The Price Is Racist: When Minorities (and Women) Are Asked to Pay More

By Derek Thompson

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The first rule of prices is that nobody knows anything. That makes us exquisitely sensitive to little tricks and biases. Research suggests that getting something extra "for free" tends feels better than getting the same thing for less. Expensive items are placed strategically near the front of a store to make other high prices seem like a bargain.

Merchants use prices to manipulate us. That's frustrating, but inevitable. More worrisome is research that finds merchants charging different prices to different people based entirely on their race and gender.

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A study by economists Meghan R. Busse, Ayelet Israeli, and Florian Zettelmeyer looked at car repair shops and found that women tend to be quoted consistently higher prices than men when the callers didn't mention a price. The most reasonable explanation, as Nanette Fondas explained on, was that repair shops believe women are less informed about prices than men. So they're gullible.

But get this. When women and men suggested a price -- any price, fair or too high -- both genders got the same offer. Just saying a number closed the price gap. Once the mechanic had data telling him exactly how well-informed his potential clients were, gender was no longer "a useful basis." In fact, repair shops were more likely to offer a price concession if asked by a woman.

Remember the first rule of prices? Nobody knows anything. Biases and anchors rule our brains. When mechanics had no information but gender, they were anchored by gender bias. But once they heard a price, they were anchored by the price.

But where does the demographic bias even come from? Another car study by economists Ian Ayres and Peter Siegelman might have some answers. This survey of new-car dealerships revealed that merchants quoted lower prices to white males than to black (or female) test buyers. "In negotiations for more than 300 new cars, Chicago car dealers offered black and female testers significantly higher prices than the white males" even with identical bargaining strategies, they found.

This is weird. Black families have lower average household income than white families. Why would dealers ask them to pay higher prices? Okay, maybe they're just bigots. But maybe dealers aren't making a judgment about their customers' ability to pay; they're making a judgment about their customers' knowledge(For a flip-side study, see this fascinating paper that found Lima, Peru, cab drivers consistently offer men higher rates -- and also accept a higher share of female passengers -- because they suspect men can pay more.)

It's possible that these dealers expected white men to be smarter about cars. So they offered a better price. It's possible dealers thought blacks could be duped. So they offered a higher price. In fact, even in the haggling process, white men managed to eke out a better deal on the car. In the economists' words: "Dealers were somewhat more likely to volunteer information about the cost of the car to white males than to the other testers, possibly because they believed that white males already had such information."

Ayres and Siegelman's conclusion is nothing short of depressing. It suggests that, armed with identical information and bargaining tactics, women and minorities might face a permanent disadvantage due to bias in markets like the one for cars. But the first study is more hopeful. It suggests that the way to fight sexism in these markets is to lead a negotiation with the fact that you've done your homework, you know the market, and you're not going to be duped. 

The best weapon against sexist and racist pricing tactics is to arrive at the negotiating table with a price of your own.

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