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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 ma

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

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