Economics is a science? Or, don't believe your lyin' eyes.
I have already said on a number of occasions to compare and contrast an economics text on price as discovered in market by the law of supply and demand and a business book on marketing and pricing. Economists theorize based on rationality. Firms know from experience that demand is sensitive to perceived value, which can be manipulated using cognitive bias. The goal is to maximize price by end-running "the law of supply and demand" responsible for price discovery, which so-called rational agents follow.
However, most retail pricing is administered pricing, based on average cost and markup. For example, the sticker price is the anchor price that establishes the value in the consumer mindset. The retailer only expects to sell a relatively few items at this price. Most of the prices are promotional prices at a discount from the sticker price. Price changes are used to attract different types of customers so the whole range of prospects can be served, including impulse buyers (think Black Friday). The remainder will have to be factored at a liquidation price.
The arithmetic mean of all these prices at the their respective volumes is the average sale. Cost of goods is relative to quantity ordered, so it benefits the retailer to order as a great a quantity as possible in order to get the best markup. The retail business is highly competitive, so this is an art (advertising and sales) and a science (marketing).
For example, positioning is very important in marketing and sales. A price set too low can reduce demand just as can a price set too high. Obviously, when a price is set too high affordability is a factor, whereas this is not the case on the low side. What is going on? Marketers know that consumers buy the sizzle and not the steak. The product just has to meet the promise sufficiently not to be returned in excess of standards.
A price set too low damages the perceived value. This is a reason that there is a low end to promotions below which the firm will factor the excess inventory rather than "cheapen the brand."
I had a friend who had a chain of specialty shops that he bought very advantageously. He used to say that the secret of buying is knowing the real price and getting it. He had a rule that nothing be marked up over 20 times cost. He was continually frustrated to find items marked up 30 and 40 times and when he confronted the pricing manager the story was always the same — very few want to the item at only 20 times. It was not credible that the product had value.
In many cases demand curves are non-monotonic (wavy) rather than downward sloping. Marketers know this, and they also know that this differs in different locales. So they spend considerable money to do elaborate testing in order to identify the sweet spot.
James Buchanan’s flabbergasting gibberish on demand theory
Lars P. Syll | Professor, Malmo University
Tom, Unrelated & Off Topic , but I thought you'd really be amused with this article by Charles Koch. He says, "I think one of the biggest problems we have in the country is this rampant cronyism
ReplyDelete...And for disadvantaged people trying to get started, it’s unconscionable in my view. I think it’s in our long-term interest, in every American’s long-term interest, to fight against this cronyism.... As you all have heard me say, the role of business is to create products that make people's lives better while using less resources to do it and making more resources available to satisfy other needs. When a company is not being guided by the products they make and what the customers need, but by how they can manipulate the system — get regulations on their competitors, or mandates on using their products, or eliminating foreign competition — it just lowers the overall standard of living and hurts the disadvantaged the most. We end up with a two-tier system. Those that have, have welfare for the rich."
He is on the same page as you about many of the problems of corruption and cronyism facing the nation though he approaches them from the far right instead of the far left. Interesting none the less because it means while you don't agree on the problem even though you disagree on other issues. Worth a read to understand your adversary, if nothing else;
I meant to say you do agree on the problem even though you disagree about other issues.
ReplyDeleteTom is a libertarian of the left Ryan and the Kochs are libertarians of the right I think they endowed the Cato people...
ReplyDeleteso this is not surprising (to me) the common thread is libertarianism.... Tom rages against 'rents' though and I wonder how Koch feels about 'rents'.... sounds like he is at least against monopoly rents... they are mostly in productive industries, like paper products, oil refining, etc dont know if they have a lot of commercial property interests...
the other thing is the environment as Tom has climate change in view and probably Koch not so much... this is where the left/right divide comes in... and social justice/anti-warfare.... Koch probably doesnt have those issues in forefront...
so they are each in different quadrants of the 'political compass'....
rsp,
I don't think that anyone on the left would argue with that statement by Charles Koch.
ReplyDeleteI assume he would say that the way to eliminate cronyism is to shrink government, which the left would disagree with since they see that as only half the problem.
The other half is the class and power structure that the Koch's sit at the apex of and they would have more power and wealth without regulation, leaving them free to exploit negative externalities to capitalize the upside and socialize the downside.