You are currently browsing the category archive for the ‘Pricing strategies’ category.
Because I have white hair and that so sparse as to resemble the Soviet harvest of 1963, I am asked for advice. Just recently I was asked about `hot’ research topics in the sharing economy. `You mean a pure exchange economy?, said I in reply. Because I have white hair etc, I sometimes forget to bite my tongue.
Returning to topic, the Economist piece I linked to above, gets it about right. With a fall in certain transaction costs, trades that were otherwise infeasible, are realized. At a high level there is nothing more to be said beyond what we know already about exchange economies.
A closer looks suggests something of interest in the role of the mediator (eBay, Uber) responsible for the reduction in transaction costs. They are not indifferent Walrasian auctioneers but self interested ones. eBay and Uber provide an interesting contrast in `intrusiveness’. The first reduces the costs with respect to search, alleviates the lemons problem and moral hazard by providing information and managing payments. It does not, however, set prices. These are left to participants to decide. In sum, eBay it appears, tries to eliminate the textbook obstacles to a perfectly competitive market. Uber, also does these things but more. It chooses prices and the supplier who will meet the reported demand. One might think eBay does not because of the multitude of products it would have to track. The same is true for Uber. A product on Uber is a triple of origin, destination and time of day. The rider and driver may not be thinking about things in this way, but Uber certainly must in deciding prices and which supplier will be chosen to meet the demand. Why doesn’t Uber allow riders to post bids and drivers to post asks?
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.
The August 3rd NY Times has an article about the advertising of Fishoil and Facebook. As sometimes happens with a NYT article, the interesting issues are buried beneath moderately interesting anecdotes that may be traded with others at the dinner table in what passes for serious discussion.
The story is about a company called MegaRed, that peddles fish oil. It wants to target consumers who are receptive to the idea of fish oil because they believe that it confers health benefits. The goal is to get them to try out and perhaps switch to MegaRed.
Facebook proposes a campaign which raises the eyebrows of the marketing director, J. Rodrigo:
“I can go to television at a quarter the price.”
Brett Prescott of Facebook agrees, that yes, Facebook is more expensive than TV. But offers an analogy between advertising on Facebook and firing a shotgun.
“And you are firing that buckshot knowing where every splinter of that bullet is landing.”
If biology is the study of bios, life, and geology is the study of goes, the earth, what does that make analogy?
Some arithmetic to clarify matters. Suppose 1 in 100 of all people would be receptive to the idea of MegaRed’s message. Suppose each of these people is worth $1 on average to MegaRed. If you could reach all 100 of these people via TV, then MegaRed should pay no more than 10 cents per person and so $1 in total.
Enter, stage left, Facebook. It claims that it can target its ads so that they go just to the right person. How much is that worth? $1. In this example, Facebook is no better or worse than TV.
If Facebook has any added value compared to TV it does not come from better targeting because one can always compensate for that by paying TV less and reaching more eyeballs. It must come from access to eyeballs unreachable via TV, or, identifying eyeballs that MegaRed would not initially have identified as receptive to their message, or that the medium itself is more persuasive than TV. Is this true for Facebook? If not, MegaRed is better off with TV.
On many campuses one will find notices offering modest sums to undergraduates to participate in experiments. When the experimenter does not attract sufficiently many subjects to participate at the posted rate, does she raise it? Do undergraduates make counter offers? If not, why not? An interesting contrast is medical research where there has arisen a class of human professional guinea pigs. They have a jobzine and the anthropologist Roberto Abadie has book on the subject. Prices paid to healthy subjects to participate in trials vary and increase with the potential hazards. The jobzine I mention earlier provides ratings of various research organizations who carry out such studies. A number of questions come to mind immediately: how are prices determined, are subjects in a position to offer informed consent, should such contracts be forbidden and does relying on such subjects induce a selection bias?