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exercise W04C98
November 29, 2018

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Aradhna Krishna

Pink Tax: Price Discrimination and Product Versioning

Exercises

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The term “pink tax” refers to the situation in which a product costs more for a woman than for a man.
Although the notion of a pink tax was widely discussed, people did not believe that it actually existed – after
all, how could the same product cost more for women than men? A study by the New York City Department
of Consumer Affairs,1 however, found overwhelming evidence for the pink tax. Across 794 products surveyed,
the study found that women’s products cost more than men’s products 42% of the time.
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Diana Kelly is the brand manager for a nail brightening product that is soon going to be launched. One of
her jobs is to figure out how to price the product. Among other things, she is considering pricing her product
differently for men versus women. She has an in-house price consultancy and also an external consultancy
to provide her with the data she needs to make her decision.
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Customer Segmentation

The two consultancy teams have produced a number of different scenarios to consider in terms of customer
segmentation. Both teams suggest that reservation pricesi for nail brightening cream vary by segment – but
the consultancy teams have proposed different segmentation schemes. The in-house consultancy team has
suggested a demographic gender-based segmentation (male versus female), while the external consultancy
team has suggested a benefit-based segmentation (health versus beauty). Interestingly, the benefits-based
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segmentation is largely driven by gender-specific needs. In many of the scenarios provided by the external
consultancy team, many women (but not all) want nail brightening cream for beauty reasons (prettier nails),
while most (but not all) men want the cream for health reasons (healthier nails).

Reservation Price and Consumer Surplus

Both teams have provided Kelly with different scenarios in terms of the size of the respective segments
they have proposed and the reservation prices associated with those segments. To keep it simple, the teams
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i The reservation price is the maximum price that a consumer is willing to pay for a product.

Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan.
©2016 Aradhna Krishna. This exercise was developed by Aradhna Krishna (Dwight F. Benton Professor of Marketing) at the University
of Michigan’s Ross School of Business. This exercise was prepared exclusively as the basis for class discussion and is not intended to
illustrate either effective or ineffective handling of a situation. The exercise should not be considered criticism or endorsement and
should not be used as a source of primary data.

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 Pink Tax: Price Discrimination and Product Versioning Exercises W04C98

have given Kelly the reservation price for a representative consumer in each segment, knowing that they can

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later examine the variance in this reservation price within the segment. The teams want Kelly to understand

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that pricing decisions can be very different across these scenarios.

As Kelly considers the different scenarios, she will also need to keep in mind that while firms maximize
profit, consumers maximize their consumer surplus, which equals the maximum they would be willing to pay
(reservation price) versus what they must pay (actual price). Their consumer surplus is therefore “reservation
price – actual price.” If they get the same consumer surplus from two options, they choose the one with the

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higher reservation price.

Kelly’s Problem

Kelly wants to understand how all the different scenarios the consultancies have proposed will affect
her product versioning and pricing decisions. So, she will do two separate analyses, using the data from each

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consultancy team. In each analysis, she wants to figure out:
• Should she offer one version of the product or more than one version?
• What should be the basis for the difference between versions?
• What price(s) should she charge?
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 Pink Tax: Price Discrimination and Product Versioning Exercises W04C98

Exercise 1: Demographic (Gender-Based) Segmentation

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Data provided by the in-house consultancy team

The in-house team has provided Kelly with the data below, to decide whether to offer a gender-neutral
version of the product or two separate (male and female) versions of the product. Exhibit 1 shows four
scenarios in terms of the market for the nail brightening cream. The four different scenarios reflect the
reservation price (the maximum price a consumer is willing to pay) for the nail brightening cream.

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In each of the four scenarios, Kelly needs to determine what price to charge if she has:
1. only one gender-neutral version of the product
2. two versions of the product: a male-specific version and a female-specific version

Assume that:

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• Cost=$0.50 and also that the fixed cost of having a male and female version is about the same as
having a gender-neutral version.
• The consumer’s reservation price for a gender-neutral version of the product is the same as her
(his) reservation price for a female (male) version of the product.
• If male and female versions of the product are available, the malesi buy the male version and the
femalesii buy the female version (and they will not buy the product if the price of the version for
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their gender is more than their reservation price).
What should Kelly do?

