Knowing and Making

The OFT has just fined a bunch of building companies £129 million for "cover pricing", which is described as "the practice of submitting an artificially high bid for a contract which you do not intend to win". But, I thought, companies do that all the time. If a client comes to me with a project that I don't want to do for £20k, I may well be willing to do it for £50k. So I put in £50k, fully expecting not to win, but if I do, then great. Hearing the vague explanation on the BBC this morning, I figured there must be something more to it. This article from Contract Journal explains it better. The issue is not actually the high prices as such. It's the fact that there's collusion between suppliers, ensuring there is no real competition for the tender. As CJ says: What is cover pricing? Cover pricing is when a contractor bids for a job with no intention of winning the tender. For example, Company A has been invited to tender by a client, but for various r...

The Office of Fair Trading is conducting a market study on advertising and pricing . This is of interest to me because one of my company's services is advising clients on how to structure their prices. Finding the right price structure is in the interests of both supplier and consumer; although pricing can look like a straight zero-sum game where any gain by the supplier is a loss to the consumer, this is not at all true in general. Thanks to the OFT for pointing out the study to me. The authors have requested comments on what its scope should be; I have made the following submission: Consumers' experienced utility of a good is not always predictable in advance, and pricing can be a key factor in several situations relating to this. Purchases can broadly be classified into four types: In the first type , consumers have a good prior understanding of the utility they can expect to gain. This is the type of purchase dealt with by rational choice theory. Many of the pricing practi...

Sam Robbins and I attended a fascinating workshop yesterday at the OFT , titled Trust In Markets . It covered three areas: the nature of trust and its importance in economic exchange; trust and the law; and how trust is manifested in some specific industry sectors (online marketplaces and finance). I'm especially interested in trust as an economic concept. Clearly trust is an absolute prerequisite for many kinds of economic systems to even function. Any system in which transactions are not instantaneous; anything where the quality and nature of the product is not fully known in advance of purchase; and any financial system where credit is offered - will operate smoothly only if parties broadly trust each other. The crowning theory of microeconomics, the Arrow-Debreu theorem, can only work where futures markets are available - and futures markets can only work if parties know that their contracts will be honoured over time. Sometimes trust can be replaced, in the short term at leas...