Shoe Shine Ethics, Again
Two months ago I blogged about the Ethics of Shoe-Shine Pricing, based on my experience at an airport shoe-shine stand. I was particularly interested in the relationship between base price and tipping behaviour. I noted that pricing decisions by businesses might well have a substantial impact on customers’ tipping behaviour, by making it more or less convenient, for example, simply to “round up” to the nearest dollar (or currency denomination). Case in point: I was charged $6.75 to have my shoes shined, and gave the guy a ten. It occurred to me that, had the price been $8.00 instead, I would have given the guy the same ten, but the resulting tip would have been substantially smaller.
Well, I’m back at the airport, and just had my shoes shined. And guess what: the price has gone up. I was charged $8.00, and, yes, as predicted I gave the guy a ten-dollar bill and told him to keep the change. In other words, rather than tipping on any principled basis, I did what was convenient. I suspect the vast majority of customers do the same.
Whoever decided to raise the price from $6.75 to $8.00 may not have thought about a couple of secondary effects of that decision (not that consciousness of these effects would necessarily have altered the decision). One secondary effect is that he or she reduced employees’ tips by $1.25 per shine (assuming most people tip roughly the way I do). That’s a big cut, big enough that it probably ought not to be made thoughtlessly.
The other effect of this pricing decision is of course the effect on the customer. The obvious effect is that a shoe-shine now puts a slightly larger dent in the customer’s wallet. But then, an airport shoe-shine is pretty clearly a luxury good (if a very minor one), and so it’s pretty easy to avoid the price change simply by forgoing the service. But less obviously, the customer now finds it slightly less easy to engage in a minor act of beneficence, namely the act of overtipping. Note that, back when the price was $6.75, my $10 payment amounted to nearly a 50% tip, which is crazy when compared to the 15-20% that most people aim at in response to good service at a restaurant. But shoe-shine customers who are anything like me are still going to do the easy thing (i.e., give the guy $10), even after the change in price. My evidence here is purely anecdotal, but I suspect that people generally value being handed the opportunity to engage in small, reasonably pain-free acts of kindness or generosity. I must admit that, back when I was charged just $6.75, I felt kind of good about having given the guy a “big” tip (percentage-wise) and it made me feel good about the whole shoe-shine experience. Today, the $8 shoe-shine cost me exactly the same (after tip), and the service was just as good, but I went away without that warm-and-fuzzy feeling, having given the guy a “mere” 25% tip.
It’s interesting to note that the ethics of pricing is virtually virgin territory, from an academic point of view. There’s practically nothing on the topic in the scholarly literature on business ethics, aside from a few journal articles on price gouging, a some stuff on price fixing in textbooks, and of course a bit of work on the pricing of executive talent. I’ve always assumed that the paucity of work on the topic has something to do with the fact that pricing is seldom seen (from the outside, at least) as a choice. In theory, at least, companies charge “what the market will bear,” and that tends to mean a number dictated by a combination of consumer demand and the availability of competing products. But for many products, pricing is in fact a choice, and I think the ethics of pricing is far more complex and interesting than most people realize.
The Business Ethics Blog 
Chris
There are a few articles, some dated and some Geo specific, in the economic journals on ethics of price discrimination. I hold the view, pricing for profit using legal price discrimination is ethical and in fact benefits some segments who otherwise would not have had access to the product/service. What is likely bad or unethical is how the price discrimination is implemented.
Regards
-rags
http://twitter.com/pricingright
I think what you observed is a variation of Partitioned Pricing – where the consumer surplus differs even when the total price remains the same Here is a paper When 2+2 is not same as 1+3
Click to access When%202plus2%20Is%20Not%20the%20Same%20as%201plus3%20Variations%20in%20Price%20Sensitivity%20Across%20Components%20of%20Partitioned%20Prices.pdf
I’ve experienced the same sort of thing on cab rides. As I see the price increasing 14, 15, 16…I feel like Bill Gates knowing I am going to give the driver a $20 regardless. (I only have 2 twenties anyway.) But then the price rises to 18 and 19 and my plan is foiled. I don’t feel so generous anymore handing over the twenty. The final charge comes out to $21 and now I have to do math in my head: I hand the driver the two twenties and ask for $15 back (because asking for $16 is just lame.)
Hello Chris,
I just came across your blog, and I was instantly attracted to the topics and discussions. My research interests are primarily in the relationship between religion and economics, and the field of business ethics assumes a big part. My training is in economics, although my research tends to be interdisciplinary.
On the “Shoe Shine” issue, I do feel that what we choose to pay reflects an ethical valuation, if we are in any way conscious of the act. People do face a ‘market’ price, but as economists would put it, they have a certain “willingness to pay” (WTP) that reflects their subjective evaluation of the product’s worth or utility. And so when we do tip, it serves a personal “warm-glow” effect that is part and parcel of our utility.
And yet when we do tip sometimes, it is more a statement of what we feel the service, or more suitably, the seller ‘deserves’, that what our utility amounts to. I may give my barber $10 instead of the $6 he is asking for, because I feel that $6 is less than what he deserves. Or, it may be an indirect way of redistributing wealth towards a more just (in my opinion, of course) allocation. But all this extra payment, I believe, has nothing to do with the utliity received from the haircut itself. The extra $4 is an expression of my discomfort with the prevailing ‘market’ price. And if the price is to be raised the next day to $10, I do not necessarily feel the need to give more.
Many economists will respond arguing that utility is an elastic term that may well encompass all these considerations. I do not deny that economic methods can be very accomodating when responding apologetically (and at the same time arrogantly) to such critiques, But this really misses the point. I have implicitly just argued that ‘market’ prices do not reflect our subjective judgements, as economists would like us to believe, but can actually run counter to such judgements. ‘Market’ outcomes are very much like other social processes, where the outcome does not reflect the preferences of the individuals at stake, or even their ethical considerations.
Ayman:
Thanks for your comment.
I agree with you that it is dangerous simply to package every consideration into one the term “utility.” That obscures as much as it illuminates.
But I also think tips (within a certain range) are in a sense part of the market value of a thing. In most of North America, for example, the market price of a meal at a restaurant is menu price + tax + tip. The tip may be legally voluntary, but it is a very strong moral norm, and is as much a real part of the price as are, for example, any of the transaction costs associated with the meal.
Chris.
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