Living Economics

Make Me an Offer
Brian Whaley*
A salesman on commission has an incentive to practice perfect price discrimination.

During high school, my uncle owned a clothing store in the mall. I worked for him doing everything from selling to stocking. After about 4 or 5 years he closed the store permanently. He put all of the store fixtures and equipment into storage and began to sell it. There was a large selection from clothes hangers to surveillance cameras.

After a while, he offered me a job selling the equipment on commission. He worked out 3 different price ranges for each piece of equipment. I would receive 32% if I sold it in the highest price range, 20% in the next one down, and 10% for the last bracket. If I had to go below the last bracket, he wanted me to still sell but I would receive 0% of the sale. I chose to become a price discriminator because charging every buyer his/her reservation price would bring me a higher commission.

To be more efficient, I did not put sale prices on the items, but I would let the buyer know what they were worth if he purchased them new. This gave the buyer the feeling they were getting a good deal, which they were. I would let them offer me a price first, to which I would then present a counter offer that was higher. The customer would raise their original offer a little higher, but still lower than mine. I dropped my counter offer down a little bit more, to which the person would offer a final price and say they cannot go any higher.

This is the point at which I would make the sale and charge the buyer close to his reservation price, leaving him little consumer surplus. But the closer I could get to the buyers' reservation prices, the higher my commission would be given the sliding commission scale. Being a price discriminator in this instance was more profitable than being a price searcher, because by lowering the price of one item, I would not necessarily have to lower the price of any other item.

Note:
  1. *Brian Whaley is an undergraduate at the University of Memphis.
  2. *Brian Whaley is an undergraduate at the University of Memphis.
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