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> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. I always found this statem

> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Otherwise, demand elasticity becomes very relevant. Sure, your competitor may take the larger share of the market, but then you can compensate with higher per item profit. The common wisdom is that in properly functional markets there's enough supply with n-1 market participants, therefore given a market signal of one participant lowering their prices the last one standing without lowering prices gets kicked out of the market, making maintaining prices the losing move. Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market. Making price maintenance, and depending on elasticity maybe even jacking of prices, the winning move in the presence of this signal. Turns out the probability of either move being the winning move is dependent on probability of other market participants colluding/defecting. However, since lowering the prices hurts the profit a rational market participant would conclude that the rest of the market is inclined, even if a little bit, not to lower their prices in reaction given price cutting signal and similarly a bit more inclined to raise the prices given price hike signal.

AnthonyMouse 1y ago
> Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Individual lowering of prices makes sense if you are capable of producing some amount more than you currently do. Suppose there are 10 suppliers, your production cost is $1 and the current market price is $2. You each sell 100 widgets and you yourself make $100, the other 9 providers also sell an average of 100 widgets, so there are 1000 total purchases. If you can produce 200 widgets and you lower your price to $1.90, you're now making $180 instead of $100, because people prefer to pay $1.90 to $2 until you run out of capacity. Moreover, the other suppliers have now collectively lost 100 sales to you unless they match your price reduction and maybe some of them have higher costs than you and can't, which means you get to keep their share of the market. The other participants who have lower costs like you, even if they don't have any excess capacity, would rather make the ones who can't lower prices eat the loss in sales because it's better to lower margins by 10% than take an 11% reduction in sales. And lowering prices might also increase sales if customers buy more market-wide at the lower price. > Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market. How would the one lowering the price kick themselves out of the market? Their sales would only go up, or if consumers are completely insensitive to price, stay the same. As long as the lower price is still yielding them a net profit, they're still in the market. The theory isn't expected to cause them to lower prices below their own costs, because of course they weren't going to do that. If consumers are completely price insensitive and they didn't know that until they tried it, they might end up raising the price again because it didn't do any good, but that's also pretty uncommon. If you can get the exact same thing for less money, do you pay more for no reason? > Turns out the probability of either move being the winning move is dependent on probability of other market participants colluding/defecting. Collusion is something else entirely. If all of the participants are getting together in a back room to fix prices then none of this applies, but that's also why there's a law against that. It's also why the theory doesn't work when the number of participants is very small. Suppose there are only two providers and they each have unlimited capacity. They each have a $1 cost, sell 500 widgets for $2 and make $500 each. If one of them lowers prices to $1.90, they'll sell 1000 widgets and make $900. Except that the other one will just match their price and then they'll each make $450 instead, which they both know so they both don't do it. And that's on top of explicit collusion being much easier to hold together and harder to detect when there are fewer sellers. That isn't what happens when there are 100 sellers, because then 99 of them are trying to hold together a cartel and the last one is laughing at them all because they can increase their sales by 10,000% by lowering prices by 5% and none of the others are matching them.
lotsofpulp 1y ago
> I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Like Walmart/Dollar Tree/Costco/Aldi/Target/Kroger/Amazon etc can (and have)? And on a macro scale, like China can (and has)?
- guywithahat 1y ago
  If anything it's incredible how competitive the market is. You can go into walmart, in the richest large country on earth by a significant margin, and buy pants for like $20. There are some heavily regulated industries where maybe we don't want this but in general companies competing to drive down prices is how most things work, and it works unbelievably well.
wordpad 1y ago
This feels like a variation of prisoners dilemma. I think what you say is true for well established markets. In growing markets the incentive to capture market share may well override any profit considerations.
- LPisGood 1y ago
  TFA is about game theory and the prisoner’s dilemma is one of the most basic examples of game theory, so this makes sense.
dghlsakjg 1y ago
It is an intentional oversimplification. Although a good proxy for the situation in the real world is gas stations, as long as you ignore that gas stations tend not to make much, if any, profit on gas sales.
