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Review of Economic & Statistics August 2010

CUSTOMER DISCRIMINATION

BYLINE: Jonathan S. Leonard; David I. Levine; Laura Giuliano * SECTION: Pg. 670 LENGTH: 7572 words ABSTRACT We test for customer discrimination with data from more than 800 retail stores employing over 70,000 individuals matched to census data on the demographics of each store's community. While our tests detect some increase in sales when the workforce more closely resembles potential customers, the effects we find are modest in magnitude. Customer discrimination is neither strong nor pervasive. We find little payoff to matching employee demographics to those of potential customers except when the customers do not speak English. I. Introduction DECADES after employment discrimination was outlawed by the Civil Rights Act of 1964, the CEO of Shoney's Inc. personally investigated one of its restaurants because it suffered from lagging sales. Noticing many black employees in visible positions and many white customers, he directed the restaurant manager to employ more whites up front so as to increase sales (Watkins, 1997). How well founded is this CEO's perception of customer discrimination, and how important is customer discrimination in explaining differences in the product and labor markets? * Leonard and Levine: University of California, Berkeley; Giuliano: University of Miami. We thank the employer for providing the data, BOLD, Thomas Kochan, and the University of California, Berkeley, Institute of Industrial Relations for financial support. Comments from Florian Zettelmeyer and seminar participants at University of California, Berkeley; UCLA; and the University of Massachusetts were helpful. Economic theory suggests that in perfectly competitive markets, discrimination by managers to satisfy their personal preferences reduces profits (Becker, 1957). In contrast, discrimination to satisfy customers' preference can increase profits. Customer discrimination is...