US corporations are making allies through their charitable giving—and the systemic impact could be huge.Lobbying’s Secret Frontier: Corporate Philanthropy
Dealer’s Special: The Problem of a Fair Price
Should a buyer’s identity affect what she pays?
- May 05, 2021
- CBR - Economics
What is a fair price? Taken in isolation, this is a question that can seem either maddeningly obvious or obviously mad—it all depends on one’s commitment to equality.
What do I mean by this? Consider the following thought experiment.
Let’s say you purchase a car for $2,000. You lovingly care for it for two years, and at the end of those two years, you sell it for $2,500. No one is coerced into buying the car, and you make no fraudulent representations of its condition. Is $2,500 a fair price?
Make a note of your answer. Now, let’s change things slightly. Let’s say you purchase a car for $2,000. You lovingly care for it for two years, and at the end of those two years, you sell it for $2,500. No one is coerced into buying the car, and you make no fraudulent representations of its condition. This time, however, the buyer is your sister. Is $2,500 a fair price?
When I present these possibilities to my students, I ask them to raise their hands if they have no objections to selling the car for $2,500.
In my fall class, 37 students raised their hands in the first instance; eight did not. In the second instance, the numbers flipped. When the bargain was struck with one’s sister, eight students had no objections to the $2,500 price tag, while 37 resisted.
I then tell them this is not merely a philosophical dilemma but the makings of family drama.
When I was 16, I bought my first car, a 1986 Saab 900S. For eight years, the silver-gray sedan had been owned and meticulously cared for by a family friend. When he decided to part with it, he offered to sell it to me for a steal, just $2,000. To this day, the kindness of the gesture still leaves me a little misty-eyed. The car had a moon roof, automatic windows, and plush, plum-colored seats. I’m a little biased, of course, but at the rural, Midwestern high school I attended, it was the coolest car in the parking lot, a Scandinavian swan in a sea of boxy American afterthoughts. For two years, I spent every penny I earned maintaining it—and working for $4.25 an hour, I didn’t have many pennies to go around. But my adolescent penury made for something of a sorry choice when I finally left home for college. The Saab was the most valuable thing I owned—heck, it was the only thing of value I owned—and I could afford neither to take it with me nor to leave it waiting for me at home. I had to sell it. My baby. My beloved Saab.
I did, however, have an interested buyer immediately available to me, my middle sister, Alexis, two years my junior. She needed a car, and a splendid one in spotless condition happened to be sitting in the driveway.
Homo economicus is not merely blind to color or politics but to any trait—cultural, lineal, or biological—that might distinguish us. Whether it is Stalin, Cousin Glen, or the Lord God Almighty, everyone is treated equally.
But what should I sell it to her for? I decided to ask the person who seemed like an authority on such matters, the mechanic recommended to me by the previous owner. Having collected nearly all of my pennies for two full years, he knew the car’s condition better than anyone else: What would a fair price be? The mechanic said $2,500. That would be a fair price, perhaps even a little generous.
I had only one thought: sold!
Now, of course, $2,500 is $500 more than I paid for the car, a detail that I was morally unperturbed by but one that made for something of a sensitive matter in the Rollert household. For my Eagle Scout father, the very idea that I would contemplate selling my car at a profit to my little sister was irrefutable evidence of my moral corruption as well as his failures as a parent. My mother was more ambivalent. She was hardly thrilled by the bargain, but in her view, the car was mine, and I had worked hard to maintain it, so especially since the money would be going toward schoolbooks, she was willing to hold her nose while a deal was struck right under it.
When I invite students to the proverbial dinner table for this debate, most often their initial verdicts begin to wobble. If, before I share my story, the overwhelming majority of students treat it as axiomatic that Thou Shalt Not Profit off Thy Sister, when they consider the fact that $500 was hardly a trifling amount to me at the time, their sympathies begin to tip in my favor. Yes, I could have given my sister a $500 break and sold her the car for $2,000, but I didn’t have to sell it to her, and with my $4.25/hr. wages, we’re talking about a gift that was the equivalent of more than 100 hours of labor. A brother should be kind to his sister, but couldn’t he just send her flowers?
For other students, the fact that the car had the quality of a gift built into the original purchase price meant that I shouldn’t profit from the sale at all. It’s odious to capitalize on a kindness, they say. The family friend hadn’t done me a favor simply for me to pawn it. Rather than monetize the gift, I should “pay it forward.”
These aren’t the only observations that trouble the moral certainty of students. Some note that, even if $2,500 was a fair price, since my sister saved me the hassle of advertising the car, she deserved some consideration. Others contend that, however valuable the $500 cash was to me at the time, it had to be weighed against the long-term opportunity for reprisal. I might have a few more bucks in my pocket at the beginning of college, but for decades to come, Thanksgiving would be hell.
It should be noted that such moral indecision and prudential hairsplitting tend to baffle one outlying group in my classes, the equalitarians. For them, the answer to the fair price question is simple and straightforward: whatever the market will bear.
Now, when they offer this response, these students are typically providing a mechanical answer rather than a moral one. They know from their microeconomics classes that the price for a good in a free market is determined by whatever a buyer is willing to pay for it. But to say as much is merely to explain an economic phenomenon; it doesn’t articulate a moral commitment.
Which is not to say that it can’t be one. Indeed, whether they are aware of it or not, when my students make such a declaration, they are actually committing themselves to the principle of equality. When business affairs are pursued with the untroubled logic of a utility maximizer, they involve neither friend nor foe but merely agents who lack any distinctive elements of individual identity and the moral claims they make.
