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#COVID19

Ethical Pricing and Corona Virus

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by Nevo Hadas – Partner at DYDX

 

For the longest time, this concept of ethical pricing was never an issue I was concerned about, my mind automatically assumed maximizing profits and generally, in the fairly short to medium term (the shorter the term the better) was the context that pricing should be viewed in.

My understanding of risk was related to achieving the opportunity versus having a bigger systemic view i.e. transactional risk versus systemic risk. My mind was firmly in the Supply/Demand mindset, industrial age paradigms that leave us all slightly poorer as they assume the winner takes most.

So let’s pose a hypothetical question:
A hardware store normally sells handpumps at $10, after heavy rains and flooding in an area, they increase the price of handpumps to $20. Is this right? This question moves across the paradigms of ethics and business opportunity.

We know consumers hate to be taken advantage of, and many who need a pump may pay the $20 (assuming they can afford it, which is an equally serious issue) but may feel negatively about the hardware store afterwards and not frequent it again.

Now imagine the shop was selling respirators or facemasks?

My first response was based on supply/demand and externalities i.e. there are only so many pumps and there is so much demand ergo price increases due to externality causing demand. While we know that consumers will be angry and feel ripped off – they will pay because they need the pump now to avoid irreparable damage. However, on deeper reflection, there are many other value optimizing strategies that are MORE systemic than merely increasing price –  i.e. they create more benefit to ALL the parties involved.

The shop could, for instance, reduce the price but bundle waders and buckets to increase overall deal value and possibly margin mix. This would make customers feel like they are getting a good deal and that the shop is responsive to their needs, winning a longer-term loyalty. Another strategy could be to rent the hand-pumps out or provide a service to help people pump out their houses.

The net effect of a different view would mean more people would have pumped the water from their houses overall, as the finite supply of pumps means that those that have purchased the pumps would have excluded others from having a pump at all.

In the coronavirus time, what does this mean for how we distribute or utilize scarce resources?

 

Here is another thought experiment.

Most people are aware of the increasing wealth-gap being created. The 1% rapidly owning more of the world’s value due to the rising returns of capital vs productivity (i.e. your rate of return on your capital is rising more consistently and quickly than average wages). In many ways how we price financial services exacerbates this phenomenon. For example: when applying for a home loan the bank will give a lower mortgage rate to a richer family than a poorer one, even if it is for the same property.

We would answer that this is due to the risk of default i.e. poorer people have less money, therefore, are more likely to default. The inverse of you are charging poorer people more money therefore they are more likely to default also holds true. Furthermore, if the value is the same in both properties i.e. the underlying value of the asset provides sufficient security is the cost of default so significant that it justifies the higher pricing?

The same applies to managing retirement assets, the more money you have the less it costs, even in large institutions who are managing your money with thousands of other people i.e. your money makes no difference to their cost base. Banks and asset managers charge poorer people more because they can, not because they need to or because it will make them more money in the long run.

In fact, overcharging ensures that you destroy long term shareholder value because it makes you the target of disruption. Do people love banks – almost uniformly no. Do fintech startups want to spend the billions of free VC dollars attacking their business models? yup!

How are our private healthcare system insurance industry causing systemic damage with exclusionary pricing? What are the opportunities they are missing that could be more systemic?

Neil Gaiman, in his book Coraline, says: “Fairy tales aren’t true, fairy tales are more than true. Not because they tell us that dragons exist, because they tell us dragons can be beaten.”

This, in some strange way, speaks to the hope that we all have of breaking the rules and constraints that have been thrust upon us by the limitations of our society’s past. A society grappling with a finite goods based paradigm, with limited infrastructure to share, with no access to real-time data and imperfect information flows.

While the digitisation age has not reached all corners of the globe equally, there is an opportunity that by rethinking how we price we can bring about greater inclusivity and accelerate change.