29

prices should have already been set to maximize the trade off between profit-per-sale and volume sold But profit-per-sale depends on costs, which depends on the theft numbers, so if theft increases, the equation changes.


19

What you're describing is retail shrink. It is taken into consideration when setting prices. A business will typically have consultants come in, measure their shrink to be X percent, and prices will be adjusted accordingly. Back when I worked in retail, there was a big printout in the break room informing everyone on shrink. The 5 kinds of shrink outlined on ...


9

Price is set by the competition In general, the prices are set by the supply and demand for the whole market. If a merchant sells the same goods for a higher price than competitors without a corresponding advantage (location, better service, convenience) then people won't buy these goods and the merchant will earn less profit as the decrease in volume will ...


7

Answer to question If we take your assumptions literally, Jim will decide not to enter the widget business. For suppose he did incur the cost of entry and that Mary is selling at price $p_m$. Jim can only sell to consumers if his price $p_j\leq p_m$. The best price for Jim is $p_m-\epsilon$ (where $\epsilon$ is some very small, positive amount). But this ...


7

Your reasoning seems to be this: Under the old conditions, a widget seller calculates that the profit-maximizing price of a widget is \$1. Conditions now change (e.g. because of increased theft). Under these new conditions, she should not change her selling price, because of her earlier calculation that \$1 maximizes profits. But the above reasoning is ...


6

The Applied Theory of Price by Donald N. McCloskey McCloskey published the book (pdf) for free now. The Chicago school's other economists also published their books on price theory (see Milton Friedman's and George Stigler's).


5

Glenn Ellison's "A model of Add-On Pricing" seems closely related to this issue. He addressed the question 'why don't firms compete more aggressively to attract consumers by lowering the initial price?' The answer that he offers is that doing so induces an adverse selection problem because lowering the advertised price will disproportionately attract "...


5

The graph you've depicted is just very generic supply and demand intersection, under the generic/introductory assumption that an equilibrium price exists. Even at this level of abstraction, the demand curve is perfectly flat for a price taker, so it's not always the case that those two functions (supply or demand) are always a bijection between price and ...


4

Check this paper out: The Value of Time Spent in Price-Comparison Shopping: Survey and Experimental Evidence Author(s): Howard Marmorstein, Dhruv Grewal and Raymond P. H. Fishe Source: Journal of Consumer Research, Vol. 19, No. 1 (Jun., 1992), pp. 52-61 With a bit of hand-waving, you can say that consumers are willing to search as long as value of time &...


4

This strikes me as a straightforward industrial organization anomaly question. Like, why do hot dogs and buns come in different counts to a package or why are the finest apples shipped out of apple producing regions? Gentzkow and Shapiro (2010) that this paradox is only an apparent contradiction. They find slant is mostly a product of readership bias. ...


4

The most comprehensive survey of estimating oil prices is here. There you fund from very complicated models to very simple ones. As the article shows, the ultimate answer depends on whether you are estimating nominal or real price, and short-term or long-term prices. Some simple models to estimate price of oil might be: no-change forecast: if changes in ...


4

The example you've picked is slightly complicated, because I think there are two possible reasons for the difference in price. Both could contribute at the same time, depending on your view of how wood production works in your example. 1. The labour value invested in growing, harvesting and processing better quality wood (prior to furniture manufacture). ...


4

Two very general reasons are: 1) High prices at the beginning target "early adopters" - people that have a higher "willingness to pay" for a new product just to have it first. Early adopters know that they pay more, and they 're ok with it. 2) As regards consumer reaction, it is much better to reduce prices than to increase prices. So sometimes prices are ...


4

In addition to (intertemporal) price discrimination, there's a parallel process of ramping up production. Especially with tech products, they can have bugs at the beginning, even with all the precautions during design/prototyping. So a massive launch at high production volume is more risky. (Lower production volume also implies higher unit price; see ...


4

I want to flesh out the answers from Alecos Papadopoulos and Bill Clark to make sure it's clear why a firm might want to reduce prices over time—known as intertemporal price discrimination. Suppose there are two groups of potential customers: enthusiasts (who love the product) and laymen (who aren't very interested in the product). Enthusiasts are willing ...


