Knowing and Making

Ed Kless at Verasage presents an interesting retail pricing scenario and asks for suggestions . Best to read his post and look at the pictures before continuing, otherwise the following will not quite make sense. If you're reading offline, here is his summary of three racks in a clothes shop: The first offered two tee-shirts for $30 or $19.50 each. The second, right next to it offered two tee-shirts for $30, but no mention of individual price and the third rack had individual tee-shirts for $15 each. My thoughts: I've noticed recently that a few places which charge "$N for two" will happily sell you a single one for $N/2. If there's no price for the single item then I imagine this would be the default policy. I'd suggest that the existence of these two apparently redundant offers is metered price discrimination - capturing people with a higher willingness-to-pay by selling them an extra product rather than charging a higher unit price. The $30 vs $...

You might remember a previous discussion of Amazon's pricing policy. I came across a further thread about it on... Amazon's own website ! I hope that guy with the last comment is doing it for research purposes and not because he thinks it will save money. Some theories from that discussion: currency fluctuation (which is plausible); stock position of different suppliers (not so much); testing of the demand curve via small price adjustments (quite an interesting hypothesis and certainly possible); and adjustments to changing demand (if true, would reveal a surprisingly detailed understanding of demand for individual books - but you never know). Another possibility: it could be driven by competition - but as the market leader, it's less likely that Amazon adjusts its price to competitors than vice versa. Maybe then they deliberately make frequent pricing changes to stop competitors from finely undercutting them. Anyone know whether competitors can use Amazon's API to...

Mark Thoma posts an interesting article from EurekAlert about some Caltech research. The researchers set out to solve the free rider problem by measuring people's real valuation of public goods. The classic problem with public goods is that if you ask people what the service is worth, they have an incentive to lowball their answer. I may claim that a new railway line, or the NHS, is worth only £10 a year to me. That way, I am likely to pay lower fees or taxes for it, and since I think that lots of other people will put a higher value on it, the government will build the railway and keep funding the NHS regardless of my feelings. It's the same dynamic as in the tragedy of the commons; no matter what I do, the behaviour of all the other people will determine whether the good is provided. My action won't make any real difference to the outcome, so I may as well act selfishly. The consequence, however, is that if everyone claims to put a low value on the outcome, the governme...

Daniel Hamermesh reminded me of a subject I have been planning a post on. In case you made the mistake of thinking cutthroat price competition is always efficient, I have a small demonstration for you. Imagine a market where there are three consumers of sausages, A, B and C. A derives £5 of benefit from a sausage; B gets £10 and C £15. Suppose now there is a single butcher in town, and he has to charge a fixed price. The variable cost of producing a sausage is £4 and the fixed cost for the period is £5. If the butcher prices his sausages at £15 he'll sell one unit at a cost of £9 and make a profit of £6. If he prices at £10 he'll sell two units at a cost of £13 and make a profit of £7. If he prices at £5 he sells three units at a cost of £16 and makes a loss of £1. Naturally then, the butcher will set the price to £10, make £7 profit and generate consumer surplus of £5 (all of which goes to lucky C). However, imagine that he develops the ability to price-discriminate and charg...