Australian music companies succeeded in making it illegal to import legally produced cheaper versions of their own songs. These days, although it is legal to import music at overseas prices, iTunes won't let you. If you are from Australia it will charge $20.99 for an album. If from the US it will charge $12.99. If you make the mistake of getting an Amazon Kindle delivered to an Australian address, each ebook you buy from then on will cost more than if you had had it delivered to the US.

Consumer group Choice says one of the Microsoft software development packages is so expensive here it costs $8500 less to buy it in the US. It is worthwhile paying someone to fly to the US, buy the package and fly back here. (Except you would have to pay Australian prices for the flight, often double the price of tickets bought overseas.)

Why would international commerce discriminate against a nation? ''Willingness to pay'' is one of the answers Treasury comes up with in its submission to Parliament's IT pricing inquiry, due to report soon. Affluent and not too concerned about value, we have globally classified as soft touches.

At home, there's always the risk we'll see through the ruse of someone selling the same product for two different prices. So retailers will often roughen the product up, metaphorically punching and bruising half the lettuces so they are genuinely worse than the other half. In the US white goods retailers are said to take hammers to some fridges so they are ''shop soiled''.

Australia's first computing mainframes were given big brains and then hobbled for entry-level customers. When the customer wanted an upgrade a technician would arrive, charge for the extra memory, and then remove the hobbling device.

These practices offend our sensibilities. But, appallingly, they are what our own government's new $37 billion national broadband network is planning in the prices it charges retailers. It wants to hobble the speed for ordinary users and remove the block for users who pay a higher price. The constraint is artificial. There is nothing to stop it giving all Australians the truly phenomenal speeds of which it is capable. If it wants to charge for usage it can charge for data.

Former Telstra economist John de Ridder has told the Competition Commission the thinking on the NBN is mired in the past. It is imposing scarcity where none exists, ''building a motorway and then only using one lane''. Unless we are given what we have already paid to build, most of us might never know what it's truly capable of.

Peter Martin is economics correspondent.

Twitter: @1petermartin

43 comments

  • Try shopping at Campbells Cash and Carry, a so called grocery "wholesaler" here in Melbourne. Often their prices, in bulk case buys, are dearer than off the shelf prices at Woollies or Coles. How they get off calling them selves a "wholesaler" is beyond me.

    Commenter
    Michael
    Location
    Carrum Downs
    Date and time
    January 15, 2013, 10:15PM
    • My human food sources don't shop at any of the stores you mentioned, including Campbell's. In the west, Aldi, Sims, Bongiovanni's and Footscray Market's where it's at. Haven;t been ripped off in any of those establishments.

      Commenter
      GuntherKater
      Date and time
      January 17, 2013, 7:27PM
  • And then there is the overpricing of cars which the government is also responsible for as we are too stupid to see through the empty threats of foreign car manufacturers and pay up 3 times the US or European price for all imported cars, especially so called luxury cars. Why is the price of a Nissan GTR twice the price in Australia as the US and don't tell me its because its Right Hand Drive. Australia is NOT the only country with RHD vehicles. Why is a Porsche, pick any model, at least 2 and up to 3 times more expensive in Australia than the US?

    Commenter
    David
    Location
    Melbourne
    Date and time
    January 15, 2013, 10:34PM
    • That's right. After all, Japan is a RHD country! And I buy all my CD/DVD's from overseas, there are instructions on the Internet to make virtually any DVD player "universal" and capable of playing any disc - it's really quite easy.

      Commenter
      MichaelH
      Location
      Mitcham
      Date and time
      January 15, 2013, 11:19PM
    • David, the reason the GTR is dearer is because of GST, Luxury Car Tax and Stamp Duty.
      I'm looking at a new S500 Merc. Price is $255k approx, plus 10% Gst $25k, plus luxury car tax $60k, plus State Govt stamp duty $15k. Final cost, without extras, $355k+!!! All up it added to over $100k of govt charges. Same car in US $102,755 plus $8,732 ORC and sales tax. Total for exact same car in US $111,487. Coverts to $AU equals $105,487. Even if I was $20k out the difference is ridiculous and is why when you arrive in LA one of the first thing you notice is how many quality European cars there are.

      Commenter
      Teddy
      Location
      Melbourne
      Date and time
      January 16, 2013, 7:13AM
    • @Teddy

      You say the reason the GTR is more expensive is all about tax, and then you mention that the EX-TAX price in Australia is $255K compared to $102K in the US.

      Can you not see a flaw in your argument?

      Commenter
      Bob
      Location
      Sydney
      Date and time
      January 16, 2013, 3:01PM
    • "David, the reason the GTR is dearer is because of GST, Luxury Car Tax and Stamp Duty.
      I'm looking at a new S500 Merc. Price is $255k approx, plus 10% Gst $25k, plus luxury car tax $60k, plus State Govt stamp duty $15k. Final cost, without extras, $355k+!!! All up it added to over $100k of govt charges. Same car in US $102,755 plus $8,732 ORC and sales tax. "

      By your own numbers, the S500 costs $150% more in Australia before any taxes whatsoever are applied. How is that the fault of taxation ?

      Starting at $100k, you attract $10k in GST, $14k in LCT and about $5k in SD, for a total of $130k.

      It's not tax, it's car manufacturers ripping you off. VW is one of the few that don't (or do it relatively less). BMW, Audi, Mercedes are the worst.

      Commenter
      drsmithy
      Date and time
      January 18, 2013, 9:02AM
  • The labour government's NBN pricing is really highway robbery when it is our tax money being put into the infrastructure. It is behaving just like Telstra except it is answerable to itself. Can the government be trusted to run business? Depending on your views, it may be even more ruthless in suppressing choice and charging monopolistic pricing. Only if the consumers have deep pockets like the miners to launch campaigns against the government's NBN policy.

    Commenter
    Stan
    Date and time
    January 15, 2013, 10:36PM
    • Actually, the NBN isn't being paid for out of our taxes. This is one of the biggest misconceptions held by the general public. The government is just financing/underwriting the development of the network through the issuance of government bonds, which will then be repaid through income that the NBN corporation derives from subscribers. It's going to take about 21 years for the NBN network to be paid off this way and the government will then own a valuable company. (Which hopefully won't be sold off again)

      Commenter
      Mike
      Location
      St Kilda
      Date and time
      January 15, 2013, 11:04PM
    • The NBN only delivers wholesale high speed bandwidth to service providers where isn’t otherwise available. The wholesale price is closely monitored by the ACCC and is in line or better than existing services. If you want to stick with your existing (possibly limited) service then do so. If you need a higher speed Internet connection then be thankful when NBN comes past your door but in any case having a choice is better than not.
      The NBN will be an asset to the country for the next generation. We as a population need to stop thinking of the NBN as a political stunt and see it as an investment in valuable infrastructure like a hospital, freeway or new rail station. The currency of the future is information and access to high speed Internet will be the next line that divides developed nations from the rest. Australia is at a natural disadvantage due to the size of our country and the low density of our population so without government backing to make something like the NBN a reality we would face a slow but certain reduction in our status on the world stage.

      Commenter
      Dean
      Date and time
      January 16, 2013, 12:21AM

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