Dear Friends,
As August winds down, several of my colleagues will be gearing up for conference presentations across North America and Europe.
Javier Anta will speak at two conferences sponsored by EPP in September, starting with the introductory keynote address at the EPP AI Summit in London on the evening of September 11th. The following day (September 12th), my colleagues Giorgio Farina and Marcelo Cirelli will give keynote addresses at the conference.
On September 26th in Barcelona, Javier and our colleague Scott Bradley will speak at the EPP Global Retail & E-Commerce Pricing Forum. Their keynote entitled “Overcoming Retail Complexity with AI-Powered Pricing” will build on an article they published earlier this year.
You might recall that Javier has also contributed to our Expert Interview Series. He explained that companies need to keep transparency, fairness, and customer benefits in mind when they use AI and advanced analytics for pricing. You can watch that video here.
In between Javier’s two keynotes, my colleague Steven Greene will deliver a keynote address at Ardensi’s 2024 Pricing Strategy USA Summit titled “Winning Your Pricing Game: (Gen-)AI enabled Market Intelligence in a Dynamic World” on September 18th in Chicago.
Earlier this week I posted about United States government officials’ ramping up their efforts to fight alleged price gouging and “surge pricing.” You can read that post here. The rhetoric around prices in the upcoming US elections underscores some of the points I made in a recent edition of the newsletter with the title “Do Prices Decide Elections?”
In case you missed them, here are other posts since the last newsletter:
Fair prices for scooters: Portland, Oregon wants scooter providers to offer discounts to low-income earners. You can read the full post here.
Apple keeps playing the Value Game: That explains why they continue to offer AI tools free of charge. You can read the post here.
Making e-commerce work better: Localization in terms of currencies and payment methods can make it easier for customers to buy. You can read the full post here.
Surge pricing insurance? That seems to be what Lyft is introducing. You can read the full post here.
Honest ticket prices: Concert venues in Denver launch all-in pricing. You can read the full post here.
Price psychology in streaming: Has Paramount+ found a way to get subscribers to trade up? You can read the full post here.
Is AI a selling point? Evidence shows it may detract from a value proposition. You can read the full post here.
My co-author Arnab Sinha and I spend most of our time focusing on how businesses craft their pricing strategies and set prices. But governments in all forms – local, regional, and national – also set prices that can have a huge social impact. These prices include tax rates, surcharges, and fees for a vast range of services.
Civil and criminal penalties such as fines are also prices, because they essentially represent the price for crime. Few people will argue, for example, that speeding in a motor vehicle warrants some form of punishment, often a fine. But how large should that fine be? That is worth exploring, because such decisions have many parallels to pricing decisions and depend on many factors.
The Price of Committing a Misdemeanor
Imagine that a family of four sports fans is on the way to a game in the US state of Virginia. Ahead of them on the highway is a fancy sports car, and judging from the license plate, the kids think the driver might be one of their favorite superstar players, the kind who easily earns $20 million per season.
A few minutes later, a state trooper pulls over both cars for exceeding the speed limit by 15 miles per hour. The cost for that violation would work out to $90 plus a court fee for each driver. The reason is that fines in most US jurisdictions follow the principles of the Uniform Game. In principle, it makes sense that the nature of the violation – such as the amount of harm caused or the adverse risk created – determines the extent of fine, and not the nature of the individual. Uniform fines ostensibly treat everyone equally under the law, because the consequences of the violation are identical in each case.
Now imagine that same traffic scenario playing out in Finland. The family driver would pay less, with the fine working out to around $70. But that superstar athlete is in for a rude awakening. Assuming his monthly net income is $1,000,000, his fine would work out to around $17,000 for that single traffic violation.[ME1] [FL2]
That isn’t even the ceiling. An entrepreneur driving in Finland in 2023 reportedly faced a fine of €121,100 for going 30 kilometers per hour over the speed limit.
Welcome to the world of “day fines”
Finland, Switzerland, and some[FL3] other European countries set some fines based on the violator’s net income instead of the nature of the crime. These so-called “day fines” align the level of a fine with the ability to pay. This system addresses one of the main arguments against uniform fines, which is that the system is regressive and does not treat everyone equally.
The uniform system punishes low-income earners disproportionately hard, because the fine represents a greater share of their financial resources. On the other hand, the uniform fine may not punish high earners sufficiently to encourage them to change their behavior. The fines for parking, speeding, or other traffic or vehicle violations, for example, make up a small or even negligible share of their financial resources.
When governments in developed countries implemented uniform fines decades or even a century ago, income disparities were smaller. But as the distribution of incomes widens, it allows many people to take calculated risks to break the law by parking illegally, speeding, or committing other misdemeanors. When they weigh crime and punishment, they may risk getting caught and paying a small fine if it means that they make an appointment on time, because the opportunity cost is much greater. Low-income earners can’t make that same risk calculus when a fine would be difficult or impossible for them to pay.
The positive effects of progressive systems
A progressive fine system such as day fines can bring several benefits. Jean-Pierre Dubé, a professor at the University of Chicago’s Booth School of Business, points out that a progressive system would encourage low-income people to actually pay a smaller fine. Unpaid fines under a regressive uniform fine system, in contrast, can lead to additional penalties, debt, or the suspension of a driver’s license. Dubé concludes that the jurisdiction suffers as well. He writes that “Chicago drivers have racked up more than $275 million in unpaid fines for city-sticker violations since 2012, far more than the initial revenue goal, and it’s causing many of them financial ruin.”
The adoption of a progressive fine system has parallels to the concept of progressive pricing, which I outlined in an article published in 2019. Progressive pricing enables price differentiation by pushing the logic of discrete price points to its practical limit. It offers each customer a fair, personalized price point. That’s how it overcomes the limitations of uniform pricing, illustrated in the figure below.
In the context of fines, the “unserved” segment is the population that cannot afford to pay the flat fine “P” or would endure considerable hardship. The blue area is the amount that higher earners “get away with” by paying the flat fine.
The figure below shows how a progressive model works. Prices are set proportionally to a customer’s perceived value, or in the case of fines, the amount is set proportionally to the violator’s ability to pay.
A jurisdiction would want the surplus – the “get away with it” amount – to be minimal or even negligible. The idea is to closely align fines with ability to pay while maintaining the character of meaningful punishment and effective deterrent. This may require some experimentation to get the calibration right, but that is the kind of test-and-learn approach companies use today when they set prices. Why can’t a municipal, regional, or national government apply pricing principles as well?
High fines under a progressive system may run afoul of perceptions of fairness in some countries. Some may even argue that in the United States a fine of $100,000 or more for speeding could violate the US Constitution because it is “cruel and unusual punishment.” This thorough analysis in the University of Chicago Law Review examined that question and arrived at a practical and reasonable conclusion:
“A system that imposed hefty financial sanctions on those at the very top of the income scale could face complications, but the resulting problems are manageable and can largely be avoided with caps on the size of fines. Whether or not the million-dollar parking ticket is desirable or constitutionally permissible, introducing some measure of progressivity into financial sanctions is an idea whose time has come.”
Original article can be found here.