Exhibit 1
Quantifying when to offer a male and female version
versus only a gender-neutral version
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To be filled in by students:
Scenario Reservation price Reservation price Contribution with 1 Contribution with a male
for men for women gender-neutral product and a female version of
(number of men) (number of women) the product

Scenario 1 $3.00 (100) $5.00 (100)

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Scenario 2 $3.00 (5) $5.00 (100)

Scenario 3 $5.00 (25)$3.00 (75) $5.00 (100)

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Scenario 4 $5.00 (60)$3.00 (40) $5.00 (100)

i People who identify with the male gender.

ii People who identify with the female gender.
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 Pink Tax: Price Discrimination and Product Versioning Exercises W04C98

Exercise 2: Benefits-Based Segmentation

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Data provided by the external consultancy team

The external consultancy provided Kelly with a different segmentation basis and different scenarios.

Assume that:
• Cost=$0.50 and also that the fixed cost of having a male and female version is about the same as

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having a gender-neutral version.
• The consumer’s reservation price for a health&beauty version of the product is the higher of the
reservation prices they have for the health version and the beauty version, i.e., reservation price
(health&beauty) = Max {Reservation Price (Health), Reservation Price (Beauty)}
What is the best price for Kelly to charge if she has:
1. only one health&beauty version of the product

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2. two versions of the product: a health-specific version and a beauty-specific version

Exhibit 2
Quantifying when to offer separate health and beauty versions versus only a
combined health&beauty version
To be filled in by students:
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Scenario Reservation price Reservation price Contribution with 1 Contribution with 2
for men for women product that claims versions: 1 health and 1
(number of men) (number of women) both health and beauty beauty
benefits
Scenario 5 $5.00 (60) for $5.00 (100) for
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health, $0.00 for beauty, $0.00 (100)

beauty for health
$3.00 (40) for
beauty, $1.50 for
health
A large fraction of
men with RP=$5.00
No
Do

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 Pink Tax: Price Discrimination and Product Versioning Exercises W04C98

Exercise 3: Additional Benefits-Based Segmentation

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Further data provided by the external consultancy team

The external consultancy also wants Kelly to consider some additional scenarios. They think that one of their
assumptions may not hold true. This assumption states that:
The consumer’s reservation price for a health&beauty version of the product is the higher of the reservation
prices they have for the health version and the beauty version, i.e., reservation price (health&beauty) = max

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{reservation price (health), reservation price (beauty)}. After all, if the nail brightening cream has a very
focused positioning on beauty versus a diffused positioning on health&beauty, consumers who are looking
for a beauty benefit may pay more for the beauty-specific version. The same may also hold for consumers
wanting a health benefit and a health version being offered (versus a health&beauty version). On the other
hand, some consumers may prefer a general product to a specific product.
What is the best price for Kelly to charge if she has:

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1. only one health&beauty version of the product
2. two versions of the product: a health-specific version and a beauty-specific version

Exhibit 3
Quantifying when to offer separate health and beauty versions versus only a
combined health&beauty version
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(people pay more or pay less for specialized versions)
To be filled in by students:
Scenario Reservation price Reservation price Contribution with 1 Contribution with 2
for men for women product that claims versions: 1 health and 1
(number of men) (number of women) both health and beauty beauty
benefits
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Scenario 6 $5.00 (60) for health, $5.00 (100) for

$0.00 (60) for beauty, $0.00
beauty, $4.00 (60) (100) for health,
for health&beauty $4.00 (100) for
health&beauty
$3.00 (40) for
beauty, $1.50 (40)
for health, $4.00 (40)
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for health&beauty
A large fraction of
men with RP=$5.00

Kelly has now looked at the data and scenarios provided by both the in-house and external consultants.
Are there any other scenarios (using the same data) that she should consider?
Do

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 Pink Tax: Price Discrimination and Product Versioning Exercises W04C98

Endnotes

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1
New York City Department of Consumer Affairs. From Cradle to Cane: The Cost of Being a Female Consumer. December 2015.

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<http://www1.nyc.gov/assets/dca/downloads/ pdf/partners/Study-of-Gender-Pricing-in-NYC.pdf>

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Permissions@hbsp.harvard.edu or 617.783.7860
 Pink Tax: Price Discrimination and Product Versioning Exercises W04C98

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Permissions@hbsp.harvard.edu or 617.783.7860
 Pink Tax: Price Discrimination and Product Versioning Exercises W04C98

Notes

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Permissions@hbsp.harvard.edu or 617.783.7860