A very nice price discrimination effect (which we usually call price differentiation because it sounds less threatening) is found by sinha at Pluggd In.
The WordWeb software, innovatively, offers a free version to consumers who take a return aeroplane flight less than twice a year. Those who take more flights (and are willing to admit it) have to pay for the commercial version.
It’s a nice way to achieve a few goals at once:
- Helping the environment, though in a subtle way. An economist might rightly point out that it’s absurd to think anyone would avoid several flights per year to save the £14 cost of the software. But this is where standard economics misses some of the dynamics. The effect is not a simple incentive effect, with people trading off the costs and benefits of flying versus the cost of the software. Instead, the salience of this extra cost that you have to pay to fly may well help change your preferences over time. Preferences are not fixed, and this is exactly the kind of decision that helps to change them.Conversely, if you said that you took no flights and then discover that you are being rewarded for it with free software, that is also likely to reinforce your preference for less flying.
(the company might be helping the environment more directly if it puts some of the revenue into carbon offsets).
- Getting more money out of people who can afford it. Of course, you could easily lie about how many flights you take. But by doing so, you’re not just keeping back some money from a small software company; you are also being dishonest about your own “bad” behaviour. This is very likely to strengthen the price discrimination effect, and get more people to pay up than would otherwise do so. It is likely that those who are more able and willing to pay will feel less temptation to lie for the free software – not because they’re any morally superior, but because the £14 price of honesty makes less of a hole in their wallet than it does for, say, a student or a child.As pointed out by one of the commenters on the page, and mentioned by WordWeb on their page discussing this scheme, people who can afford to fly are more likely to be able to afford the software than those who can’t.
(There are a few other price discrimination and upselling mechanisms on their pricing page – selling additional dictionaries, some of them bundled, and so on. The company has clearly given some thought to its pricing strategy.)
- Signalling something about the brand and corporate culture. We now know the publishers of WordWeb are willing to make a statement about the environment. That might just influence our future decision between their product and a competitor.
I have no idea if this scheme generates much money for WordWeb, but it’s clever, and it would be possible to create a similar mechanism for many businesses which rely on self-selecting price discrimination.