The Alchian-Allen theorem, and how we learn preferences
Apart from Alchian and Allen, Tyler Cowen is the only economist mentioned in the Wikipedia entry for the Alchian-Allen theorem . Is this because he is the pre-eminent commentator on that theorem in the contemporary economics world? Or just because he has a popular blog? This post won't answer that question, but it is prompted by Tyler's thoughts on the theorem in his book , and in an interesting Econtalk podcast with Russ Roberts . The theorem states that if a fixed unit cost is added to the prices of all products in a set, relative consumption will shift towards the most expensive one. Or more simply: high shipping costs lead to higher quality goods. The classic example is apples. In Somerset (arguably the apple capital of Britain, for readers unfamiliar with its many joys ) let's imagine a juicy, hand-picked, top quality Pink Lady apple costs £0.10; while a tasteless, mass-produced Golden Delicious costs £0.02. That's a fifth of the price! Local consumers of apples w...