Peter Shawn Taylor discusses price discrimination and seniors. He argues for the abolition of seniors’ discounts. There is probably a discussion worth having over where to target government benefits. Do rich seniors get benefits that might be better targeted at younger people? I think this can be the case (although senior poverty remains a major problem). As such, I would in no way want to stifle any discussion.
A Flawed Assumption
That said, there is one assumption underpinning his argument that doesn’t hold. (I don’t mean to pick on Taylor at least he writes pieces worth thinking about). It is important. Contrary to his assumption we cannot simply say that the existence of seniors’ discounts in the public sector disadvantages non-seniors. Price discrimination in favor of seniors does not necessarily hurt other people. Indeed, it may help them.
Taylor makes a strong assertion about the public sector.
…discounts offered to one segment of the population must inevitably be recouped from the pockets of another: Whenever a senior gets a cheap bus ticket or a swim pass, someone from a younger and poorer generation ends up footing the bill.
Taylor, 2015
This is simply not true. Taylor shows a lack of understanding of pricing.
Not A Fixed Pie
There are public sector examples where there is a fixed pie to be divided up. This is where my gain is your loss. Unfortunately, Taylor’s examples do not capture such scenarios.
Bus tickets and swim passes are actually close to the scenarios that we often see in business. For a swimming pool, it is perfectly plausible that senior discounts benefit the younger, poorer generation that Taylor is worried about. There are, after all, large fixed costs to having a swimming pool. If the pool will be relatively empty you may as well entice people in to fill it. The additional costs of letting someone swim are modest. Any customer willing to pay more than this modest cost helps contribute to covering the fixed costs. This lowers the amount that other users need to cover. It may even keep the pool afloat. (I think that is a great line too).
When are discounts good for a firm? When the discounts encourage people who wouldn’t pay full price to pay a price that is higher than the extra cost to serve them. This is also true for many public services that governments run. Note it works even if the seniors ‘should’ be willing to pay full price. The key thing is what they are willing to pay. Not what is fair, right, or should be the case.
Additional Benefits
In addition, to saving the pool there may be other public welfare benefits to the discounts. Seniors may be healthier from exercising at the pool. This lowers healthcare costs to the benefit of taxpayers. (Younger people don’t have to pay as much for the seniors’ healthcare).
Cheaper bus tickets may help socially integrate seniors who in turn give back to the community. Maybe they volunteer or something similar. There are lots of ways this can work to the benefit of the younger people.
Price Discrimination And Seniors
Discounts for one group can benefit everyone. Look for the following conditions:
- A) there is spare capacity,
- B) there is a segment of the population that can be separately identified, e.g., seniors,
- C) This segment is willing to pay more than they cost to serve but would refuse to use the service at full price.
Of course, we can’t guarantee this is true for Taylor’s examples. Yet, we absolutely cannot say that discounts for one group “inevitably” have to be paid for by others.
For more on pricing see here, here, and here. For more on fixed pie thinking see here.
Read: Peter Shawn Taylor (2015) Scrap the Seniors’ Discount, Canadian Business, May, page 32.