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Posts Tagged ‘pricing’

The Great Gefilte Fish Shortage

Fresh-made gefilte fish is hard to find this Passover season, because the harsh winter restricted fishing on the Great Lakes, sharply decreasing the supply of an essential input—whitefish. While this delicacy is not required by ritual, it is traditional—and with fresh-ground horseradish it is a mouth- (and eye-) watering treat.  One would think that a rising price would equilibrate the market, but it hasn’t—apparently merchants did not want to antagonize customers by raising prices.  Indeed, the nature-induced shortage in the market for fresh gefilte fish has increased the demand in the related market for the pre-made Manischewitz product, so that is hard to find too.  Pretty sad when you can’t find gefilte fish even in Manhattan!

Pricing at the British Library

At the British Library, the special exhibition about Georgian England has a concession (old folks) price of ₤7, but also a listed concession (gift) price of ₤8. With the latter, one gets a receipt and can deduct the ₤8 from one’s income at tax time. If one is in the 20 percent bracket (taxable income from almost nothing up to ₤32,000), the net admission price is ₤6.40. So the incidence of the subsidy is typically shared nicely by the library and the taxpayer. But for the highest-income visitors — tax rate of 40 percent — the overwhelming share of the benefit goes to the taxpayer. I’ve never seen this double-pricing scheme made so explicit — and the sharing of the gains made so clear — in the U.S.

College Campus Beer Pricing

There are three convenience stores in the student area west of the University of Texas campus.  Store A sells the most beer, and barely looks at student IDs; but it also charges the highest price of the three.  Store B is a bit stricter on fake IDs, refuses some underage students, and charges a lower price.  Store C has the best prices, but its clerks inspect IDs thoroughly. My student reports that nobody makes it through with a fake ID.  This near-campus oligopoly defines a new pricing strategy: lenience on IDs that is unsurprisingly related to the stores’ pricing policies. I wonder about differences in the characteristics of the patrons of the different stores.

(HT: JZ)

Cheaper Plumbing on Fridays

We received a postcard from our plumber offering service on Fridays with no service charge, explaining that they can offer this because the plumber will be in our area of town, thus saving drive time and fuel costs. We are better off, saving the $59 on the service charge; and the plumbing company acknowledges that the savings make it better off too. It’s not often you see a company that understands Pareto improvements this well. I invite other examples of commercial offers where the advertiser makes the mutual gains as clear as this.

Who Wants a Haircut for $9.99?

The other day I was walking past this barber shop on Broadway in the upper 90’s. This sign caught my eye.

It made me wonder what kind of customer is willing to get a crewcut by an “apprentice barber.” Would you? Also, was there really an “apprentice barber” on standby only to handle the $9.99 cuts? Not likely. It did make me think back to when I was in grad school and needed a root canal, and took advantage of the cut-rate dentistry available at my school’s College of Dental Medicine. The root canal was performed by a student — it took many visits, was unbelievably painful, and kept me from returning to any dentist for several years.

How Much for a Margarita?

I was at a restaurant the other day which had an interesting feature: the two menus they gave us listed different prices for the same items. One menu quoted $12 per margarita and the other offered the exact same drink for $11.

For a split second I wondered whether the restaurant was carrying out some sort of pricing field experiment. I’m pretty sure, though, that wasn’t the case. Just regular old incompetence, I suspect.

I wouldn’t usually pay $11 or $12 for a margarita, but I was so curious in this circumstance that I went ahead and ordered one. (Well, actually, I ordered three by the time I was done.)

What was the true price? Strangely, it turned out not to be $12, or even $11. They charged me exactly $7.94 per drink.

Luckily, I didn’t know that in advance or I might have had a fourth margarita, which definitely would have been a bad idea.

Paying Less … Without Health Insurance

Writing for the Wall Street Journal, Jeffrey Singer describes a patient who came in for a “simple outpatient surgical procedure” and discovered it was cheaper to just ignore his “low-cost ‘indemnity’ type of health insurance policy.”  The patient’s estimated costs had he used his health insurance plan: approximately $20,000 (out of the estimated hospital charge of $23,000).  After speaking to the patient, Singer realized that he wasn’t bound by a “preferred provider” contractual arrangement and offered the patient a solution that saved him $17,000:

I explained that just because he had health insurance didn’t mean he had to use it in every situation. After all, when people have a minor fender-bender, they often settle it privately rather than file an insurance claim. Because of the nature of this man’s policy, he could do the same thing for his medical procedure. However, had I been bound by a preferred-provider contract or by Medicare, I wouldn’t have been able to enlighten him….

