Is It OK To Price Things Based On How Badly You Need Them & How Much Money You Have?

Is Need + Wealth Pricing Extortion Or Just Good Business?


Board Of Directors About To Vote To Raise The Price Of Insulin — From Lexica

— David Grace (Amazon PageDavid Grace Website)

Certain Points Of View Are Hard-Wired Into People’s Brains

The Tree-Falling-In-The-Forest Question

Different people have inherently different ways of looking at the same thing.

There’s the old “tree falling in the forest” question that will be answered one way by some people and another way by other people. Their respective positions are not necessarily logical but rather are often based on how their brains are wired.

Is Extreme Wealth Unfair?

Communists think extremes of wealth are inherently unfair. Anarchists think just the opposite.

What Is Extortion & Is It Unfair?

Another fair-unfair schism forms around the idea of extortion/blackmail being wrong or OK. Most people think that extortion is wrong, but economic anarchists, libertarians, think it is just fine.

Before some libertarian jumps up and says, “Oh no I don’t” let’s look at some scenarios.

Offering To Sell Back Nude Picture Of My Girlfriend

Let’s say that my girlfriend lets me take nude pictures of her. We break up. I own the copyright on those pictures. I tell her, “I will give you the first opportunity to buy exclusive ownership of the pictures for $10,000. If you don’t want to buy them, that’s fine. In that case I will sell them to someone else.”

Yes, that is blackmail, but at its heart it is really just my selling something I own for an all-the-market-will-bear price.

Offering To Remain Silent About Embarrassing Information

Suppose I have extremely embarrassing information about you. Maybe you lied on your resume or you were convicted of a crime and changed your name. Now you have a job on Wall Street or at a bank or with a prestigious institution that would certainly fire you if they learned these facts.

I legally acquired this information. I can do what I want with this data. For $10,000 I will sign a nondisclosure agreement (NDA) with regard to it.

Of course this is blackmail, but a libertarian would say that I am just selling a service, confidentiality, for a market price.


Agreeing Not To Use My IP To Contest Your Patent

OK, suppose you invented some valuable chemical process and applied for a patent. I discovered that some other person had previously invented a similar process, and I bought all his rights to it. I then offer not to contest your patent application if you will pay me $10,000.

Aren’t I just agreeing not to disclose information that I legally possess in exchange for a fee? Most people would not call that blackmail.

But if you’re still hung up, you could change the description of the transaction and say that I would exclusively assign to you all the intellectual property (IP) rights that I acquired in the process for $10,000. That’s just a sale of IP to you. Clearly that’s not blackmail, but everything else about it is the same.

The thing is, the form of the transaction doesn’t really matter. What matters is that I have something, information, that you want to acquire exclusive rights to, and I am willing to sell exclusive control of that information to you for a price.

The digital nude photos I have of my girlfriend are just another form of data/information whose exclusive control I am offering to sell to her.

But, you say, what if I have something that you need in order to save a life? I used this example in a previous column:

Selling Something Needed To Save Someone’s Life

Your son was working under his car and the jack broke. You rush over to my house and ask to borrow my jack so that you can free him and save his life. I offer to rent my jack to you for two hours for $500.

I’m offering to sell/lease something I own that you desperately need for a very high price. Is that extortion?

Extortion Relies On The Need + Wealth Price Model

Let’s consider the pricing model for a transaction some would label as extortion.

The price I’m asking is not based on what it cost me to acquire the jack or the information. It’s not a cost + overhead + reasonable profit price.

The price it not based on the general market value, the auction value, of what I’m selling.

The price is solely based on the relationship between

  • (1) how badly you want what I’m selling (Need), and
  • (2) how much money you have (Wealth).

That’s the same business model that is used to calculate the price for lots of things.

The Need + Wealth Price Model Is Used In Many Types Of Legal Transactions

Suppose there is only one set of four cups created by an ancient craftsman left in the entire world and you already own three of them. I have the fourth one.

The price I will charge you will be determined in the same way — how badly you want to complete your set with my fourth cup (Need) and how much money you have (Wealth).

I’m charging you a price based not on my purchase price of the fourth cup or a cost + overheard + profit price but rather one determined by (1) your need for the item (Need) and (2) how much money you have (Wealth) — an all-the-market-will-bear price.

The Philosophical Division Between People Who Think The Need + Wealth Price Model Is Unfair & Those Who Don’t

The world is divided between those who think that people should be allowed to charge a Need + Wealth price and those who think they shouldn’t; those who think that prices should only be based on Cost + Overhead + Profit and those who think that prices can also validly be based on Need + Wealth.