- wat10000 1y ago
  No need to ignore it. This is exactly why gas stations tend not to make much profit on gas. In my area, there's one notorious gas station that's a couple miles away from any other commerce but has a reasonably large amount of traffic passing by. Amazingly, its prices are always about 50% higher than everywhere else. Competition works when it exists. Yes, you also have to factor in supply. That's why the phrase is "supply and demand."
spwa4 1y ago
You want to get an economist to shut up? Point out that we're now in a situation that for nearly any physical good, one producer is able to saturate the market, that nearly every factory is operating below capacity, that individual farms are so big they can easily produce what an entire state needs and in fact operates below capacity for financial reasons. Both factories and farms: A LOT below capacity. Because 1% of a modern factory's capacity is able to saturate a very large local market, and the rest depends on international treaties, not on supply, demand, or even price. Which means increasing supply for just about anything ... doesn't actually change price, and in fact the issue you're pointing out is not just one of the influences on prices, but almost the only one. The market is saturated and producers have no incentive to lower prices, for nearly every good. Which means increasing supply ... does not lower prices. Increasing demand does not raise prices ... that's just not how it works anymore. The only influence on price is international relations, or to put it more bluntly: various kinds of taxes are the only influence on prices (going from import/export tax, vat/sales tax, subsidies, raw material availability (effectively mostly meaning a tax in the form of export restrictions), what loan conditions are for good X, ...), and so economics just doesn't really apply anymore to the vast majority of goods. The price of widgets from water balloons to air fryers is controlled by government subsidies in particular countries. The price of houses is controlled by mortgage conditions, which are set in law. Meaning they are different between countries in both ways that matter (so, for example, Freehold vs Leasehold, Australia's Negative Gearing, whether 30 year fixed price is available, immigration policy, whether foreign investment is allowed ...) and in weird ways that don't matter. Supply and demand don't control price. The price of labor and services is around 80% tax in most of Europe. Measured by taking $100 that the employer pays to have labour done, so including for example France's "patronal" tax, compared to what the employer would receive and not have to pay to the government in his bank account if the employee chose to spend all of his pay on whatever his labor produces. Yes there is still some supply/demand here ... but not much. The problem is that for nearly everything "taxes" (as in taxes and tax-like regulations) determine who produces, and the tax swings are so large (going from -10%, yes minus, to 80% and more) depending on location and good, and their effect swamps any economic concern in nearly all sectors of the economy.
- wat10000 1y ago
amelius 1y ago
> I always found this statement to be rather wishful. The principles behind the free market are flawed. Copyright and patents are flawed. We're being played. But somehow the incumbents always get away with "but we have fair rules", when everybody who has ever entered a game of monopoly late knows this is not true.
- shafoshaf 1y ago
  Not flawed, but very, very complicated. The theory of free markets holds a lot of very well reasoned and tested lessons that can be instructive, depending to which principles you are referring. Newtonian principles does a really good job for a huge number of use cases, but it isn't the end all. When it comes to intertwining human taste, a doctrine of equal opportunity combined with private property, and scarce resources, I don't want to throw the baby out with the bathwater.
  - Retric 1y ago
    Free markets as described by Econ 101 don’t apply in any sector where advertising is useful. Far more complicated theories get much closer to reality, but aren’t nearly as well known outside of economic circles.
    - nerdponx 1y ago
      The irony is that rental markets are probably one of the better markets to apply Econ 101 principles. Yes you have problems with information asymmetry, but for the most part you have a huge number of relatively small buyers and sellers, and prices freely ebb and flow based on supply and demand conditions. So if you are going to analyze the effect of algorithmic pricing in the real estate market, starting with the simple free market assumptions actually is not a bad idea at all. It's also common practice to show the effect of something on an idealized free market, with the idea of being that even under supposedly ideal conditions, the something being analyzed is still problematic.
      - cogman10 1y ago
zaphar 1y ago
You shouldn't lower prices as a direct reaction to your competitor. You should lower prices as a reaction to your customers willingness to buy at a given price. It's an indirect reaction but it factors in the actual market.
- positron26 1y ago
  This is still so oversimplified. There's always bellwether products customers buy a lot and get used to. They use those to decide if you are cheap or expensive. Costco hotdogs are about satisfaction. If I can get one good deal or even a great deal that I find every time, I'm much more likely to be satisfied.