4

Actually economics does not even officially use term price gouging. Your analysis is right, actually economists dislike anti-price gauging legislation for this reason. For example, when the IGM panel of top policy economists were asked about one piece of price gouging legislation in the US, vast majority disagreed with it: However, an important caveat to ...


3

There’s two prices for a bond: Invoice or dirty price: what you actually pay; and the clean price, which is the dirty price less accrued interest. In market convention, the clean price is the quoted price. Accrued interest starts off at \$0 at a coupon date, and then rises (roughly) linearly each day until it matches the value of a coupon at the coupon ...


3

Yes. For example, in Armstrong (2006), a monopoly platform sets the price for side 1, $p_1$, such that $$\frac{p_1-f_1+n_2\alpha_2}{p_1}=\frac{1}{\eta_1}$$ where $f_1$ is the unit cost on side 1, $n_2$ is the number of consumers on side 2, $\alpha_2$ is the cross-side externality created by each side 1 consumer, and $\eta_1$ is the conditional price ...


3

There are no laws against "price gouging" where I live, at least the price of medical masks has increased 3-10 fold in the recent weeks, due to the coronavirus outbreak. Yet there is still a shortage of masks. (Also several other things.) Why is this? You write that in the absence of price gouging laws Supply would increase. Increased prices signal ...


3

There is no such thing as "intrinsic value", at least not in modern microeconomics, and your question cannot be answered. Let's for simplicity imagine a market where all consumers have unit demand. In your example, then, there are 50 consumers who have a willingness to pay (WTP) for a unit of A larger than \$100, but only 40 of those have a WTP larger than \...


2

The effect is called Anchoring. As you also say, it is actually a psychological term, made popular/coined by Kahneman. http://en.wikipedia.org/wiki/Anchoring


2

To use a simple example, assume that consumer $i$ maximizes $$U(x_i,y_i,I_i) = \alpha\ln x_i +(1-\alpha)\ln y_i + (\bar I_i-p_xx_i -p_yy_i)\\ s.t. \bar I_i \geq p_xx_i +p_yy_i$$ In other words, it may spend all his income on the two goods (but not more), or he may keep some for other goods, not modeled here. Due to the inequality in the constraint we need ...


2

Any decent basic introductionary economics textbook will answer that for you. Principles of economics by Mankiw gives some nice intuition. if you a looking for a little more advanced stuff, try Intermediate microeconomics by Varian.


2

In Lemma 1 they say that the support $\left[\underline{p}_t, \bar{p}_t \right]$ is such that $ c < \underline{p}_t $. So even though the support is connected, it does not extend to $c$, hence the $p \to c$ problem never arises.


2

To make it simple: let say your coconuts production is constant over time but the population is growing. It's a constant supply but an increasing demand, resulting in an increase of coconuts price. If the prices were constant, the demand would be higher and thus not fully satisfied.


2

That's a standard case of a Consumer Price subsidy. Its effect will be that of market expansion: higher quantity at higher equilibrium price, irrespective of whether it will be lump-sum (a fixed monetary amount) or a fixed proportion of the price. A) LUMP SUM SUBSIDY Consider a monopolist. The monopoly faces a downward-sloping demand curve, say $$q_d = a ...


2

It seems that some consumers get utility from paying for the good. This isn't always true, and it does seem counter-intuitive at times. In fact, it often seems that consumers get utility from getting a "great deal," and we often hear them brag about their amazing feats of 80% off. In this case, however, for a few different reasons, some consumers get ...


2

The question is not asking what you solved. You literally gave how much income would be needed by buy $90$ bottles at the new price. What the question is asking is basically "calculate the income effect, and add it to the original income, in order to cancel it out". That is, you solved for what he would have bought if there was no income or substitution ...


2

I'll try to fit this in an answer. I think you are confusing nominal and relative value. Inflation means that the 'value' of your money depreciates relative to other things. For example, in the year 2000 I could buy a bread for 1 USD. In the year 2015 I can buy a bread for 2 USD. This means that the dollar lost half of it's value relative to bread. But ...


2

I think your expectation that a "best" formula exists is very unreasonable. There is no "best" car design, there isn't a formula to design the fastest airplane with total weight $x$ and there is no easy formula that will give you the best price in general situations. Sciences have a lot of unsolved optimization problems. Economics, psychology and most ...


Only top voted, non community-wiki answers of a minimum length are eligible