For Milton Friedman, this essential fact about capitalism was a cause for celebration, as it made the system an engine of antidiscrimination. “No one who buys bread knows whether the wheat from which it is made was grown by a Communist or a Republican, by a constitutionalist or a Fascist, or, for that matter, by a Negro or a white,” he wrote in Capitalism and Freedom, his 1962 book on political economy. He went on:
This illustrates how an impersonal market separates economic activities from political views and protects men from being discriminated against in their economic activities for reasons that are irrelevant to their productivity—whether these reasons are associated with their views or their color.
Or their consanguinity. The fact of a family member should not matter in the marketplace. Homo economicus is not merely blind to color or politics but to any trait—cultural, lineal, or biological—that might distinguish us. Whether it is Stalin, Cousin Glen, or the Lord God Almighty, everyone is treated equally.
Now, of course, principled commitments to certain types of equality can obscure and even undermine other conceptions. Set aside the uncomfortable fact that until every element of commercial creation is superintended by enlightened automatons, discrimination of all sorts will inevitably infect capitalism, in ways both structural and familiar. The equality Friedman highlights is equal treatment of buyers in the marketplace, the moral scope of which recalls Anatole France’s famous quip about equal treatment before the law: “In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets, and steal loaves of bread.” Friedman’s commitment to equality celebrates that Oprah and I can both purchase a 16th-century Swiss château while being conspicuously silent about the fact that until academics enjoy wages commensurate with celebrated talk-show hosts, only one of us will ever have cause to take up yodeling.
For most people, the trade-off between maximum aggregate utility and inequitable purchasing power makes for a serious moral conundrum, but not for members of the equality cohort. To their mind, offering my sister a break when she is perfectly willing to pay full price is an offense to the enlightened requirements of Pareto efficiency. Because of my misguided beneficence, $500 in value tragically dissolves from the communal ledger. She doesn’t win—we all lose.
Now, it is important to note that the equalitarians in class are actually two sects, entirely at odds with each other intellectually. Both groups are in complete agreement that my sister deserves no special consideration when it comes to the sale price of my Saab. But while that belief leads the Pareto party to conclude that I should unapologetically charge her $2,500, the other holds that I should charge her $2,000 because I should charge any person only that amount.
Moral reasoning is an exhausting and at times enraging endeavor, and it can lead one to long for the certainty the equalitarian camps propose with respect to fairness in the marketplace.
I am inclined to call this second group All God’s Children, for they marry a suspicion of profit taking on a gift-inscribed good with the belief that people shouldn’t be given an absolute right to exercise disparities in purchasing power. For them, a fair price is a single price offered to everyone, one that is determined apart from the relative ability of people to pay.
It is worth noting that this group challenges the moral instinct of the vast majority of my students—that it is wrong to profit off a sibling—and counters that, in fact, it would be wrong to extend my sister a benefit that I wouldn’t extend to anyone else. Indeed, they ask, why is it so magnanimous of me to give my sister a $500 break but not some nice old lady who replies to a want ad? She could certainly use the $500, couldn’t she? And, in respect to moral commendation, isn’t it more laudable that I offer a benefit to some anonymous person from whom I stand to gain nothing than to my sister, whose consideration I stand to profit by in myriad ways for the rest of our lives?
The approach of this group—smaller in my classes than the other sect of equalitarians but buoyed by the same sense of righteous certainty—recalls a precapitalist vision of what constitutes a fair price, a commercial sensibility inspired by medieval Christian theology. For those in the thrall of this vision, the ability to pay is never regarded as the obvious answer to what constitutes a fair price. On the contrary, such a suggestion smacks of iniquity, as it seems to excuse price gouging and other predatory practices that strengthen the hand of the rich at the expense of the poor and vulnerable.
Whatever one makes of such an approach to the fair-price problem, the difficulty for this second group is something of a photographic negative to the Pareto party, who start with a mechanical certainty about how prices are to be determined, which they then patinate with moral principle. All God’s Children, meanwhile, begin with the conviction that Every Buyer Must Be Treated Fairly! and then stumble when it comes to determining a price consistent with this principle.
Again, consider my Saab. Even for one moved by such a benevolent mandate, why is $2,000 necessarily a fair price? Clearly, for All God’s Children, there is a firm conviction that I could offer everyone the car at too high a price. But could there be good reason for me to go lower than the price I bought the car for? How about the fact that automobiles are typically depreciating assets? Fairly speaking, after two years of use, shouldn’t the value I hope to collect from a buyer for the car be less than what I paid for it? Or what if we change the circumstances of the story and say that, by the time I come to sell the Saab, I’ve won the Powerball. I’m rich. Is $2,000 still a fair price when I could clearly take less and have my life be unaffected?
It bears repeating that both of these camps are outliers in my business ethics classes. Uncertainty, or at least open-mindedness, characterize most of my students’ responses any time I’ve conducted this thought experiment. The requirements of fairness are far less fixed for them, just as they are for their teacher, who wonders whether his own ambivalence about the hard bargain he struck years ago has more to do with moral enlightenment or a newfound measure of financial stability.
Moral reasoning—and what is a debate over fairness, if not that—invites not only a scrupulous attention to various details (intentions and possible outcomes as well as biographical minutiae) but also a debate over how much weight these peculiarities should be granted. It is an exhausting and at times enraging endeavor, and it can lead one to long for the certainty the equalitarian camps propose with respect to fairness in the marketplace. The central question is whether the certainty they offer is indeed a penetrating insight into moral affairs or the self-assuredness of an ideologue, who swings his mighty hammer, always expecting to find nails.
John Paul Rollert is adjunct associate professor of behavioral science at Chicago Booth.
More from Chicago Booth Review
Elections, as well as state-specific and national events, also cause levels to rise.Local COVID Lockdowns Fed Economic Policy Uncertainty
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.