  - BizarroLand 1y ago
    I was just thinking about this. Costco either loses money on or just barely breaks even on their hotdogs, but they keep selling them at $1.50. It's a part of their brand. It would be smarter for them to raise the price of their membership another $10/yr to offset the losses than it would to raise the price of their hot dogs another $0.50 to make them profitable.
    - dghlsakjg 1y ago
      Don't know if it had anything to do with the price of hotdogs, but Costco did just increase their membership prices. https://customerservice.costco.com/app/answers/answer_view/a_id/1013504/~/membership-fee-increase https://customerservice.costco.com/app/answers/answer_view/a...
    - Workaccount2 1y ago
      I wouldn't be surprised if costco writes off the loss on hot dogs as a marketing expense.
- shmatt 1y ago
  This actually works well the other way around. When sales are still growing YoY (like the post covid market), but prices are up 30% or 40%, you understand your customer is still willing to pay the higher price Its similar to a McDonalds or Starbucks situation where you just keep increasing prices dramatically until you get a first quarter of lower than expected sales, then you start adapting downwards Most corporations still haven't hit that limit, see streaming companies increasing prices every few months, they still haven't hit the point where profits decrease YoY. When they do the streaming prices start decreasing
jellicle 1y ago
> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. Imagine a town with two widget merchants. The two go out to dinner one night, and next week they both double their prices. Both widget merchants are pleased.
bluGill 1y ago
In the real world there are always things other than price to compete on. Business school will tell you constantly that best quality is where you want to compete in almost all cases. Quality has many different options and so you can compete with something that is different from someone else by enough that if someone prefers your quality you are the only option.
- ozim 1y ago
  That’s the fun part of observing influencers. Let’s say there is a dozen of them playing Minecraft, one could say they are in the same market competing with each other. But what happens really is some folks like dude with long hair, others like the other guy that screams every time he wins. Same with training videos, I bought course from a guy that is kind of monotonous and I don’t care but my GF cannot stand watching the guy for longer than 10 minutes. Bakeries seem like closest one would be best, but somehow I’d rather go 10 mins further because I don’t like the feeling of the first one. Even though quality or price they don’t differ.
- mhuffman 1y ago
  >Business school will tell you constantly that best quality is where you want to compete in almost all cases. Hmmmm, I don't remember it that way. I remember the constant take was to build a moat (typically based on intellectual property), then optimize net profit and/or network effects. Quality never really came up unless it is so bad as to cause lawsuits.
  - schmidtleonard 1y ago
    Yeah, it's the exact opposite: business school teaches you that you should avoid competing on price/quality at all costs and all the ways to avoid competition: network effects, platform effects, last-mile dynamics, predatory pricing, information asymmetry, etc. Of course, right after teaching you how to exploit all the bad incentives created by capitalism they teach you that the government is to blame for all bad incentives because capitalism only makes good incentives.
    - 1y ago
photochemsyn 1y ago
Imagine a town with two landlords who own all rental properties. Yes consumers prefer cheaper rentals, but all the landlords have to do is write an app that they can use to set prices as high as they can while not having too many units empty. If the homeless population in the town increases, that's an externality - especially if the landlords themselves don't live in the town.
- indoordin0saur 1y ago
  This works if landlords don't have significantly more units than are demanded by the population AND it is both very expensive for new units to be built and new competitors to enter the market. If enough supply comes on the market and the best move for the landlord with the additional supply would be to lower prices. Tenants then all move into the better value units and the expensive landlord is left with either empty buildings or is forced to lower his price.
  - sylos 1y ago
    Wouldn't that require a large flooding of units not attached to those landlords? And considering they already cornered the market on the "old" units, unless this market disrupting supply of units is owned by someone generous, they'll just match the old prices and call it a win.
    - denimnerd42 1y ago
      usually prices dont go down. the cost does relative to inflation. what usually happens is a new investor will do the analysis and build new units that are even more expensive but only slightly. now all the current tenants that can afford it will leave the current landlords and the current landlords wont be able to increase prices because there is a better product at that price level.
      - indoordin0saur 1y ago
        It does depend on where you are and how elastic supply is. In Austin for example there has been a recent decrease in rent (even relative to inflation) despite continually growing demand.
sharemywin 1y ago
