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Companies often misjudge what customers will consider unfair


November 23, 2011

Credit: Laughing Stock/Corbis
Credit: Laughing Stock/Corbis

Being the butt of jokes on late-night TV is something that companies and politicians should generally avoid, but many can’t foresee the outrage and ridicule their decisions might spark.

Richard H. Thaler, a professor of economics and behavioral science at the University of Chicago, writes for The New York Times  that Bank of America’s recent move to charge customers $5 a month to use their debit cards was a prime example of such shortsightedness. (Bank officials decided against the move after consumer backlash.)

In a 1986 paper that he co-authored with psychologist Daniel Kahneman and economist Jack Knetsch, Thaler posed a central question: What actions by companies do people consider unfair? Such judgments puzzle economists, business executives and MBA students, who have been taught that when demand increases and supply is limited, pries must rise to prevent shortages. As Thaler writes for the Times, many people might view such price increases as gouging.

Local stores tend to take a long-term view in their relationships with customers, typically supplying products when demand suddenly spikes — snow shovels in a blizzard, for example — without raising prices. Companies invite problems when they forget about the long term. If you run a business, Thaler writes, then think twice about charging for a service that has traditionally been free — or you might get some unwanted publicity from Jay Leno. — Greg Beaubien



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