Kathyrn Graddy and George Hall of Brandeis University have an interesting National Bureau of Economic Research paper titled “A Dynamic Model of Price Discrimination and Inventory Management at the Fulton Fish Market.”
For 111 business days in 1991 - 1992, Kathryn collected price data on sales of whiting fish sold by a fish dealer at the Fulton Fish Market in New York City. At the time, only six dealers sold whiting fish in a market that the authors characterize as “conducive to tacit collusion.” Many dealers had been there for years, trade supply with each other, and receive feedback from customers about other dealers’ prices. The authors also note that the presence of organized crime may have also discouraged entry.
The buying process of whiting is straightforward. A customer approaches a dealer and asks for a price quote. The dealer offers a price and the customer usually either accepts or passes. It is interesting that there is no additional negotiation. If a buyer finds the price too high, they move on to another dealer for a price quote. Thus, a dealer must immediately size up a customer’s willingness to pay. The price per pound of whiting during this 111 day period ranged from 33 cents per pound to $1.75 per pound.
The authors found that lower prices were systematically offered to Asians compared to White customers. The average difference between the races amounted to 6.3 cents per pound. Prices were quoted discretely and the authors feel it unlikely that White and Asian buyers knew that each group was being charged different prices.
What’s interesting is that this price difference has less to do with negotiating skills (since there was little negotiation). Instead, it is a result of the different valuations that buyers place on whiting. The authors note that Asians tended to resell the whole fish in retail shops, fry the fish for sandwiches, or make them into fish balls. Most of these establishments were located in very poor neighborhoods. Thus, there was little room to raise prices to end-users. Conversely, White buyers had more scope to pass on higher prices to customers. For a local fish dealer in Princeton, New Jersey, whiting was a small part of his purchases and his customers would often pay higher prices if he explained that wholesale prices were expensive. Thus, he spent no time shopping around for price.
While the 6.3 cent per pound price differential is of interest, the bigger lesson for B2B firms is that the resale opportunities for their products differ by each wholesale customer. Some wholesale customers have more latitude (and willingness) to pass along higher prices than others. For whiting at the Fulton Fish Market, Asians couldn’t pass along price increases while Whites could. Why shouldn’t B2B companies capitalize on these different pricing opportunities by charging different wholesale prices?
Apologies for the missed blog last week – I am in the homestretch of completing my new pricing book. Have a Happy Fourth of July! |
