4 ms·

That’s an interesting but pretty academic view of innovation I think. From my own observation there are only a few markets that really seem to reach a Nash equ

That’s an interesting but pretty academic view of innovation I think. From my own observation there are only a few markets that really seem to reach a Nash equilibrium and drive prices to the minimum sustainable value. A great example is the mattresses business. You would think that there’s not much room for high margins there since it’s such a commodity technology. Good foam based mattresses for example can be mass-manufactured for around 30-50 $ according to industry sources. Shipping is also easy and cheap as they can be vacuum-packed and shipped as regular parcels. Yet, the top selling mattresses cost around 200-300 $. How can that be? I think there are multiple reasons for it but the gist is that price alone does not determine which product wins, psychological aspects play a central role as well. And while in the long run a Nash equilibrium can be reached in practice it’s often the case that the manufacturers in the market don’t compete too strongly on price since they understand the meta-game and know that they might ruin the market for everyone including themselves if they compete too strongly on price alone.

hhs 7y ago
> psychological aspects play a central role as well. Indeed, that’s why many companies make Veblen goods and generate revenue from this.
- rjyoungling 7y ago
  Yeah, that's definitely true. Price elasticity is different for a commodity vs. a luxury item where you pay to signal.
rjyoungling 7y ago
Thanks for sharing your thoughts. I personally don't think there's that much room to move down in the mattress industry because lowering the price is usually the first thing marketers and SMB's try in order to grow market share (or when the business is struggling). I don't know much about that particular industry but I suspect it was already in a Nash Eq. It would explain why the 'new player' was Casper. Someone who didn't participate in the game but created a new game instead. I strongly agree with your comments about the psychological aspects (and general forms of psychological economic value creation). In the essay, I was referring more to businesses that are pretty much a commodity with very little distinction. It doesn't seem likely to me that the people in the market would be working together to artificially keep the price stable at a particular point. Such a system would be highly unstable since all it takes is 1 person to take advantage of it. If n is small enough, maybe but not if n is sufficiently big. This is essentially what a Nash equilibrium describes; you have a system and then 1 person's greed results in them taking advantage and forcing the other party to respond until you have a stable situation that might be less ideal for the market than what you started with.
- deleted 7y ago
  [deleted]
treis 7y ago
I don't think 2-300 is off for a manufacturing cost of 30-50 and relatively expensive shipping. Either way, it's trust. Even if a good mattress is $50, how do I know that you aren't selling me a bad one that cost $15 to make? Ultimately that's a advertising cost that rolls into the purchase price.
- lotsofpulp 7y ago
  And the cost of accepting returns or refunds due to unsatisfied customers.
agumonkey 7y ago
For markets like mattresses I think it's due to low rate of buying. You only get there once a decade, the salesman can pull all the old tricks to take as much money as possible.
- karatestomp 7y ago
  Low rate of buying and difficulty evaluating quality. So, as is so often the case, it’s a lack of information allowing high margins. Markets don’t do their price-minimizing thing if info’s not easily available to buyers.
- rjyoungling 7y ago
  I think that behavior is few and far between because asymmetrical information flow doesn't exist in the same way it did 2 decades ago. Especially as older people are dying and younger ones are replacing them, they naturally google everything. So when you're using sleazy sales tactics, you'll burn your reputation. (You don't even see it as much in the tourist restaurant business anymore because of things like Tripadvisor.) We already know from things like Yelp, Airbnb, Uber, eBay etc. that a minor drop (say 4 stars vs. 5 stars) translates into a huge drop off in clientele. In a world where every Uber driver has 5 stars, having 4.5 practically means you're a maniac in the eyes of the consumer. (Not entirely unjustified since 5 stars means 'average' for most people, and not 'outstanding'. So to give less than that is actually quite a hurdle for most people.)
  - agumonkey 7y ago
    young users won't google that young users will react to ads, feel they should spend money to feel they got something of value, get in the store on "super hot deal day" to get conned (like their parents were the first time?) I'm exaggerating a bit, some cultures put a lot of pressure on being financially responsible. But for the rest I saw what I described with my eyes.
    - rjyoungling 7y ago
      I don't have evidence to back this up, but anecdotally it does seem to me that younger people (Millenials) tend to use google to compare/look for reviews when it comes to purchases that fall outside of the impulse buy category.
xivzgrev 7y ago
I don’t think you are looking at full picture. Nash equilibrium just means any lower margins would be unsustainable. In the case of mattresses, while gross margin is higher than other industries, the volume is MUCH lower. So the overall profit is likely lower than you may guess. That said I also think mattresses are not quite that rock bottom. because people shop so infrequently and the purchase is important, they’re likely to look to authority sources for guidance on which to get which can include friends, articles, and advertising. In advertising there’s an intuitive promise that if a company can afford to advertise than they must be doing well enough so the quality must be ok. Now we all rationally know that’s not necessarily true but it’s one reason imho why advertising works. So there’s room for branding and feature differentiation exhibit A Casper.
- rjyoungling 7y ago
  Just to clarify, I laid out a fictitious model where you have a perfectly efficient market with regards to some product. Under those constraints, you'd expect cost plus a penny. In the real world, human behavior, signals, etc. make it more complex (which is why behavioral economics was created). But I can imagine a case where the Nash Eq. doesn't settle at the absolute bottom price. Perhaps consumers don't care about price alone. Like you pointed out as well, if they interpret advertising as a trustworthy signal, then a business is forced to run ads. Undercutting others with a low price, by not running ads would in that hypothetical situation signal low quality. (Maybe a better example would be a bank in a trailer park vs. a bank in one of those beautifully designed buildings.) But all those cost can be factored into things like CAC, COGS, SG&A etc. Edit: There aren't that many studies on credibility and advertising but you might find this one interesting: https://getd.libs.uga.edu/pdfs/soh_hyeonjin_200608_phd.pdf https://getd.libs.uga.edu/pdfs/soh_hyeonjin_200608_phd.pdf

hhs 7y ago

> psychological aspects play a central role as well. Indeed, that’s why many companies make Veblen goods and generate revenue from this.

