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June 14, 2005


This whole notion of marketing based economy presumes people have the extra funds to buy these "perceptions". If we had a major recession (or worse, a depression), what do you think would happen to a marketing based economy? They probably will evapolate overnight. Just like the internet boom of the 90s.

If people were forced to watch every penny, they would very quickly realize what they need and force the producers to focus on the fundamentals (aka price). Just look at Japan, the number of 100 yen store is skyrocketed while the rest of the retail sector experienced slow or no growth.

Would it be possible that the cost of competing be passed on to the consumer? Of course it is, but the consumer must be willing to pay it. This inefficiency is perhaps a result of status seeking behavior or just lack of consumer education. It is not worth their time figuring out if $2.50 Crest is really twice as good as the $0.88 Walmart brand toothpaste. Would this still be true on big ticket items? I don't think so. When the price difference is in the thousands, price absolutely matters.

Price points are indeed bound in part by overhead and competitive pressure, but in the end, it’s the consumer that determines the actual value of a product or service, e.g. the maximum one is willing to pay for X. Furthermore, there has always been a tension between the producer and the consumer, as both want to get the better end of transaction. Competition and choice are both key ingredients for a healthy consumer driven market economy.

Hi Half Sigma
I have some thoughts on advertising and the extra price we might pay for goods in this post: Are We Paying Too Much for Advertising?.

All good points by the others. The very fact that there's a mind-boggling number of toothpastes on the shelves indicates that there are willing buyers for such variety, even if it costs the consumer more than if there were only one or two types of toothpaste. As mentioned above, it's not more than people are willing to pay for the differentiation.

With the toothpaste example, I think it may not be fully recognized that price and cost are completely separate things. If you make it cheaper you can still charge $2.50. Just wanted that to be clear first.

Secondly, to avoid having to convince customers that your $1.25 toothpaste is just as good you just have to keep the $2.50 price but include $1.25 off coupons all over the place to take care of that.

Relevant article by Virginia Postrel over at Reason:

Jesus. I have never read anything so stupid in my life. Please stay away from business/economics before you hurt yourself.

You neglect to note that if there was no competition, there would be far higher prices - even if they didn't have to pay for advertising. Unless you did some monopoly price-fixing. But that's not efficient...

So yeah.

"But I think we need to examine whether competition is always guaranteed to lower prices" I don't think this statement is generally deemed to be as bullet-proof as you regard it. Competition tends to lower prices (from what they otherwise would be.) Whether this results in a price minima is completely irrelevant. The more important aspect of competition is that it gives consumers choices, and allows for their own, individual and subjective valuations. This, in turn, is what determines the price of a good.

The market price of a good is not determined by the factor costs of its inputs. Business profits are accumulated by accurate entrepreneurial foresight (i.e., I think I can sell toothpaste for at least $2.50, whereas I think my cost/unit will be at most $2.00, yielding me a gross margin of $.50/unit). If my predictions are accurate, then I make money. If my predictions are not accurate, then I either lose money, or I make less money than I might've made in another investment.

There isn't a single 100 yen store in the United States, but that proves nothing. Look at the success of the similar, but not identical, business models of Dollar Tree, Family Dollar and Big! Lots.

I think you should read about monopolistic competition, because the market you're describing sounds more like that than oligopoly. And in monopolistic competition, product differentiation does indeed occur, but competition still drives down prices, and the result can still be efficient.

It's tempting to dismss Mr. Sigma's balderdash as mere maundering. I think he is one of those people who looks at consumer decisions, and decides that they would do better if he could only force them to make the same buying decisions as him. He can't, so he makes up a theory to explain why he is correct, as if that makes up for the fact of other people's freedom.

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