if you've ever shopped at Giant Eagle instead of Kroger you'll understand the flaw in the logic. higher prices usually equals better service, less busy shopping. get in and get out. so if your time is worth more than your money you aren't sensitive to price at the widget scale. most widgets are bundled with some kind of service. I bought some printing and it was super cheap but no service not an email not a phone number nothing. not ordering from their again.
- ajmurmann 1y ago
  So the products are not the same
eitau_1 1y ago
I find double-action[0] a really useful mental model of market. [0] https://en.wikipedia.org/wiki/Double_auction#Game-theoretic_analysis https://en.wikipedia.org/wiki/Double_auction#Game-theoretic_...
yieldcrv 1y ago
The idea is that a third, fourth and fifth widget manufacturer pops up and undercuts everyone There are many industries where that doesn’t happen, but there is also opportunity to make it happen
crowcroft 1y ago
Not entirely relevant to the article, but another factor that is rarely discussed. You need to assume people know about both widget companies. You often see a McDonalds or Wendy's outcompete lower price/higher quality alternatives, simply because it's a brand people can recall.
- gowld 1y ago
  What is lower price than McDonalds or Wendy's for a substitutable good Economy of Scale is powerful.
  - cogman10 1y ago
    There's a weird thing happening in the US where all the restaurant suppliers have consolidated. What that means is you likely won't see competitive prices anywhere else not due to scale but due to the input price being fixed regardless of who you are. I believe McDonalds is still somewhat independent in it's sourcing. IDK about wendy's. But Burger King is absolutely just another Sysco reseller at this point. That means a lot of the smaller burger stands end up just selling the same stuff as every other burger stand. Food that tastes a lot like my high school cafeteria did (hint, also Sysco). The only real lever any food business can pull is in facilities and staffing. The price of the food is fixed and there's no real competition to be had.
    - alostpuppy 1y ago
      This is fascinating take and makes SO much sense.
      - treis 1y ago
        Fortunately it's not true. Sysco has 17% of the market according to Morningstar: https://www.morningstar.com/company-reports/1327868-sysco-remains-well-positioned-in-food-distribution-with-its-cost-advantage-and-service-ability https://www.morningstar.com/company-reports/1327868-sysco-re...
RataNova 1y ago
It's funny how much "rational behavior" in economics often comes down to psychological inference
BlandDuck 1y ago
> I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Otherwise, demand elasticity becomes very relevant. Sure, your competitor may take the larger share of the market, but then you can compensate with higher per item profit. You should check the distinction between Bertrand and Cournot competition. Bertrand competition is price competition where the competitor can saturate the market, as you mention. Cournot competition, on the other hand, captures your intuition of competition on quantities rather than prices.
dheera 1y ago
I once did an internship in a small town in Germany. There were 2 bakeries in this town. One closed for all of July as vacation, the other took all of August as vacation. They had coordinated this with each other so that everyone could always buy bread and pastries, but the bakers could also get their vacations. They would even put signs on their doors letting people know that the other bakery was open during their vacation. I feel like in the US or Asia this would never happen. In these hyper-capitalist and competitive societies, both bakeries would jump on the opportunity of extra business, sacrifice their family and fun time, and neither would take any vacation. Two bakeries in a town would see each other as mortal competitors instead of collaborators and take every opportunity to eat into the others' business.
Workaccount2 1y ago
The AI market is a prime example of intense competition going on right now. All the dynamics are there. If it was just one player, like Open AI, we'd still be at GPT-4 turbo and it would cost $400/mo.
- MagicMoonlight 1y ago
  They’re all charging the same price…
  - Workaccount2 1y ago
    And losing money hand over fist on it.
naasking 1y ago
> Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market. The reason this doesn't happen is because the ones lowering their prices have typically done so due to explicit measures to improve efficiency, and so they already have a healthier margin with which to capture more of the market from competitors.
bcrl 1y ago
The main difference between algorithms and humans is that software feels no guilt. Traditional human building superintendents were once happy with a 10% increase in rent from one tenant to the next, and would feel guilty when doubling prices. There are plenty of small business owners which take pride in delivering affordable prices to their customers across many market segments. Not a trait that is present in large corporations. One of the Behind the Bastards podcasts touched upon the fact that in the rental property market the 2 cloud vendors peddling software to manage properties could collude on behalf of landlords. Collusion by humans is fairly limited in scale, but when you're a "platform" every price can be set based on the prices of millions of listings -- what was once impossible for humans is now trivial.

