Strategy

It’s Not Fair

Itsnotfair

A toy store is selling the last dream doll this Christmas, and 5 customers in line have expressed their desire to buy it. What would be the fair way of deciding who gets the doll? Options include: An auction to the highest bidder, a lottery or selling it to the first person in line?

From an economist’s perspective, the answer is an auction to the highest bidder. We are, after-all, trying to make a profit, and theory suggests that the person who wants the doll the most will be willing to pay the most for it. Supply will equal demand. That answer will get you an A in your business class, but is it the best way to run a business?

Of the persons who took a survey organized by Kahneman, Knetsch, and Thaler*, 75% considered an auction to be the “least fair” option. Thaler, in particular, is an economist that studies how people really behave as opposed to rational business behavior.   If you said “to the first person in line,” you agree with 68% of the people surveyed.

People seem to have deeply seeded rules of fairness. The rules may vary from place to place, but as a business owner it is important to know them. If a business makes a decision that is wise and efficient, but violates the generally accepted rules of fairness, they will lose customers.

Don’t get me wrong; it is important to know what maximizes profit. Not knowing that information will close business doors pretty fast. But every decision should also be balanced by a look at what is best for your customers and the little girls that would love to get that amazing doll for Christmas.

-Rachel

*Kahneman, Knetsch, and Thaler. Fairness and the Assumptions of Economics. Chicago: Journal of Business, 1986.

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