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 $...

According to the CEBR, the government's VAT cut in December has worked - with retail sales likely to be £8-9 billion higher this year than without it. This is contrary to anecdotal evidence from small businesses, but I speak to lots of small businesses and they are not the first people you'd go to for econometric analysis. By their nature, smaller firms find it harder to dissociate the effects of a VAT cut or any other single input from random changes in demand. A number of larger businesses have reported better results from the change, but again they are not in a position to measure the effect across the whole economy. The CEBR is independent of the government, although they were calling for the VAT cut before it happened, so they have a vested interest in declaring it successful. Regardless of this, the retail figures are certainly good news and point to an earlier recovery than might have been expected.

Robert Peston discusses the difficulties that retailers (or their suppliers) are having getting trade credit insurance. Fundamentally, information asymmetry combined with efficient use of capital causes this problem. The reason suppliers want insurance is because the economy is shrinking and a (small but significant) percentage of retailers and wholesalers are going to go under. Even though the number is small (I'd estimate 3 to 5 per cent), the problem is that nobody knows which ones. Therefore unless suppliers stop trading altogether, they want to be covered for the risk. I read a nice analogy recently: if someone gave you ten bottles of water and you knew one was poisoned, you probably wouldn't drink any of them. Even if you were really thirsty. This combines with the (quite correct) desire of retailers to minimise the amount of working capital tied up in their supply chain in order to be price competitive and profitable. Therefore they extend payment terms to the degree th...