Friday, September 07, 2007

Keep on whining

Tyler Cowen is upset at people who purchased iphones that are now complaining about the announced price cut: "It is you people, you who resent Coase (1972), you people who induce wage and price stickiness and widen the Okun gap. . . . AAARRRGGGHH!"

I understand how Tyler feels in some ways. Why should a person complain simply because another person gets a better deal. It should have no effect on whether the deal you received was good. However, there are at least three answers to this:

First, people are not just concerned about whether they have purchased an item that is worth more to them then the amount of money they have paid, they are interested in getting an item at the best price possible (or a "fair" price). Lets say the iPhone was worth $1000 to a particular customer, she has a consumer surplus of $400 when she purchases the phone of $600. That is a good deal, but if the consume was able to buy it for $400, they would have $200 to purchase other items, increasing their utility to at least $1200.

Second, Apple sells a product, but they also sell an (exclusive) culture. By increasing the number of people who can buy, they reduce that exclusivity. When a person purchased the phone for $600, they expected the price and the level of exclusivity to remain that high for a period of time (at least a year, let's say). When Apple reduces the price, it just reduced the value after the purchase was already made.

Third, Apple breached a custom that has value: selling a product at the same price to each consumer. It might be efficient for many companies to sell products at different prices to different consumers in order to extract the maximum revenue. And this could benefit most people by encouraging the production of valuable products, increasing the number of people who will want to purchase an item, and lower prices for many consumers. However, variable prices come with their own costs. When people know prices might change it adds an incentive to try to get the lowest price possible. This could encourage people to delay purchases, to invest time into investigating price changes, and generally increase transaction cost. Ever know someone who spent every day checking flight information looking for price drops? Ever tried to find out the real price of a car? Getting a good deal can be a pain in the ass. Having a norm of giving everyone the same price reduces these transaction costs.

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