2
$\begingroup$

So, at work we are doing a charity bake sale.

Lunch hour is long gone. An email was sent out offering everything at half price.

I imagine decreased demand as everyone knows they have to get rid of it all by the end of the day, therefor everyone will expect the price to decrease further, therefor people will not buy due to the expectation of lower prices when an item is only of value for a finite amount of time.

Is there an economic term to describe this situation?

$\endgroup$
  • $\begingroup$ If you asked about the situation in people's minds, I guess it's "backward induction". If you asked about the term of human behaviour, I guess it's "fire sale", but I feel qualms about it. $\endgroup$ – Metta World Peace Mar 30 '15 at 15:54
  • $\begingroup$ More focused around the point that now people know the seller has no choice but to sell and are not buying because of that and the expectation of lower prices. $\endgroup$ – ZZ9 Mar 30 '15 at 15:58
5
$\begingroup$

You are describing a market where a "non-storable" (or "perishable") good is traded. This is the (in terms of historical precedent) model of a market, since in the old days, most goods were agricultural, and many amongst them were "non-storable".

The argument behind "market clearing", i.e. that prices will adjust so that all quantity available will be sold, owes a lot to the goods being non-storable. You can observe this today in the so-called "farmer's markets", where if you monitor a day of trading, you will observe that prices go down as the day nears to an end, as suppliers attempt to sell all their quantity.

Why some consumers nevertheless buy early on and so at higher prices, even though they know that later on prices will go down, has to do with

a) constraints imposed on the consumer schedule (say, he has to buy early because he has to prepare lunch), and/or

b) quality considerations: early on the suppliers may give you more room to "pick and choose" item per item, or they themselves will offer the better quality, to justify the higher price. It may be the case that some consumers have a lexicographic preference over a certain threshold of quality, which they expect it won't be around at the end of the day when prices will fall.

On the other hand, some consumers will hold on, given their constraints/preferences. As you can see, the phenomenon of all consumers waiting till "the last minute" presuposes a situation were the consumers are perfectly "flexible", and the quality of the good does not deteriorate with time, but the good looses all its "good-properties", instantly, at the end of its "useful life". In reality quality erodes gradually, in almost all cases.

| improve this answer | |
$\endgroup$
  • $\begingroup$ Efharisto! Extremely well explained. $\endgroup$ – ZZ9 Mar 31 '15 at 12:54
  • $\begingroup$ There are some goods that lose their value near instantaneously. For example, a seat on an airplane. Whether I buy the ticket six months in advance or I buy the ticket at the airport just in time to race through security, it is equally valuable to me as the passenger. But once the plane pulls away from the gate, the seat no longer has any value. $\endgroup$ – Jay Jun 8 '15 at 3:01
  • $\begingroup$ Another reason to buy early, at a higher price, is because the customer does not necessarily know exactly when the supply will run out. In the farmer's market example, unless I stand around the market watching the supply, or have some other means of monitoring, by the time I come back to take advantage of the lower price I may find that what I want has all been sold. And I probably won't stand around the market watching the price because I consider my time more valuable than the savings. $\endgroup$ – Jay Jun 8 '15 at 3:05
  • $\begingroup$ @Jay Good points both. $\endgroup$ – Alecos Papadopoulos Jun 8 '15 at 9:08

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.