Price discrimination and taste-based discrimination, in the same market

Price discrimination occurs when a seller sells the same good or service to different customers for different prices, and where the difference in price doesn't arise from a difference in costs. There are lots of examples of price discrimination in the real world (see some of my posts here, and here, and here, for example). Many people misunderstand price discrimination, conflating it with the types of behaviour that the word 'discrimination' is often used to describe, like racial discrimination or gender discrimination. However, more often than not price discrimination doesn't mean that the firm is pricing differently for different genders or races (although it does happen).

To make things even more confusing, discrimination in pricing on the basis of personal characteristics does sometimes happen, and it can happen in markets that also have price discrimination (as described above) as well. Take this 2018 article by Huailu Li (Fudan University), Kevin Lang (Boston University), and Kaiwen Leong (Nanyang Technological University), published in The Economic Journal (ungated earlier version here). They investigated discrimination in the commercial sex market in the Geylang district of Singapore, using a survey of 176 sex workers and a dataset based on 814 transactions between those sex workers and their clients (taken from the last four to seven transactions for each sex worker that was surveyed). Specifically, Li et al. expected to find that:

...based on beliefs about their willingness to pay, sex workers would ask for higher prices from white clients than from Chinese clients who, in turn, would be asked for more than Bangladeshi clients... We also anticipated that they would charge high prices to Indian clients, the primary client group with darker skin tones (taste discrimination).

Notice that the first expectation there is price discrimination, in a similar way to what we often see in other markets - consumers with a higher willingness-to-pay, or with less elastic demand (less sensitivity to price), are charged a higher price than consumers with a lower willingness-to-pay or more elastic demand. Li et al. refer to this as 'statistical discrimination', since it is based on statistical differences between groups (in their willingness-to-pay for sex services). The second expectation (referred to as 'taste-based discrimination') is purely based on the preferences of the seller (it is what most people would recognise as discrimination). In relation to this expectation, Li et al. first report that:

The sex workers were asked to rate different ethnicities on a scale of 1 (dislike) to 5 (like very much) with 3 being ‘like.’ They consistently give high ratings to Chinese (4.2) and white (3.9) clients... In contrast, the Bangladeshi and Indian clients earn average ratings of 3.1 and 2.1...

Does that difference in sex worker preferences transfer into pricing differences? That is, do sex workers charge higher prices to clients from ethnic groups that they like less, and lower prices to clients from ethnic groups that they like more? Li et al. find:

...robust evidence that sex workers are less likely to approach Indians and that they are less likely to reach an agreement. We do not confirm the expectation of a higher price relative to Chinese clients; the initial prices demanded of the two ethnicities are similar, perhaps because sex workers also believe that Indian clients have a relatively low willingness to pay, a belief that would be consistent with the low offers made by Indians when they make the first offer. Consistent with our expectations, Indians pay a premium relative to Bangladeshis.

On the other hand, there is also statistical discrimination as well, because:

Relative to the base group (Chinese), the same sex worker suggests an initial price to whites with an 11% (10 log points) premium and gives Bangladeshis a 13% discount on the initial price offer, thus asking whites for almost 30% more than she asks from Bangladeshis.

So, there is both statistical discrimination (price discrimination based on perceived differences in willingness-to-pay), and taste-based discrimination, in this market. How confusing!