Most people are unaware that if they don’t use insurance, they can negotiate upfront cash prices with hospitals and providers substantially below the “list” price. Doctors are happy to do this. We get paid promptly, without paying office staff to wade through the insurance-payment morass.

So we canceled the surgery and started the scheduling process all over again, this time classifying my patient as a “self-pay” (or uninsured) patient. I quoted him a reasonable upfront cash price, as did the anesthesiologist. We contacted a different hospital and they quoted him a reasonable upfront cash price for the outpatient surgical/nursing services. He underwent his operation the very next day, with a total bill of just a little over $3,000, including doctor and hospital fees. He ended up saving $17,000 by not using insurance.

(HT: Jason Hirschhorn)

Taxi Pricing: Hail or Call?

I called a taxi for a short trip in Melbourne, Australia.  When I paid the price on the meter, the driver added a $2 booking fee.  This is standard here, unlike in the U.S. where the price is the same whether you hail or call a taxi.  

The Australian system may be a sensible way to set price to cover marginal cost.  The booking service generates costs; and in many cases the booked driver “dead-heads” to pick up the passenger, using his valuable time without generating revenue.  On the other hand, having a booked fare saves the driver time waiting in a queue or cruising, so perhaps the impact on marginal cost isn’t so clear.  Is this monopoly pricing, or price reflecting cost?

Age Discrimination? Pay Your Birth-Year Rate

Canadian reader Lisa Sansom wrote to us about an interesting price promotion at Starwood hotels: 


We’re celebrating the year you were born. With this special offer for two or three night stays, you’ll receive rates equal to your birth year!

  • First night: full rate
  • Second or third night: rates equal to your birth year! (If you were born in 1948, you’ll receive your 2nd and 3rd nights at $48!)
  • Rates for second and third night stays will be confirmed at check-in upon presentation of valid ID.
  • Valid for arrivals Thursday – Saturday

The Economics of Toilet Paper

You never know what kind of useful information will turn up in your in-box. From a reader named Darin Haselhorst:

Steven and Stephen,

Thought this might be right up your alley.  An analysis only a true cheapskate could love.

I get very frustrated trying to compare prices on “paper products” at my local supermarket, Safeway.  They have various marketing terms meant to confuse the average consumer, regular, double, mega etc., making nearly impossible to compare prices on the spot.  So, I threw together a little spreadsheet (attached).

The price as Safeway was not all that surprising until you compare it to the price for which Amazon is willing to deliver it to your front door.  The Amazon Subscribe and Save program is about 30% cheaper than going to the store.  Not too bad.  If you have Amazon deliver 5 items on automatic delivery, they will take an additional 20% off the entire delivery.  A deal any true economist simply cannot pass up.

Its surprising to me that Amazon is willing to deliver to your door for approximately half the price Safeway has on their shelf.

The Absurdity of U.S. Air Travel: Baggage Fees

On the way home from visiting my brother-in-law’s family in Ohio, we changed planes in Chicago. To avoid the baggage fees, we, like most of our fellow passengers, schlepped our luggage through the airport to the gate in Dayton.  Of course, we had to gate-check it because the overhead bins were long-full by the time we could board (boarding group: infinity). The plane arrived in Chicago late, we waited 20 minutes for our baggage to be unloaded, and then we sprinted to (and barely caught) our connecting flight to Boston.  Naturally, we had to gate-check the luggage for that flight as well.

Baggage fees brought U.S. airlines in 2011 a total of $3.4 billion. That amount is almost one-half of the industry’s 2011 profits of $7 billion. To double the airlines’ profits, the social benefit of which is highly unclear, society incurs many costs:

FREAK-Shot: Christmas Ornament Edition

Reader Tim Kelly sends in photo from a store in Lombard, Illinois:

As Tim writes:

I spotted an interesting sign while out Christmas shopping the other day.  The sign stated the company’s “breakage policy,” where any broken item must be bought, but that the store will only charge half price on the broken item.  The sign continued offered to repair the broken item, free of charge (I confirmed the free repairs from the shop owner, as it is not explicitly stated in the sign).

The sign was located on a mall kiosk selling Christmas ornaments.  I imagine breakage is a big issue for such a shop, as their product is relatively fragile and are highly enticing to bored kids stuck Christmas shopping with their parents.

My initial instinct upon seeing the sign was that this policy seemed to be inviting people to game the system.

