You are currently browsing the tag archive for the ‘pricing’ tag.

Orwell’s review of Penguin books is in the news today courtesy of Amazon vs Hachette. You can read here about that here. I wish, however, to draw your attention to an example that Orwell makes in his review:

It is, of course, a great mistake to imagine that cheap books are good for the book trade. Actually it is just the other way around. If you have, for instance, five shillings to spend and the normal price of a book is half-a-crown, you are quite likely to spend your whole five shillings on two books. But if books are sixpence each you are not going to buy ten of them, because you don’t want as many as ten; your saturation-point will have been reached long before that. Probably you will buy three sixpenny books and spend the rest of your five shillings on seats at the ‘movies’. Hence the cheaper the books become, the less money is spent on books.

Milton Friedman in his textbook Price Theory, as an exercise, asks readers to analyze the passage. He does not explicitly say what he is looking for, but I would guess this: what can you say about the preferences for such a statement to be true. Its a delightful question. A budget line is given and a point that maximizes utility on the budget lie is identified. Now the price of one of the goods falls, and another utility maximizing point is identified. What kind of utility function would exhibit such behavior?
By the way, there are 60 pence to a shilling and a half a crown is six pennies.


Get every new post delivered to your Inbox.

Join 132 other followers