06 Jan

How companies get pricing wrong and other market mishaps

Posted By Politybooks

ffwherryIt was only $2. And those who enrolled in auto-pay wouldn’t be charged. Verizon’s convenience fee for making one-time bill payments got the math right but the meanings wrong. A public controversy ensued as consumers expressed righteous outrage over the new wireless phone fee, and the company backed down.

Had monthly phone or data rates inched up on all plans by less than a dollar, who would have noticed? It was not the amount but the culturally inappropriate manner in which it was levied that stirred the flames. If you ask consumers whether Verizon should charge more for specific categories of service, the answer depends on the service you’re talking about. Sometimes consumers will appear to be penny wise but pound foolish as they quibble about a dollar here or there, but these consumers are acting appropriately given their understandings of what’s right and what’s wrong for a specified category of expenditure.

The Culture of Markets builds on arguments by economic sociologists like Viviana Zelizer who show just how fraught spending categories can be. Money earned by a child who delivers newspapers or who mows the neighbors’ lawns gets its own nickname (category): paper money, lawn mowing money. The child may be encouraged to use those funds for school related expenses or to buy toys, but those earnings are unlikely to be applied to the rent or the car note. Money that comes from a lottery win gets spent differently from money that comes from an adult’s salary. And what the right price is also depends on negotiation and group understandings. In other words, what we think we should do with our money depends on where it came from, who earned it, and the purpose to which it will be put. Paying more to pay a bill just feels wrong. It stirs up a collective memory of exploitation and usury. And these collective understandings of what the charges mean compel consumers to act to restore their sense of justice.

Markets are not amoral places; they are moral communities with situation-specific norms and principles that are keenly felt when breached. As Verizon comes to understand the morality of markets, they will find that they can charge more, but first they have to get their categories right.
The Culture of Markets makes sense of market mishaps such as this one and provides other examples of how companies inadvertently stir up firestorms: why consumers “inexplicably” fail to respond to market stimuli (e.g. incentive pay, some types of tax cuts), and why “more efficient” options are sometimes foregone.

People do lots of different things in markets, and their understandings about what they are doing depend on more than mathematical calculations. As their intentions and the stories that they share with others come into focus, we can better perceive what money means, how demand rises and falls, why producers partner with specific types of suppliers and distributors, and why well calculated schemes go awry. (See my blog: cultureofmarkets.com)

Frederick F. Wherry is associate professor of sociology at the University of Michigan.