Archives for price theory



Price Controls in the NBA Force Teams to Find Different Ways to Keep Their Stars

The NBA free agent market opened this month and the moves making headlines include:

Steve Nash signing with the L.A. Lakers
Ray Allen signing with the Miami Heat
Jason Kidd signing with the New York Knicks
Deron Williams re-signing with the Brooklyn Nets

And then there is the Dwight Howard saga. 

Each of these stories appears to be summarized by a familiar line: 

Big star signs in Big Market.  Read More »



The Price of Blown Glass: Opportunity Cost and Demand Elasticity

A puzzle. My nephew has switched to making art glass full-time, and I think his work is gorgeous. His problem, though, is figuring out what price to charge. Among other things, he blows gorgeous candlesticks, which he thought of selling for $70 a pair. I say he should charge $250 a pair. He says no, because he thinks he can sell many more at the lower price.

He assumes it takes one hour of his time to blow a pair after he’s done the first pair, and incurred the fixed cost. So I guess his decision depends on the opportunity cost of his time and the elasticity of demand for his product. Clearly, there is a set of combinations of the cost of his time and the expected change in quantity sold that would make him indifferent between the high and low prices, with a higher opportunity cost requiring a higher demand elasticity if the price is lower.

Given the two prices, what is this set? And what do you think the demand elasticity actually is in this case? (HT to SEH)



Paris Under Siege: Why Were Cats Four Times the Price of Dogs?

In his discussion of the Siege of Paris 1870-71, David McCullough in The Greater Journey discusses the path of meat prices. One observer “considered cats ‘downright good eating,’ as apparently did many people. The price of a cat on the market was four times that of a dog.” Whether the price difference was really based on demand—differences in tastes for the two kinds of meat—or supply—is not mentioned in the book, but perhaps Parisians protected Fido less well than they protected Fluffy.

This illustrates a ubiquitous problem in discussing price differences: It’s easy to adduce a cause on one side of the market, but just as easy to bring up another cause on the other side of the market. I would bet on demand in this case, though, since it’s easier to protect Fido than a loose-running cat.



Is the Senior Slam Smart?

Denny’s breakfast menu in Provo, Utah, offers something that combines demand-based and cost-based price discrimination, but it’s neither.

The “French toast slam” is two pieces of toast and two eggs, two strips of bacon and two sausages for $6.99. The “senior French toast slam” is one piece of toast and one egg, and two strips of bacon or two sausages for $5.49, and you must be at least 55 years old to buy this. Read More »



Disneyland and the Texas Tower

A local artist paints landscapes and various Austin sights, including the Texas Tower (the university’s main building). He must pay the university a flat fee per year for the right to sell paintings of University property, emblems, or even anything containing the burnt-orange color. All are copyrighted. Also, if his sales rise above a certain level, he must pay the University 10 percent of his extra revenue. Read More »



Bicycle Inflation in Paradise?

When I arrived in Portland last month, the first thing I wanted to do was buy a bike and get around the way the locals do. Since I wouldn’t be in town for too long, and it wasn’t clear that I’d be able to take the bike with me when I left, I wanted something extremely cheap. Read More »



Brothels, Buffets, and Disneyland

I read in a local newspaper about a bordello in Germany, where prostitution is legal, that charges customers a fixed fee: a bit over 100 euros ($140) for an evening of drinks, food, and entertainment.

This kind of pricing is common to amusement parks (Disneyland, for example), ski lifts, all-you-can-eat restaurants, and elsewhere. It is a way the firm can minimize the transactions costs of pricing each service and also, if the fixed price is set properly, extract the entire consumer surplus. Read More »



Would You Pay More …

… for a Sanka ashtray if Luc Sante made up a story about it? Apparently at least a few people would, as Joshua Glenn and Rob Walker found when they launched a project called Significant Objects, where they paired up creative writers with objects bought at garage sales and asked them to make up a story about the objects. Each object is for sale on eBay, where anyone can bid for it. Read More »