Archive for the ‘pricing’ Category
Chilean Miners: What is Rescue Worth?
Filed under: aid, CSR, disaster, employees, government, pricing, risk, workplace safety |
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Happily, rescue crews seem to have made better progress than anticipated toward rescuing 33 Chilean miners trapped deep underground since August.
Here’s a recent story giving details, by Alexei Barrionuevo and Christine Hauser writing for the NYT: Drill Reaches Miners in Chile, but Risks Remain
As the rescue proceeds, most of us will (rightly) be focused on the human side of this story, the ordeal those 33 men have gone through. But this story also has an important business- and economic component. Last month, I blogged about whether the trapped miners ought to be paid, and by whom. But another issue is that the rescue effort itself is likely to be exceptionally expensive. What should the companies doing the drilling be paid? Back in April, after a mine collapse in West Virginia, I blogged about the Ethical Obligation to Save Trapped Miners, and pondered the extent of the financial obligations of the mining company and the government in the face of such a disaster. Today, I’d like to look at the question from a different angle. How much should drilling companies involved in such a rescue be charging for their work?
Now, just to be clear, I’m not talking about the actual companies involved.
Brandon Fisher, founder & president of US-based Center Rock Inc., the company that made the drill used, is reported to have nobler motives:
He says the Chilean government is paying for his time and equipment — “that’s the plan anyway.” But he is not at the Mina San Jose for the money. He is there for the miners.
“I don’t know that there’s 10 minutes that you’re out here that you don’t look down there and think, ‘There’s 33 guys 600 feet below our feet,’ ” he said. “Whenever you’re tired, it’s real easy to think, ‘Hey, I’m out here seeing sunlight and breathing fresh air. It’s time to suck it up and get these guys out of here.’ ”
It’s also worth noting that, in fact, this is a competitive arena — there are apparently quite a few companies with relevant capacities, and they’re likely competing with each other to bid for the work. Perhaps they’re even charging less for this high-profile job than they normally would, because it’s good advertising. But let’s set that complication aside for the moment.
So, a thought experiment: what if there were only one company qualified to do the rescue work, or only one company available locally? What should that company charge?
A few quick options:
1. They should charge whatever the market will bear, which would essentially amount to charging the most the Chilean government and/or the mining company involved are willing to pay.
2. They should charge nothing. They should be happy to be involved, and to charge anything would be to put a price on human lives, which is unacceptably exploitative.
3. They should charge just enough to cover their own costs — machinery, fuel, and maybe their own workers’ wages.
4. They should charge exactly the same to drill this hole as they would to drill any other hole of similar size, depth, and complexity. No more (that would be exploitative), and no less (that would be foolish).
Do you favour one of those four? On what grounds? Or can you suggest another principled answer?
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Addendum: I found a story that offers the following relevant detail: “Local newspaper La Tercera reported that the rescue efforts, expected to last three to four months, will cost anywhere from $10 million to $20 million.”
When Companies “Play Games” With Prices
Filed under: advertising, consumers, food, pricing, profits, retail |
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Is it ethical for companies — without deception — to make use of well-documented human tendencies and weaknesses in order to get us to buy more? Social scientists have long been aware that humans are subject to a range of cognitive biases that affect the way they think in fairly predictable ways. And, apparently, smart marketers know it, too.
For instance, check out this critique of Apple’s pricing, by Ben Kunz: “How Apple plays the pricing game”
Economist Dan Ariely, author of Predictably Irrational, gives the classic example of a Realtor who shows you a home that needs a new roof, right before taking you to a higher-priced house she really wants to sell. It’s hard to tell if a $400,000 colonial is a good deal – but compared with a $380,000 home that needs work, it looks quite good. Now consider, $499 for an iPad? Well, compared with a smaller one with fewer features, it suddenly looks great.
Decoys explain why Apple often sells each gadget in a pricing series, such as the new iPod Touch’s $229, $299, and $399 price points for different storage capacities. You may gladly spend $229 to get a hot media player, thinking it’s a deal compared with the highest-priced version and not blink that you could instead buy an iPhone 4 at the lower price of $199 with more features.
(Don’t put too much stock in the details of the prices quoted — as one of the comments under the article points out, Kunz may be comparing apples & oranges by comparing retail prices for iPod Touch to the discounted iPhone price that you get when you sign a 3-year contract with a phone company.)
At any rate, practices like the ones Kunz describes are by no means unique to Apple. Many restaurants, for example, will include one or two high-priced entrees. I’ve heard it said that those, too, are “decoys.” The restaurant doesn’t expect to sell much of the $35 Surf’n’Turf, but the fact that there is a $35 entree makes the $25 entrees look very reasonably-priced. Now notice that there’s no actual deception, here…just a reliance on the fact that most people will have their choices swayed by such pricing.
Here’s the short version of the case for such practices: Look, there’s no deception here. And consumers still have free will. And there’s no clear difference between using this kind of so-called “trick” and the “trick”, known by salesmen since time immemorial, that people will buy more stuff if you smile and are polite to them. The relationship between buyer and seller is an adversarial one, so buyer beware. (Notice also that a company can accidentally, unintentionally engage in such pricing. Maybe the restaurant really thought the #35 Surf’n’Turf would sell well. But it didn’t, and so the net effect is that the dish ends up acting as a decoy, but it’s hardly something you can blame the restaurant for.)
Here’s the short version of the case against such practices: The cognitive biases that such pricing preys upon are so strong that they effectively limit consumer autonomy. Preying upon them is therefore wrong. We put limits on marketing to young children, because we realize that young children aren’t fully capable of filtering messages, evaluating options, and choosing rationally. But the (sad) news from the psychological literature is that adults are likewise limited. We just aren’t as rational or autonomous as we think we are. Selling crack to a crack addict is unethical in part because the addict has no choice but to buy. She doesn’t rationally choose to buy the crack: her addiction ensures the sale. Now, cognitive biases of the kind describe above aren’t quite like addictions. But if a given cognitive bias is only effective “most” of the time (as opposed to an addiction’s near certainty) doesn’t the fact remain that the person doing the selling is relying on a kind of human compulsion, rather than on a rational choice that is likely to satisfy the consumer’s needs?
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If you’re interested in this stuff, I highly recommend Dan Ariely’s book, Predictably Irrational. See also Judgment under Uncertainty: Heuristics and Biases, by they guys who basically invented the field, Daniel Kahneman, Paul Slovic, and Amos Tversky.)
The Business Ethics Blog 