Usury and the Uniqeness
This is going to be another one of my dense, abstract posts.
I've been thinking about what economists call demand sensitve pricing for a while now. I'm sure Paul is sick of me talking about it and specifically how his company is evil but I wanted to get comments from others folks about it.
Demand Sensitive Pricing as I understand it is pricing goods pegged to demand more than what it took to make it. So, in the classic Adam Smith model of the marketplace, it takes 10 cents to make a widget, you charge 15 cents because you had to spend 10 and you add an extra amount for your efforts. This way, the people are able to enjoy their widgets and you are able to enjoy your profits. The thought in demand sensitive pricing (as I understand it) is that you need to spend money up front to make it, but once it's been made, you've already spent the money, so if you can't sell your widgets at 10 cents, you should lower your price further so you can recoup something. The flip side is if there's a huge demand, your price doesn't have to reflect what it cost you to make it, so charge $100 if people are willing to buy it at that price.
It seems that the pricing of many goods in America has shifted from the classical model to the demand sensitive model. Costs of products seem to be dissociated with the costs of production. Paul's company using computer modelling to help small stores analyze the changes in buying patterns at different prices. Good thing in that it helps the smaller stores compete with the bigger chains (because that's what the chains do) but I have reservations about the trend as a whole. It seems the practice encourages usurous pricing--taking advantage of a situation because you can. Maybe there is no morality in economics, but it seems the whole concept of usury is that there are some things in the marketplace which are beyond the pale.
Again, drawing on my feeble understanding of economics, there is a concept of utility which is generally defined as happiness or contentment or the ability to get something done, which is the abstract concept of what the consumer is actually buying. So, the reason why a consumer buys a car is that he/she needs the ability to get around and because of the joy of having a new car and the reliability it brings. The reason why the car is bought is that the money spent buys more utility than it could've bought with something else. So, in every transaction there is a residual utility that drives the transaction forward--the consumer is getting more utility by spending the money, and the seller is getting revenue. The important thing is that this residual utility is the bonus that consumers used to get. You would've paid $10 for a dozen eggs, but at that price, what you would've paid would have been equalled by the effort you had to spend to get the money. But since you only spent $2, the transaction left you with $8 of residual utility. With demand sensitive pricing, it seems we are losing more and more of that residual utility-- that extra bonus you got with any transaction.
The level of complexity we've ignored until now is that everyone is different. Some people really like eggs and some people don't. So if you really like eggs, maybe you'd pay $50 for a dozen eggs and so even at $10 you'd be getting a bargain. Obviously most people are going to be somewhere in the middle, and that's where the sellers are going to have their price point to maximize their revenues. It seems to me that that would encourage uniqueness. The perfect economic situation for a consumer is where you don't like what everyone else likes (so you don't want those high demand, high price items like BMW) and you do like what everyone else dislikes (so you like low demand, low price items like Ford Fiestas). I guess this is the silver lining of demand sensitive pricing, as long as the uniqueness doesn't cross over into deviancy or criminal behavior. Of course the thing that keeps this trend from actually occurring is the incredible barrage of advertising which continually courts us to keep drinking Pepsi, drive the new Z4 and vacation in Cancun. But if you ignore the advertising and enjoy the taste of Jolly Good soda, like the handling of an '85 Escort and like to vacation in Chiapas, you can still find bargains out there in this brave new demand sensitive world.
I've been thinking about what economists call demand sensitve pricing for a while now. I'm sure Paul is sick of me talking about it and specifically how his company is evil but I wanted to get comments from others folks about it.
Demand Sensitive Pricing as I understand it is pricing goods pegged to demand more than what it took to make it. So, in the classic Adam Smith model of the marketplace, it takes 10 cents to make a widget, you charge 15 cents because you had to spend 10 and you add an extra amount for your efforts. This way, the people are able to enjoy their widgets and you are able to enjoy your profits. The thought in demand sensitive pricing (as I understand it) is that you need to spend money up front to make it, but once it's been made, you've already spent the money, so if you can't sell your widgets at 10 cents, you should lower your price further so you can recoup something. The flip side is if there's a huge demand, your price doesn't have to reflect what it cost you to make it, so charge $100 if people are willing to buy it at that price.
It seems that the pricing of many goods in America has shifted from the classical model to the demand sensitive model. Costs of products seem to be dissociated with the costs of production. Paul's company using computer modelling to help small stores analyze the changes in buying patterns at different prices. Good thing in that it helps the smaller stores compete with the bigger chains (because that's what the chains do) but I have reservations about the trend as a whole. It seems the practice encourages usurous pricing--taking advantage of a situation because you can. Maybe there is no morality in economics, but it seems the whole concept of usury is that there are some things in the marketplace which are beyond the pale.
Again, drawing on my feeble understanding of economics, there is a concept of utility which is generally defined as happiness or contentment or the ability to get something done, which is the abstract concept of what the consumer is actually buying. So, the reason why a consumer buys a car is that he/she needs the ability to get around and because of the joy of having a new car and the reliability it brings. The reason why the car is bought is that the money spent buys more utility than it could've bought with something else. So, in every transaction there is a residual utility that drives the transaction forward--the consumer is getting more utility by spending the money, and the seller is getting revenue. The important thing is that this residual utility is the bonus that consumers used to get. You would've paid $10 for a dozen eggs, but at that price, what you would've paid would have been equalled by the effort you had to spend to get the money. But since you only spent $2, the transaction left you with $8 of residual utility. With demand sensitive pricing, it seems we are losing more and more of that residual utility-- that extra bonus you got with any transaction.
The level of complexity we've ignored until now is that everyone is different. Some people really like eggs and some people don't. So if you really like eggs, maybe you'd pay $50 for a dozen eggs and so even at $10 you'd be getting a bargain. Obviously most people are going to be somewhere in the middle, and that's where the sellers are going to have their price point to maximize their revenues. It seems to me that that would encourage uniqueness. The perfect economic situation for a consumer is where you don't like what everyone else likes (so you don't want those high demand, high price items like BMW) and you do like what everyone else dislikes (so you like low demand, low price items like Ford Fiestas). I guess this is the silver lining of demand sensitive pricing, as long as the uniqueness doesn't cross over into deviancy or criminal behavior. Of course the thing that keeps this trend from actually occurring is the incredible barrage of advertising which continually courts us to keep drinking Pepsi, drive the new Z4 and vacation in Cancun. But if you ignore the advertising and enjoy the taste of Jolly Good soda, like the handling of an '85 Escort and like to vacation in Chiapas, you can still find bargains out there in this brave new demand sensitive world.
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