There is nothing so mysterious as the commonplace, said Sherlock Holmes. I was surprised by one such ‘commonplace yet mysterious’ incident reported in this article. The author, drawing on her personal experience, has reported that hair salons charge more (well, almost double) for the hair cut from women compared to men. Why would a barber, more interested in earning profit than anything else, want to charge more than the cost of service, even at the cost of being competed out?
There are two plausible explanations.
Basic economics tells us that when firms exercise market power, actual price need not be based on the cost of service. In fact, it is a standard undergraduate exercise that profit markup will depend on the willingness to pay (aka demand elasticity). If women, for some reason, are more willing to pay for their personal care products, it makes economic sense to charge differentially. This practice, known as ‘price discrimination’, is ubiquitous; it is the reason why book vendors charge differently for the domestic and international editions of their books (which have almost similar content).
The second explanation could be related to switching cost. Switching costs refer to the costs that must be incurred by the consumer for changing their current service provider.
Assume that, on average, men have greater mobility. They use modes of transportation which are more flexible and personalized (bikes, cars). When presented with a bad deal, they can easily say no and walk away. Now assume women, on average, use less flexible modes of transportation (say taxis or autos). Once they are in the salon, it will be more costly, both in terms of money and convenience, to say no and walk away. Knowing this, a barber would offer less favorable price deal.
In fact, this ‘theory’ can be empirically tested. If a number of salons are located nearby, the switching cost will be low and prices will be driven down to their cost of service by competitive pressure.
Sherlock Holmes has also said that it is a capital mistake to theorize before one has data. It is possible that none of the explanations make sense and something else is going on. But certainly it is a mystery that needs to be examined more closely.