AnthonyMouse 1y ago

> Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Individual lowering of prices makes sense if you are capable of producing some amount more than you currently do. Suppose there are 10 suppliers, your production cost is $1 and the current market price is $2. You each sell 100 widgets and you yourself make $100, the other 9 providers also sell an average of 100 widgets, so there are 1000 total purchases. If you can produce 200 widgets and you lower your price to $1.90, you're now making $180 instead of $100, because people prefer to pay $1.90 to $2 until you run out of capacity. Moreover, the other suppliers have now collectively lost 100 sales to you unless they match your price reduction and maybe some of them have higher costs than you and can't, which means you get to keep their share of the market. The other participants who have lower costs like you, even if they don't have any excess capacity, would rather make the ones who can't lower prices eat the loss in sales because it's better to lower margins by 10% than take an 11% reduction in sales. And lowering prices might also increase sales if customers buy more market-wide at the lower price. > Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market. How would the one lowering the price kick themselves out of the market? Their sales would only go up, or if consumers are completely insensitive to price, stay the same. As long as the lower price is still yielding them a net profit, they're still in the market. The theory isn't expected to cause them to lower prices below their own costs, because of course they weren't going to do that. If consumers are completely price insensitive and they didn't know that until they tried it, they might end up raising the price again because it didn't do any good, but that's also pretty uncommon. If you can get the exact same thing for less money, do you pay more for no reason? > Turns out the probability of either move being the winning move is dependent on probability of other market participants colluding/defecting. Collusion is something else entirely. If all of the participants are getting together in a back room to fix prices then none of this applies, but that's also why there's a law against that. It's also why the theory doesn't work when the number of participants is very small. Suppose there are only two providers and they each have unlimited capacity. They each have a $1 cost, sell 500 widgets for $2 and make $500 each. If one of them lowers prices to $1.90, they'll sell 1000 widgets and make $900. Except that the other one will just match their price and then they'll each make $450 instead, which they both know so they both don't do it. And that's on top of explicit collusion being much easier to hold together and harder to detect when there are fewer sellers. That isn't what happens when there are 100 sellers, because then 99 of them are trying to hold together a cartel and the last one is laughing at them all because they can increase their sales by 10,000% by lowering prices by 5% and none of the others are matching them.

lotsofpulp 1y ago

> I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Like Walmart/Dollar Tree/Costco/Aldi/Target/Kroger/Amazon etc can (and have)? And on a macro scale, like China can (and has)?

guywithahat 1y ago
If anything it's incredible how competitive the market is. You can go into walmart, in the richest large country on earth by a significant margin, and buy pants for like $20. There are some heavily regulated industries where maybe we don't want this but in general companies competing to drive down prices is how most things work, and it works unbelievably well.

wordpad 1y ago

This feels like a variation of prisoners dilemma. I think what you say is true for well established markets. In growing markets the incentive to capture market share may well override any profit considerations.

LPisGood 1y ago
TFA is about game theory and the prisoner’s dilemma is one of the most basic examples of game theory, so this makes sense.

dghlsakjg 1y ago

It is an intentional oversimplification. Although a good proxy for the situation in the real world is gas stations, as long as you ignore that gas stations tend not to make much, if any, profit on gas sales.

wat10000 1y ago
No need to ignore it. This is exactly why gas stations tend not to make much profit on gas. In my area, there's one notorious gas station that's a couple miles away from any other commerce but has a reasonably large amount of traffic passing by. Amazingly, its prices are always about 50% higher than everywhere else. Competition works when it exists. Yes, you also have to factor in supply. That's why the phrase is "supply and demand."

