Wednesday, February 04, 2009

For The Discriminating Few

Here's an article on price discrimination by gender, written by moi in my stern goddess-with-eyeglasses form. You might find it useful. Or tedious. Up to you.

Did you know that it's often perfectly legal to charge men and women different prices for the same product or service, just because of their gender? No federal law along the lines of the Equal Pay Act of 1963 (which bans paying men and women different wages for the same work) or the Titles VII and IX of the Civil Rights Acts (which ban other sex discrimination in employment and education, respectively) covers the case where men and women are not producers or students but consumers.

A recent newsworthy example of this is individual health insurance, the kind that John McCain would have loved to push onto more Americans, the kind that your employer usually does not offer you and also the kind that the National Women's Law Center (NWLC) analyzed in a recent study which found 38 U.S. states where women were quoted considerably higher prices for the same basic policy than men. The exact gender gap in the premia varied by the age of the hypothetical applicant and also by the specific state but on average the basic policy would annually cost women a third more until the age of fifty-five. After that some (but not all) states of those 38 charged men more for the same insurance package. What's especially interesting about these findings is that very few of the quoted policies included coverage for pregnancy or childbirth. That would be an extra charge for the women, over and above that one-third price difference, and in many cases the childbirth rider was so expensive as to make the term 'insurance' meaningless.

Individual health insurance markets are not the place where most of us get our health insurance. That place is our employment, and laws covering gender discrimination at work make charging women and men different prices for their health insurance benefits illegal. But the individual health insurance markets are free to practice price discrimination unless specific state laws ban it. No federal law requires that men and women should be charged the same prices for the same individual insurance policy. It sounds unfair, doesn't it?

The health insurance market is not the only insurance market which charges men and women different prices for the same package of benefits. Car insurance rates also vary by the sex of the applicant, especially when combined with age. Young men get quoted higher prices than young women for the very same benefits. It doesn't matter initially that a young man might be a careful Volvo-driving meditator and a young woman a reckless rally-driver type; their gender determines that it is he who should pay more for the policy. This sounds unfair, too.

Yet both these practices are time-honored ones in the insurance business and mostly not illegal. The reason has to do with group experiences: young and middle-aged women, as a group, use more health care than young and middle-aged men, as a group, and young men, as a group, make more car insurance claims than young women, as a group. Because insurers are unable to predict an individual's future behavioral patterns precisely, they use whatever information they are allowed to use for setting premia so as to maximize their profits or at least minimize their losses. Besides, if these gender pricing differences were disallowed then the insurers would have to charge men more for their individual health insurance and women more for their car insurance premia, right?

The problem I have described in these two markets is a curious one: It doesn't have an obvious solution which wouldn't treat someone unfairly. The current practice of price discrimination by gender means that all women will have to pay higher premia for individual health coverage, even if they themselves will never consume much care, just because they belong to the group 'women', and these higher premia don't even cover pregnancy and childbirth! Likewise, young men must pay more for car insurance, at least initially, however well and carefully they might drive. This means that we are treating people differently just because of their gender. But gender-blind premia for everybody would mean that men, as a group, would pay less for car insurance than they cost the insurers and women, as a group, would pay less than their total claims for individual health insurance.

Let's not get too calm and understanding about these explanations for gender discrimination in insurance pricing. It's quite possible for the prices to vary for reasons not related to different average claims experiences between men and women. For example, the NWLC study found that the quoted premia differences fluctuated wildly between insurance companies located in the same state, too wildly to be explained by just different claims experiences by men and women in that state.

Then there are the ethical issues: Do we really want to see women bear the whole costs of childbearing when children are something that benefits the whole society? Note that though most of the policies that NWLC looked at didn't cover childbirth, its indirect effects are one of the reasons for women's higher health care use. As one expert interviewed in the New York Times put it: "Bearing children increases other health risks later in life, such as urinary incontinence, which may require treatment with medication or surgery."

Note also that the insurers in the past have decided to dispense with indicators which are linked to claims rates, without anyone forcing them to do so. There was a time when race was used as one valid category in insurance pricing, but that time is long past, mostly because we as a society decided so.

