An extension on the traditional theory of customer discrimination: customers versus customers - Featured Article

American Journal of Economics and Sociology, The,  April, 2003  by Stephanie O. Crofton

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I

Introduction

THE THEORY OF CUSTOMER DISCRIMINATION HAS BECOME A MAINSTAY of the research regarding wage discrimination. The standard version of this theory considers the case in which consumers may prefer not to be sewed by a certain type of individual. This paper argues that there can also be situations in which customers prefer not to purchase goods and services in the presence of a certain type of individual. In addition, it is argued that in cases where customers discriminate against other customers, we should observe market segmentation. Also, as is the case when customers discriminate against employees, we should observe higher prices being charged at the establishments that cater to "discriminatory" customers.

An example of the traditional theory of customer discrimination might involve male customers in a hardware store who do not wish to be served by female employees. Since the female employees are not able to serve the discriminatory male customers, the productivity of female employees is less than the productivity of male employees, who are able to serve any customer in the hardware store. According to theory, a profit maximizing company pays a worker a wage equal to the marginal revenue product of that worker (where marginal revenue product equals the marginal product of the worker multiplied by the marginal revenue generated from the sale of the worker's additional output). In other words, an employee is paid a wage equivalent to the additional income generated for the employer by the employee.

Using the hardware store example, since female workers can only serve women and nondiscriminatory men, female employees will have lower marginal revenue products. Thus, they will be paid a lower wage than male employees who have a higher marginal revenue product. Two types of stores will develop in the marketplace. "Firms that cater to discriminatory customers will hire the 'preferred' group of workers, pay higher wages, and charge higher prices than firms that employ workers from disfavored groups and that serve nondiscriminatory customers" (Ehrenberg and Smith 1997: 438-39).

Since male workers can serve both discriminatory and nondiscriminatory consumers, male employees have a higher marginal revenue product and can thus command higher wages. The higher wages that must be paid by firms catering to discriminatory customers and hiring only the "preferred" type of worker force those same firms to charge higher prices in order to provide this type of environment for the customer (for a simple mathematical explanation, see Ehrenberg and Smith 1997: 434). Firms that choose to hire workers not of the preferred group (i.e., female workers) are able to pay lower wages, since those workers have lower marginal revenue products, and are also able to charge lower prices.

Despite wide agreement that customer discrimination exists, the theory has been examined empirically on a limited basis (see Nardinelli and Simon 1990; Borjas and Bronars 1989; Anderson and LaCroix 1991). To a large extent, this is due to the difficulty in finding a case of discrimination that can be clearly attributed to customers rather than to employers, fellow employees, and so forth. I argue, however, that women's colleges represent a heretofore unexamined example of customer discrimination present in the marketplace. Unlike the traditional case, this form of discrimination does not involve customers (or employers) versus employees, but rather customers versus customers.

The Women's College Coalition argues that there are numerous benefits to be obtained by attending a women's college. To mention only a few of those benefits, studies show that their students participate more in the classroom and extracurricular activities and have more opportunities to hold leadership positions. Women educated at women's colleges score higher on standardized achievement tests, are more likely to graduate, and are more successful in future careers (see Smith, Wolf, and Morrison 1995; Ledman, Miller, and Brown 1995). In his study of college environments, Alexander Austin suggests that "single-sex colleges show a pattern of effects... that is almost uniformly positive... students become more academically involved, interact with faculty frequently, show large increases in intellectual self-esteem, and are more satisfied with practically all aspects of the college experience compared with their counterparts in coeducational institutions" (qtd. in the Women's College Coalition Brochure n.d.: 3).

If enough women believe that they may receive a better education at a women's college or may simply enjoy being able to attend school without men, there will be a market demand for all-women colleges. The fact that some women may intentionally choose not to attend a school admitting men is, I hypothesize, an example of customer discrimination. Women may choose to discriminate against men and attend an all-women institution.

The type of customer discrimination seen in women's colleges does not fit the standard example, in which consumers discriminate against sales agents and other types of workers. However, the case of women's colleges is simply another form of customer discrimination. In this situation, customers discriminate against fellow customers and wish to patronize institutions that allow only customers of the "preferred group" in. Also, this is an example of customer discrimination rather than product differentiation. Coeducational colleges and single-gender colleges today provide essentially the same product, an accredited college degree. The product is simply offered in different environments.