The entire principle of eminent domain is based on the idea that under certain circumstances it is fair and right for the government to force people to sell their property at a competitive market price and that it is unfair for the seller to be paid based on a Need + Wealth price.

Pharmaceutical companies are firmly in the Need + Wealth price camp. Costco is firmly in the Cost + Overhead + Profit price camp.

The Epipen, gasoline, insulin and many generic drugs are priced based on the Need + Wealth pricing model while lots of other common consumer items, toothpaste, mouthwash, cake mixes, pasta sauce, etc. are sold at a Cost + Overhead + Profit price.

What Determines Which Pricing Model Will Be Used?

Supply. It’s all about supply.

The larger the supply that is available from competitive sellers, the more likely the price of the product will be based on the Cost + Overhead + Profit price model.

The smaller the supply available from competitive sellers the more likely the price will be based on the Need + Wealth price model.

Going back to my “nude pictures” example, my “damaging information” example, my “rent my jack” example, the seller owns the entire supply of the item/service being sold and thus the seller is able to charge a Need + Wealth price.

On the other hand if I own a company that makes boxed cake mixes or ballpoint pens there are many other sellers who can satisfy the needs of people who want to buy a cake mix or a pen and thus I’m stuck with the much lower Cost + Overhead + Profit price model.

Large Supply — Cost + Overhead + Profit Pricing Model

If you’re selling something that is easily available on the open market from many other sellers, then consumers will get what they believe is a “fair” price, namely, the Cost + Overhead + Profit price.

Small Supply — Need + Wealth Pricing Model

If you’re selling something whose limited supply is only available from a few or no other sellers, then consumers will be charged what they believe is an unfair, much higher, Need + Wealth price.

Under some circumstances we call the Need + Wealth price extortion or blackmail. For example, if it’s bottled water or gasoline being sold in the aftermath of a hurricane we call it profiteering. In such cases charging the Need + Wealth price is illegal.

But when Mylan increased the price for the Epipen from originally $100 to $600 or insulin suppliers doubled or tripled the price for their need-to-live drug from a Cost + Overhead + Profit price to a Need + Wealth price, it was no less unfair to those who believe that Need + Wealth pricing is unfair, but it wasn’t illegal.

Ignore The Entire Idea Of Fair Or Unfair

So, like the divide between the “makes a sound” and “doesn’t make a sound” of the two tree-falling-in-the-forest camps, there’s the dichotomy between the “Need + Wealth pricing is fair” and “Need + Wealth pricing is unfair” camps.

The answer is that we need to skip the whole notion of “fair” and “unfair” because they are philosophical, subjective, value judgments. Subjective ideas of fair and unfair are irrelevant and unworkable.

I can’t rationally convince you that something you think is unfair or morally wrong isn’t, any more than I can rationally convince you that peaches taste better than pineapples or that women with long legs are more attractive than women with short legs.

Stick With Facts & Logic

But I can logically argue that

  • It’s better for everyone to have a more efficient economy rather than a less efficient one;
  • It’s better for a country to have a narrower wealth gap between the top 20% and the bottom 20% than to have a larger wealth gap;
  • Because every person and every company is a consumer of something, that it’s better for everyone to be able to purchase products based on the lower Cost + Overhead + Profit price model and worse for everyone for the price of goods to be based on the much higher Need + Wealth price model.

Ignore What Communists & Libertarians Think Is Fair Or Unfair

Once we leave the entire “fair” and “unfair” notions of communists and libertarians behind, then it only becomes a question of how we can efficiently switch sellers from charging a Need + Wealth price to charging a Cost + Overhead + Profit price.

If profits that are made from a Need + Wealth price in excess of the profits that would have been made from a Cost + Overhead + Profit price are taxed at 100% then sellers will have no incentive to charge a Need + Wealth price.

See the details on how that would work here:

Such a tax would allow us to skip the entire philosophical debate about fair or unfair and instead focus on promoting a much more efficient economic system, lower prices for all consumers and establishing an automatic mechanism that counters the rich-get-richer/poor-get-poorer feedback effect.

See the details about how institutions are destroyed by the feedback effect here:

— David Grace (Amazon PageDavid Grace Website)

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Graduate of Stanford University & U.C. Berkeley Law School. Author of 16 novels and over 400 Medium columns on Economics, Politics, Law, Humor & Satire.