spwa4 1y ago

You want to get an economist to shut up? Point out that we're now in a situation that for nearly any physical good, one producer is able to saturate the market, that nearly every factory is operating below capacity, that individual farms are so big they can easily produce what an entire state needs and in fact operates below capacity for financial reasons. Both factories and farms: A LOT below capacity. Because 1% of a modern factory's capacity is able to saturate a very large local market, and the rest depends on international treaties, not on supply, demand, or even price. Which means increasing supply for just about anything ... doesn't actually change price, and in fact the issue you're pointing out is not just one of the influences on prices, but almost the only one. The market is saturated and producers have no incentive to lower prices, for nearly every good. Which means increasing supply ... does not lower prices. Increasing demand does not raise prices ... that's just not how it works anymore. The only influence on price is international relations, or to put it more bluntly: various kinds of taxes are the only influence on prices (going from import/export tax, vat/sales tax, subsidies, raw material availability (effectively mostly meaning a tax in the form of export restrictions), what loan conditions are for good X, ...), and so economics just doesn't really apply anymore to the vast majority of goods. The price of widgets from water balloons to air fryers is controlled by government subsidies in particular countries. The price of houses is controlled by mortgage conditions, which are set in law. Meaning they are different between countries in both ways that matter (so, for example, Freehold vs Leasehold, Australia's Negative Gearing, whether 30 year fixed price is available, immigration policy, whether foreign investment is allowed ...) and in weird ways that don't matter. Supply and demand don't control price. The price of labor and services is around 80% tax in most of Europe. Measured by taking $100 that the employer pays to have labour done, so including for example France's "patronal" tax, compared to what the employer would receive and not have to pay to the government in his bank account if the employee chose to spend all of his pay on whatever his labor produces. Yes there is still some supply/demand here ... but not much. The problem is that for nearly everything "taxes" (as in taxes and tax-like regulations) determine who produces, and the tax swings are so large (going from -10%, yes minus, to 80% and more) depending on location and good, and their effect swamps any economic concern in nearly all sectors of the economy.

wat10000 1y ago

amelius 1y ago

> I always found this statement to be rather wishful. The principles behind the free market are flawed. Copyright and patents are flawed. We're being played. But somehow the incumbents always get away with "but we have fair rules", when everybody who has ever entered a game of monopoly late knows this is not true.

shafoshaf 1y ago
Not flawed, but very, very complicated. The theory of free markets holds a lot of very well reasoned and tested lessons that can be instructive, depending to which principles you are referring. Newtonian principles does a really good job for a huge number of use cases, but it isn't the end all. When it comes to intertwining human taste, a doctrine of equal opportunity combined with private property, and scarce resources, I don't want to throw the baby out with the bathwater.
- Retric 1y ago
  Free markets as described by Econ 101 don’t apply in any sector where advertising is useful. Far more complicated theories get much closer to reality, but aren’t nearly as well known outside of economic circles.
  - nerdponx 1y ago
    The irony is that rental markets are probably one of the better markets to apply Econ 101 principles. Yes you have problems with information asymmetry, but for the most part you have a huge number of relatively small buyers and sellers, and prices freely ebb and flow based on supply and demand conditions. So if you are going to analyze the effect of algorithmic pricing in the real estate market, starting with the simple free market assumptions actually is not a bad idea at all. It's also common practice to show the effect of something on an idealized free market, with the idea of being that even under supposedly ideal conditions, the something being analyzed is still problematic.
    - cogman10 1y ago

zaphar 1y ago

You shouldn't lower prices as a direct reaction to your competitor. You should lower prices as a reaction to your customers willingness to buy at a given price. It's an indirect reaction but it factors in the actual market.

