Should selling price depend on product quality or on work to produce the product if both not in positive correlation?

Question

I am a Natural Science student and read a little about economics. I am not sure this question is related to economics or not, decided to give it a try.

Recently, I am looking for printing service. From more than one service providers, I got the details that, printing a page is more expensive than photocopying a page. I asked them why is that so, and they said because the quality from printing is better than the quality of photocopying (photocopying inevitably causes a little dislodgement, cannot be 100% same as the original). They confirmed that the inks and papers used for both are the same. This is what I replied: ''Raw materials required for both are equal, printing needs way less work than photocopying each page one by one, so I actually expect the price for printing to be at worst the same as photocopying if printing is not cheaper than photocopying.'' And I didn't hear back from them.

Who is right here?

If the shoppers are right and printing should cost more than photocopying, do you really want to penalise your customer for reducing you work?

If I am right and printing should cost less than photocopying, do the shoppers really want to give higher-quality product to customers at lower price?

Is there any economics theory for this and other similar everyday occurrence?

Answer 1

No one is "right" here, there is rarely a "should" in economics, it is not about morals.

When making a purchase, you are usually willing to pay an amount $x$ larger than the price $p$ which is larger than the cost $c$ it took to make the product/provide the service. You are arguing that price should only depend on cost. The store is arguing that if you are willing to pay more, they can charge more. Unless they have competition who undercuts them, they are right.

In the theoretical model of perfect competition, where there is a single type of product and firms face very strong competition the price would equal the average cost in the long run. I would argue the model does not apply here, competition is not perfect (if I am wrong, go to the competition). In case of imperfect competition it is normal to charge people whose demand is less elastic w.r.t. price more.

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What you can do: pay them or find a better offer. If you are convinced that you are right, found a rival printing firm, undercut them and put them out of business.

Answer 2

What's right here is that people who are experts on a subject generally know a lot more about it than people who have a cursory understanding of a topic. That applies to almost any human endeavor.

Your economic analysis is flawed, probably on several levels, but specifically in one area. You did not mention any consideration of the setup cost or batch size. I used to be responsible for a newsletter that had a distribution of a few thousand copies. What I came to understand is that there is a setup cost associated with printing that is not associated with copying. Using some made up numbers to help illustrate this, let's assume that they will charge you 5 cents for each photocopy. For printing, let's say that there is a setup cost of \$100, and then each copy is 2 cents after that. When you ask for a quote for 2000 copies, they may not tell you that pricing structure. Instead they may simply say that it will be \$100 for the copying or $140 for printing it. But if you are getting 10,000 copies made, then the photocopies will be \$500, but the printing will be \$300. So in that case, the setup cost is amortized over a larger print run and equates to fewer cents per copy for printing versus copying.

So the problem with your economic analysis is that you were looking at only the marginal cost per page, not the marginal costs + fixed costs.

Answer 3

For a product to exist in a competitive marketplace at a higher price, it must both provide higher value, and have higher cost. Note that the "provide higher value" requirement is merely that there are situations where some potential customers would prefer it. If it has higher cost, but no higher value, then it will simply be eliminated from the marketplace. If it has a lower cost, then firms will compete and push the price down.

It is understandable that a business might, when asked by a potential customer about higher prices, explain to that customer what greater benefits there are to that customer, rather than talking about their cost structure. It is reasonable to expect a customer to be more willing to pay the higher price when the former is explained to them, rather than the latter, and so it is in the business' interest to focus on the former. And it is reasonable for a business, when asked to explain the entirety of their cost breakdown to some random person off the street, to not be interested in compiling a detailed accounting.

A further issue is when some of the costs are marginal, and others are fixed. For instance, at a restaurant, rent is a fixed cost that must be amortized across all menu items, while ingredients are a marginal cost for a particular menu item. It is quite possible that there are two menu items for which the one with the higher ingredient cost has a lower menu cost: the rent cost is distributed among the menu items according to how the restaurant thinks customers will pay (price sensitivity/elasticity), not based on ingredient cost.