Insurance isn't the only industry which charges people different prices based on their gender. Think about those "Ladies' Days" in baseball or about the admissions charges to night clubs and bars which often involve discounts of 25% or more or even free admissions for women. The Men's Rights Activists in California have certainly thought about them a lot, enough to take the cases to court as examples of sex discrimination, and that it is, of course, though a court in the state of New York recently declared differential prices to men and women at night clubs and bars a legal business practice.

Why would it be legal, anywhere? The argument hinges on the idea that firms have always tried to charge more to those groups of consumers which are less price sensitive, because less price sensitive consumers are both willing and able to pay more for the same product or service. This works as long as consumers cannot re-sell the product or service to each other.

A common example of routine price discrimination has to do with airline ticket prices for business travelers and vacation travelers: the former are usually charged more for the same flight because they cannot wait for a better deal the way vacation planners can. From this point of view women would get discounts at ball games and at night clubs because they are more price sensitive consumers or perhaps because they are more likely to be new consumers, currently unacquainted with the product or service, and therefore wary of paying too much. The idea is to get them through the door and then they might become faithful patrons of the establishment and willing to pay the usual (and higher) fees.

This doesn't fully explain the discounts for women in admissions to night clubs, though. Women are not new customers in the industry. The real reason for the discount policy might be the proprietors' desire to attract more (heterosexual) men to the establishment, to balance the numbers on the dance floor and so on. It might not be too far-fetched to suggest that the female customers are offered discounts so that the establishments might attract more male customers. Women as bait? You decide.

Whether these practices are traditional in business or not they certainly constitute gender discrimination in prices, because the only reason why someone is offered a lower price is the person's gender. Some U.S. states, Canadian provinces and the European Union have banned certain types of differential prices or are considering doing so.

Gender discrimination in prices can cost consumers real money, even in cases where this is hidden behind customs and cultural blinders. Take the common practice of charging between twenty to fifty percent more for women's shirts at dry cleaners and laundries or the even more common practice of charging women up to twice as much for a basic haircut. Those extra fees don't add up to much over a month or over a year but do so over a consumer's lifetime.

Why are women charged more for the same laundry or hair cutting services? The usual explanation is that the services are not the same. For instance, women's shirts are on average smaller than men's shirts, which means that they don't fit into the shirt press the cleaners have decided to buy so that hand-ironing is necessary. Women's shirts are also more likely to have darts or ruffles or flimsier material, all of which requires more expensive treatment. Yet a man taking in a very small men's shirt with tucks and ruffles would most likely be quoted the lower men's price and a woman taking in a large and straight women's shirt made out of tough material the higher women's price.

Likewise, a woman's haircut is, on average, more complicated, having to do with more hair, and thus takes more time. But a short-haired woman asking for a simple male haircut would still be charged a higher price than a man with long locks.

That the firms don't base their prices on the actual cost differences of different haircuts or laundering tasks is easily explained. They earn higher profits by simply charging women more than men wherever this is legal. That women go along with this practice is less easily explained. The traditional answer: that women are the less price sensitive market segment, might apply to the hairdressing example but not to the laundering example, given that women are still more likely than men to do their laundry at home and having more options tends to increase price sensitivity. I suspect that we are all simply used to price discrimination in these particular markets. Until more states ban it or more firms see a profit opportunity in gender-blind pricing the most we can do when faced with different prices by gender is to negotiate with the seller.

Sadly, even that might not work. Final prices in car sales are traditionally not the ones marked on stickers but a result of sometimes protracted negotiations between the prospective buyer and the dealer. Studies have shown that those final prices end up favoring men over women, even when the pretend-buyers are trained to use the same negotiating tactics and to present the same relevant evidence, though a study conducted in Chicago and including both black and white actors playing buyers revealed a further twist: Similar negotiation styles left black men with the highest final price offer and white men with the lowest, while white women did worse than white men but better than black women. This study suggests that dealers use the buyers' gender and race as predictors of the latter's willingness to accept certain prices and/or for their credit-worthiness. Note that no federal law bans this practice.

It's rather astonishing, this lack of federal laws, given that such laws ban pure gender (and race) discrimination both in employment and in education. Unless state laws decree differently, consumer prices can legally vary between men and women, even when no underlying cost differences could account for such differences. The beginning of a new federal administration might be a good time to address this issue.