positron26 1y ago
This is still so oversimplified. There's always bellwether products customers buy a lot and get used to. They use those to decide if you are cheap or expensive. Costco hotdogs are about satisfaction. If I can get one good deal or even a great deal that I find every time, I'm much more likely to be satisfied.
- BizarroLand 1y ago
  I was just thinking about this. Costco either loses money on or just barely breaks even on their hotdogs, but they keep selling them at $1.50. It's a part of their brand. It would be smarter for them to raise the price of their membership another $10/yr to offset the losses than it would to raise the price of their hot dogs another $0.50 to make them profitable.
  - dghlsakjg 1y ago
    Don't know if it had anything to do with the price of hotdogs, but Costco did just increase their membership prices. https://customerservice.costco.com/app/answers/answer_view/a_id/1013504/~/membership-fee-increase https://customerservice.costco.com/app/answers/answer_view/a...
  - Workaccount2 1y ago
    I wouldn't be surprised if costco writes off the loss on hot dogs as a marketing expense.
shmatt 1y ago
This actually works well the other way around. When sales are still growing YoY (like the post covid market), but prices are up 30% or 40%, you understand your customer is still willing to pay the higher price Its similar to a McDonalds or Starbucks situation where you just keep increasing prices dramatically until you get a first quarter of lower than expected sales, then you start adapting downwards Most corporations still haven't hit that limit, see streaming companies increasing prices every few months, they still haven't hit the point where profits decrease YoY. When they do the streaming prices start decreasing

jellicle 1y ago

> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. Imagine a town with two widget merchants. The two go out to dinner one night, and next week they both double their prices. Both widget merchants are pleased.

bluGill 1y ago

In the real world there are always things other than price to compete on. Business school will tell you constantly that best quality is where you want to compete in almost all cases. Quality has many different options and so you can compete with something that is different from someone else by enough that if someone prefers your quality you are the only option.

ozim 1y ago
That’s the fun part of observing influencers. Let’s say there is a dozen of them playing Minecraft, one could say they are in the same market competing with each other. But what happens really is some folks like dude with long hair, others like the other guy that screams every time he wins. Same with training videos, I bought course from a guy that is kind of monotonous and I don’t care but my GF cannot stand watching the guy for longer than 10 minutes. Bakeries seem like closest one would be best, but somehow I’d rather go 10 mins further because I don’t like the feeling of the first one. Even though quality or price they don’t differ.
mhuffman 1y ago
>Business school will tell you constantly that best quality is where you want to compete in almost all cases. Hmmmm, I don't remember it that way. I remember the constant take was to build a moat (typically based on intellectual property), then optimize net profit and/or network effects. Quality never really came up unless it is so bad as to cause lawsuits.
- schmidtleonard 1y ago
  Yeah, it's the exact opposite: business school teaches you that you should avoid competing on price/quality at all costs and all the ways to avoid competition: network effects, platform effects, last-mile dynamics, predatory pricing, information asymmetry, etc. Of course, right after teaching you how to exploit all the bad incentives created by capitalism they teach you that the government is to blame for all bad incentives because capitalism only makes good incentives.
  - 1y ago

photochemsyn 1y ago

Imagine a town with two landlords who own all rental properties. Yes consumers prefer cheaper rentals, but all the landlords have to do is write an app that they can use to set prices as high as they can while not having too many units empty. If the homeless population in the town increases, that's an externality - especially if the landlords themselves don't live in the town.

indoordin0saur 1y ago
This works if landlords don't have significantly more units than are demanded by the population AND it is both very expensive for new units to be built and new competitors to enter the market. If enough supply comes on the market and the best move for the landlord with the additional supply would be to lower prices. Tenants then all move into the better value units and the expensive landlord is left with either empty buildings or is forced to lower his price.
- sylos 1y ago
  Wouldn't that require a large flooding of units not attached to those landlords? And considering they already cornered the market on the "old" units, unless this market disrupting supply of units is owned by someone generous, they'll just match the old prices and call it a win.
  - denimnerd42 1y ago
    usually prices dont go down. the cost does relative to inflation. what usually happens is a new investor will do the analysis and build new units that are even more expensive but only slightly. now all the current tenants that can afford it will leave the current landlords and the current landlords wont be able to increase prices because there is a better product at that price level.
    - indoordin0saur 1y ago
      It does depend on where you are and how elastic supply is. In Austin for example there has been a recent decrease in rent (even relative to inflation) despite continually growing demand.

sharemywin 1y ago

if you've ever shopped at Giant Eagle instead of Kroger you'll understand the flaw in the logic. higher prices usually equals better service, less busy shopping. get in and get out. so if your time is worth more than your money you aren't sensitive to price at the widget scale. most widgets are bundled with some kind of service. I bought some printing and it was super cheap but no service not an email not a phone number nothing. not ordering from their again.

