The Sound and the Furby

furbwise.jpgWhen should equity concerns outweigh efficiency? One could write a book on the topic, but for today’s blog post a riff on James Boyle’s article Cruel, Mean, or Lavish will suffice. Boyle’s paper addresses the question of price discrimination, the practice of charging different prices to different individuals based on diverse ability (and willingness) to pay. If the seller does this, it has to worry about arbitrage, whereby the buyers who pay less go out and sell their product to those willing to pay more. As long as the reseller’s price is below the seller’s asking price, they can undercut the seller.

One solution to this problem is “versioning,” which Boyle conveys with a whimsical example of tiered “Furbies” (a type of talking doll pictured at right):

[L]et us imagine [the manufacturer of Furbies] wants to engage in price discrimination. . . [One] possibility, called “versioning,” is to produce goods with different qualities or features: a bare bones “pauper’s model,” perhaps, with a mutilated ear and a cough, a more luxurious Furby of the bourgeoisie, its pelt rich but modest, and a tycoon Furby with a larger vocabulary and a mink coat.

I remember chuckling at this when I read it, but I never anticipated the degree to which “brand name bullies” might complicate matters for owners of the “pauper’s model.” Vanessa O’Connell at the WSJ chronicles the trend:

Dorothy Espelage, a professor of educational psychology at the University of Illinois, Urbana-Champaign, who has studied teenage behavior for 14 years, says she has seen an increase in “bullying related to clothes.” She attributes that to the proliferation of designer brands and the display of labels in ads. In the more than 20 states where she has studied teens, she has been surprised by how kids revere those they perceive to have the best clothes. Having access to designer clothing affords some kids “the opportunity to become popular — and that protects you and gives you social power and leverage over others,” she says. (emphasis added)

It seems that our “classless society” has produced excellent methods of “sorting” the haves and have-nots.

So to come back to the Furby example, perhaps the “versions” are less about objective differences between the Furbies than about what they come to signify. Perhaps versioning itself creates value–the “top of the line” Furby prized not merely because of its extraordinary pelt and vocabulary, but because it marks one out as one of the few people able to afford it.

But if scarcity in itself is a source of value in versioning, it would seem to operate as the mirror image of the “resentment” anti-egalitarians are constantly warning us against. The “class war” described in the brand name bullies article isn’t one of the poor “pulling down” the rich; it’s almost the reverse phenomenon, of big spenders flaunting to feel a sense of superiority over those who can’t keep up. Isn’t a sense of pride or superiority in material goods at least as bad as a resentment of those who have more?

Boyle notes other tensions within the traditional economic defense of price discrimination for IP:

The defenders of intellectual property [IP] expansionism . . . initially argued that intellectual property rights were simply property rights, not monopolies. When it comes to price discrimination, however, their argument was simple: “Well, since we already have a monopoly, the only efficient market is a monopoly with perfect price discrimination. What’s more, the greater the amount of consumer surplus captured by the producer, the greater the incentive to create future information goods.” Once again, the arguments are mirror images of one another.

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The popular definition of chutzpah is the child who kills his parents and then throws himself upon the mercy of the court because he is an orphan. The economic definition of chutzpah is the industry that demands a legalized monopoly, and then, once given it even though the evidence was weak, insists on the state’s aid in price discrimination, the better to wring every last cent of consumer surplus out of their customers.

I agree with Boyle that, in areas where value inheres in a hall of mirrors of triangulated perceptions, we should be very suspicious of efforts to assure perfect price discrimination. On the other hand, compulsory licensing schemes for, say, music or drugs, where licenses are based on “ability to pay,” may be much better for society than a system of charging the same price to everyone. Though “versioning” of drugs to avoid arbitrage is troubling, price discrimination to assure access has real practical advantages. Moreover, I don’t see a problem in charging something like a small progressive tax for access to music.

On the other hand, versioning is a persistent worry. As Boyle notes,

[One] laser printer aimed at the business market that produced 8 pages per minute. In order to capture the personal computer market, a version was sold with a “wait chip” that reduced its speed to 4 pages per minute.

When we are talking about “optional” or luxury goods, or about minor differences in functionality or prestige, this process seems beneficial or at worst risible. Of course, when the goods get more necessary and the disparities in wealth distribution (and hence ability to pay) get more acute, the versioning process begins to look less benign, suggesting an underlying problem with the ability/willingness to pay metric of valuation. . . . [An analyst of tiering in travel] captures the process perfectly. “What the company is trying to do is prevent the passengers who can pay the second-class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich.” To be sure, this is a point by no means limited to discussion of price discrimination, and if this is the only way to get some important social good to the poor, we may swallow our qualms.

When we consider how bad the bottom tier in US health care is getting, we might start to wonder whether American style medical “versioning” really is the ” only way to get some important social good to the poor.”

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