Ananish Chaudhuri: Price discrimination and the black jersey

If Kiwis want to support Piri Weepu and the other All Blacks by buying a jersey, they'll have to pay double the overseas price. Photo / Getty

Opinion

Adidas New Zealand would have us believe that the considerably higher cost of All Black jerseys being sold in New Zealand compared to the cost of those available overseas reflect local market conditions. According to the manager of adidas New Zealand the price they set in New Zealand is "relative to the local market".

What does this really mean? Can it mean that the higher New Zealand prices are the result of higher costs here, as seems to be the implication in the statement released by adidas New Zealand? This seems unlikely since in all probability these jerseys are being made in China or another less developed country. From there they are being shipped to all parts of the world.

It is possible that transportation costs for getting them to New Zealand might be higher. But it also likely they are being imported in bulk into New Zealand because it is unlikely that the demand for All Black jerseys can be that much higher in countries outside New Zealand. This means that there must be some cost savings from the higher volumes of these jerseys being imported into New Zealand.

But in any case it seems improbable that these cost differences can explain mark-ups of close to 100 per cent with each jersey costing twice as much in New Zealand than in, say, the United States.

I think it is a safe bet that adidas New Zealand is engaging in some good old fashioned price discrimination. This is where sellers charge a much higher price to those buyers who are willing to pay up, mostly because they are less flexible in terms of their purchase decisions.

This is why the person sitting in the seat next to yours on the airplane may have paid hundreds of dollars more than you did because he bought his ticket at the last minute while you bought yours two months back.

But the more appropriate comparison here might be between hardcover books and paperbacks. Who shells out the mega-bucks for the hardcover version of the latest thriller from John Grisham? The dedicated fan who wants to read the book right now rather than wait for it to show up at the local library later or in paperback form even later.

So what adidas New Zealand is implicitly assuming is that once the World Cup gets going - and especially if and when New Zealand starts to win (hopefully) - the fans will catch the fever and in the heat of the moment will willingly snap up these jerseys in spite of the much higher prices.

We all do it. We walk out of a concert by our favourite rock group still on a high and humming the tunes and then promptly snap up the memorabilia - the T-shirts and the dvds - from the store outside the venue, even though we can easily buy these much cheaper from an online store, only if we are willing to wait a few days. But we don't because we want to possess them immediately. And somehow the act of buying these - even at prices we know and recognize to be inflated - becomes part of the same religious experience as attending the concert, it sustains the high; it helps us remember later that we were there, we took part in that momentous occasion.

There are, however, two other aspects to the logic of price discrimination. One of these relates to people's willingness to accept the price. If enough people consider the price to be unfair and refuse the buy the jerseys at these high prices then the logic of price discrimination starts to fall apart.

But at the same time successful price discrimination - charging a higher price to the more eager and more committed Kiwi customer while charging less to those living abroad - requires that there is no arbitrage. This means that the strategy of price discrimination can be profitable only as long as people buy from retail outlets in New Zealand.

If enough people go online and buy there, or even worse for adidas if an enterprising Kiwi goes online and buys a lot of these jerseys at half price in US and re-sells them here in New Zealand at a small profit which still makes the jerseys cheaper than what adidas is charging, then adidas will no longer be able to engage in price discrimination.

Some news reports suggest adidas has woken up to this threat and is now taking steps to prevent this from happening. For instance an American website selling the merchandise no longer has NZ as a shipping option. It is likely though that resourceful All Black fans may find a way around this.

Nevertheless, at this point it is clear that adidas has seriously underestimated the degree of displeasure both from the fans as well as retail outlets.

I expect that sooner rather than later someone at adidas will figure out that the increased profit margins on these jerseys are not worthwhile after all given the amount of goodwill adidas is losing among the fans, retailers and probably, more importantly, among the All Blacks themselves who proudly wear these jerseys and who might have something to say the next time the jersey contract comes up for renewal.

One hopes that such good sense prevails soon so that we can move beyond this fracas to enjoying the World Cup festivities.

* Ananish Chaudhuri is Professor of Experimental Economics at the University of Auckland Business School.