ajmurmann 1y ago
So the products are not the same

eitau_1 1y ago

I find double-action[0] a really useful mental model of market. [0] https://en.wikipedia.org/wiki/Double_auction#Game-theoretic_analysis https://en.wikipedia.org/wiki/Double_auction#Game-theoretic_...

yieldcrv 1y ago

The idea is that a third, fourth and fifth widget manufacturer pops up and undercuts everyone There are many industries where that doesn’t happen, but there is also opportunity to make it happen

crowcroft 1y ago

Not entirely relevant to the article, but another factor that is rarely discussed. You need to assume people know about both widget companies. You often see a McDonalds or Wendy's outcompete lower price/higher quality alternatives, simply because it's a brand people can recall.

gowld 1y ago
What is lower price than McDonalds or Wendy's for a substitutable good Economy of Scale is powerful.
- cogman10 1y ago
  There's a weird thing happening in the US where all the restaurant suppliers have consolidated. What that means is you likely won't see competitive prices anywhere else not due to scale but due to the input price being fixed regardless of who you are. I believe McDonalds is still somewhat independent in it's sourcing. IDK about wendy's. But Burger King is absolutely just another Sysco reseller at this point. That means a lot of the smaller burger stands end up just selling the same stuff as every other burger stand. Food that tastes a lot like my high school cafeteria did (hint, also Sysco). The only real lever any food business can pull is in facilities and staffing. The price of the food is fixed and there's no real competition to be had.
  - alostpuppy 1y ago
    This is fascinating take and makes SO much sense.
    - treis 1y ago
      Fortunately it's not true. Sysco has 17% of the market according to Morningstar: https://www.morningstar.com/company-reports/1327868-sysco-remains-well-positioned-in-food-distribution-with-its-cost-advantage-and-service-ability https://www.morningstar.com/company-reports/1327868-sysco-re...

RataNova 1y ago

It's funny how much "rational behavior" in economics often comes down to psychological inference

BlandDuck 1y ago

> I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Otherwise, demand elasticity becomes very relevant. Sure, your competitor may take the larger share of the market, but then you can compensate with higher per item profit. You should check the distinction between Bertrand and Cournot competition. Bertrand competition is price competition where the competitor can saturate the market, as you mention. Cournot competition, on the other hand, captures your intuition of competition on quantities rather than prices.

dheera 1y ago

I once did an internship in a small town in Germany. There were 2 bakeries in this town. One closed for all of July as vacation, the other took all of August as vacation. They had coordinated this with each other so that everyone could always buy bread and pastries, but the bakers could also get their vacations. They would even put signs on their doors letting people know that the other bakery was open during their vacation. I feel like in the US or Asia this would never happen. In these hyper-capitalist and competitive societies, both bakeries would jump on the opportunity of extra business, sacrifice their family and fun time, and neither would take any vacation. Two bakeries in a town would see each other as mortal competitors instead of collaborators and take every opportunity to eat into the others' business.

Workaccount2 1y ago

The AI market is a prime example of intense competition going on right now. All the dynamics are there. If it was just one player, like Open AI, we'd still be at GPT-4 turbo and it would cost $400/mo.

MagicMoonlight 1y ago
They’re all charging the same price…
- Workaccount2 1y ago
  And losing money hand over fist on it.

naasking 1y ago

> Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market. The reason this doesn't happen is because the ones lowering their prices have typically done so due to explicit measures to improve efficiency, and so they already have a healthier margin with which to capture more of the market from competitors.

bcrl 1y ago

The main difference between algorithms and humans is that software feels no guilt. Traditional human building superintendents were once happy with a 10% increase in rent from one tenant to the next, and would feel guilty when doubling prices. There are plenty of small business owners which take pride in delivering affordable prices to their customers across many market segments. Not a trait that is present in large corporations. One of the Behind the Bastards podcasts touched upon the fact that in the rental property market the 2 cloud vendors peddling software to manage properties could collude on behalf of landlords. Collusion by humans is fairly limited in scale, but when you're a "platform" every price can be set based on the prices of millions of listings -- what was once impossible for humans is now trivial.