Price discrimination of health food

A basic tenet of economics is that some customers are willing to pay more than others for a given product. So it’s in any company’s best interest to charge more to customers who are willing to pay more. This practice, called “price discrimination,” is illegal in its most basic form. But it is commonly practiced in many more subtle ways. One example is coupons: customers willing to find and cut out coupons tend to be willing to pay less than customers that don’t want to spend time finding the coupons.

Another prevalent example of price discrimination is first-class vs. coach-class seating on trains and planes. People willing to pay a lot of money for a plane ticket will buy a first-class seat if the experience is significantly better than in coach. I remember reading in Econ 101 that many train companies purposefully degraded the experience in coach class so that anyone who could afford first class would pay the premium. Fortunately, this trick doesn’t work well in a highly competitive marketplace because other providers can win over the low-paying customers by providing them a better coach class experience.

I’ve started to think that the same principle applies to health food. People who want organic, pesticide-free, low-calorie, whole-grain food tend to be people lucky enough to have the luxury to think about such things. In other words, they tend to be richer and have more money to spend on food. Conversely, people who have just barely enough money to get by are more interested in getting the most calories per dollar so they can eat a satisfying meal without breaking the bank. In other words, restaurants and grocery stores know they can get away with selling health foods at a premium, because they know the people most interested in those products are willing to pay more.

I think this explains why healthy food often costs so much more than junk food even when it doesn’t actually cost more to produce. Williams College, which is big enough to purchase directly from food producers, saved money by using more local, organic dining hall food.

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