rjyoungling 7y ago
Yeah, that's definitely true. Price elasticity is different for a commodity vs. a luxury item where you pay to signal.

rjyoungling 7y ago

Thanks for sharing your thoughts. I personally don't think there's that much room to move down in the mattress industry because lowering the price is usually the first thing marketers and SMB's try in order to grow market share (or when the business is struggling). I don't know much about that particular industry but I suspect it was already in a Nash Eq. It would explain why the 'new player' was Casper. Someone who didn't participate in the game but created a new game instead. I strongly agree with your comments about the psychological aspects (and general forms of psychological economic value creation). In the essay, I was referring more to businesses that are pretty much a commodity with very little distinction. It doesn't seem likely to me that the people in the market would be working together to artificially keep the price stable at a particular point. Such a system would be highly unstable since all it takes is 1 person to take advantage of it. If n is small enough, maybe but not if n is sufficiently big. This is essentially what a Nash equilibrium describes; you have a system and then 1 person's greed results in them taking advantage and forcing the other party to respond until you have a stable situation that might be less ideal for the market than what you started with.

deleted 7y ago
[deleted]

treis 7y ago

I don't think 2-300 is off for a manufacturing cost of 30-50 and relatively expensive shipping. Either way, it's trust. Even if a good mattress is $50, how do I know that you aren't selling me a bad one that cost $15 to make? Ultimately that's a advertising cost that rolls into the purchase price.

lotsofpulp 7y ago
And the cost of accepting returns or refunds due to unsatisfied customers.

agumonkey 7y ago

For markets like mattresses I think it's due to low rate of buying. You only get there once a decade, the salesman can pull all the old tricks to take as much money as possible.

karatestomp 7y ago
Low rate of buying and difficulty evaluating quality. So, as is so often the case, it’s a lack of information allowing high margins. Markets don’t do their price-minimizing thing if info’s not easily available to buyers.
rjyoungling 7y ago
I think that behavior is few and far between because asymmetrical information flow doesn't exist in the same way it did 2 decades ago. Especially as older people are dying and younger ones are replacing them, they naturally google everything. So when you're using sleazy sales tactics, you'll burn your reputation. (You don't even see it as much in the tourist restaurant business anymore because of things like Tripadvisor.) We already know from things like Yelp, Airbnb, Uber, eBay etc. that a minor drop (say 4 stars vs. 5 stars) translates into a huge drop off in clientele. In a world where every Uber driver has 5 stars, having 4.5 practically means you're a maniac in the eyes of the consumer. (Not entirely unjustified since 5 stars means 'average' for most people, and not 'outstanding'. So to give less than that is actually quite a hurdle for most people.)
- agumonkey 7y ago
  young users won't google that young users will react to ads, feel they should spend money to feel they got something of value, get in the store on "super hot deal day" to get conned (like their parents were the first time?) I'm exaggerating a bit, some cultures put a lot of pressure on being financially responsible. But for the rest I saw what I described with my eyes.
  - rjyoungling 7y ago
    I don't have evidence to back this up, but anecdotally it does seem to me that younger people (Millenials) tend to use google to compare/look for reviews when it comes to purchases that fall outside of the impulse buy category.

xivzgrev 7y ago

I don’t think you are looking at full picture. Nash equilibrium just means any lower margins would be unsustainable. In the case of mattresses, while gross margin is higher than other industries, the volume is MUCH lower. So the overall profit is likely lower than you may guess. That said I also think mattresses are not quite that rock bottom. because people shop so infrequently and the purchase is important, they’re likely to look to authority sources for guidance on which to get which can include friends, articles, and advertising. In advertising there’s an intuitive promise that if a company can afford to advertise than they must be doing well enough so the quality must be ok. Now we all rationally know that’s not necessarily true but it’s one reason imho why advertising works. So there’s room for branding and feature differentiation exhibit A Casper.

rjyoungling 7y ago
Just to clarify, I laid out a fictitious model where you have a perfectly efficient market with regards to some product. Under those constraints, you'd expect cost plus a penny. In the real world, human behavior, signals, etc. make it more complex (which is why behavioral economics was created). But I can imagine a case where the Nash Eq. doesn't settle at the absolute bottom price. Perhaps consumers don't care about price alone. Like you pointed out as well, if they interpret advertising as a trustworthy signal, then a business is forced to run ads. Undercutting others with a low price, by not running ads would in that hypothetical situation signal low quality. (Maybe a better example would be a bank in a trailer park vs. a bank in one of those beautifully designed buildings.) But all those cost can be factored into things like CAC, COGS, SG&A etc. Edit: There aren't that many studies on credibility and advertising but you might find this one interesting: https://getd.libs.uga.edu/pdfs/soh_hyeonjin_200608_phd.pdf https://getd.libs.uga.edu/pdfs/soh_hyeonjin_200608_phd.pdf