Pancake City

NPR to Remain in the District - washingtonpost.com

Albert, the deputy mayor, said he understands the business owners’ concerns about escalating property taxes and encouraged them to appeal the assessments.

This quote was tucked at the end of an article on how D.C. got NPR to stay in the city after offering it huge tax breaks. Some small business owners have complained this is unfair. The quote from the deputy mayor encouraging small businesses to appeal their assessments made me wonder if the appeals process is a vehicle for variable pricing.

The general idea behind variable pricing is that the ideal situation for a business is to have each customer pay the maximum amount that he or she is willing to pay.

If a cup of coffee is $3.50 and you are secretly willing to pay $3.95 for it, then Starbucks is losing .45 in profit to you each time you buy a cup of coffee. If a cup is $3.50 and you are only willing to pay $3.00, then Starbucks is losing money by not making a sale to you (assuming the coffee costs less than $3.00 to make).

Starbucks can’t start a “pay the most you can” system though–no one would follow it. But they will lose lots of money under a flat price system, as the above example shows. So they use pricing techniques to get around it as best as possible, like selling a Tall for $3.00, a Grande for $3.50, and a Venti for 3.95. The actual extra materials cost may only be 5 cents for a larger size, but this allows them to serve both price conscious consumers and people with money to spare.

Another example would be, I don’t know, selling the IPhone  for $200 more to early adopters willing to pay a higher amount, then lowering the price for more price-sensitive people. Not that Steve Jobs would do something like that.

I wonder if the quote on the property tax appeal process reveals a similar system. Let’s say D.C. wants the most tax money business owners can afford to pay, but not so much that it hurts their business and they move away.

D.C. can’t tax people in the same neighborhood different rates based on what they are willing to pay though. So they tax businesses at a slightly higher rate than what they need, but make the appeals process lax enough that most people who make an appeal get a tax reduction. Businesses not being severely hurt by the property tax won’t go through the hassle of making an appeal. Businesses that are being hurt will go through the trouble.

The result: variable pricing in an area that doesn’t lend itself easily to variable pricing. I’m not an economist and may be completely wrong, but I thought it would be an interesting idea to throw out.