FREAK-Shots: Tequilanomics, and Fenway Gas

From a reader in Annandale, Va., named Christopher Galen, who earlier sent in his daughter’s third-grade economics quiz (never too young to start!), comes this pricing quirk:

That’s right: the cost per unit is cheaper on the smaller version, which isn’t the kind of pricing we’re accustomed to in this supersize-me era. (For an interesting related read, see “Does Food Marketing Need to Make Us Fat?” and a Forbes summary of same.) As Christopher writes:

I’m passing along a photo I took Friday at one of the state-run ABC liquor stores in Fairfax, Va. … Neither [bottle] was on sale, and it contrasts with most other liquor offerings, where larger product offerings tend to have a lower unit cost.

Which led me to wonder — and no, I had not done any in-store sampling — is this simply the counterintuitive marketing strategy of a state-run enterprise? Is the store trying to discourage excessive alcohol consumption by making smaller product sizes less expensive?

Wine: Very Liquid

Wine Spectator includes a feature (subscription required) on Nicolás Catena, who received the magazine’s Distinguished Service Award for 2012.  His online bio states, “One year, Domingo [Nicolás’ father] realized that it would cost him more to harvest than to leave the fruit on the vines. He asked his twenty-two-year-old son Nicolás, a recent Ph.D. graduate in economics, what to do about such a dilemma. Nicolás advised him not to harvest.”  You don’t need a Ph.D. to see the sense of Nicolás’ advice — if price is too low to cover average variable cost, shut down.  Sadly, “Domingo could not follow his son’s advice with a clear conscience and picked anyway.”  No doubt the family vineyard lost even more money than if Domingo had listened to his son.

"Information Wants to Be Shared"

The Australian economist Joshua Gans, who has shown up on this blog before, has published a new book called Information Wants to Be Shared. It “looks at the struggles facing information content industries — most notably, publishing (books and newspapers) — and examines the underlying economics of those industries.”  Gans and his publisher, HBR Press, are also running a pricing experiment:

HBR eBooks are all DRM-free but, in this case, if someone were to purchase the book (from HBR or from, say, Amazon or Apple), then they will find on the last page a coupon that they can send to a friend. The friend can then buy the book for only $0.99 directing from HBR. In other words, when you share with a friend, your friend gets a great deal. The usual price of the book is $4.99. I have outlined the rationale behind this at my blog Digitopoly. Basically, it is the sort of thing I advocate for information businesses in general.


Pricing Road Races

The Berlin Half Marathon charges €30 to each of the first 5,000 registrants, €35 for the next 10,000, €40 for the next 10,000 and €45 for the next 2,500, at which time registration closes.  This pricing strategy is new to me:  in the more than 100 road races I’ve done, including one in Europe, a fixed entry fee is charged that jumps up shortly before the race date.  Why the difference?  I don’t think this pricing mechanism is playing off demand elasticities: those who register earliest would be the most avid, low demand-elasticity runners. I don’t see the purpose of what is to me a novel pricing strategy for road races.

Coffee in Berlin

The local coffee shop and bakery near my apartment in Berlin charges €1 for an excellent cup of coffee.  The similar shop near my office, but on a main tourist street, charges €1.99 for an equal quality cup.  Similar quality coffee can be had for €1.50 at a bakery one block from my office in another direction, in a less touristy area with many office buildings.  I can explain the €0.50 difference from my local shop to the third shop as cost-based discrimination: I assume higher real-estate prices generate it.  The €0.50 difference between the two shops near my office must be mainly due to demand-based discrimination:  Tourists are unwilling to search, implicitly have a low demand elasticity and are an easy mark for the shopkeeper.

Summer Solar Power

The City of Austin has given us a windfall:  As of October 1, it will pay 12.8 cents per kilowatt-hour for power generated by our new solar system instead of the previous 3 cents/kwh.  Of course, this seems fairer to me—but it also reflects more closely the value of the power we generate for the grid.  Demand varies over the day and season, and the city prices higher when more power is used (in summers, mostly for air conditioning)—it engages in peak-load pricing, a form of price discrimination.  Supply is limited by capacity, and in some cases in summer the capacity constraint is reached.  The power we produce is storable, presumably for release during the peak times when its opportunity cost is highest.  Thus the increased price paid to us reflects the value of what we generate.  Regrettably, my joy at this windfall is tempered by the simultaneous substantially increased price when we must purchase power because our system fails to generate enough for our needs!

What Surgeons Get Paid, and What Patients Think Surgeons Get Paid

Jared Foran, an orthopedic surgeon in Denver, is a co-author of a new study called “Patient Perception of Physician Reimbursement in Elective Total Hip and Knee Arthroplasty” (PDF here). The authors surveyed 1,200 patients to see how much they thought orthopedic surgeons should make and what Medicare actually pays for a hip or knee replacement.

In an e-mail, Foran describes their results:

On average, patients thought that surgeons should receive $18,501 for total hip replacements,  and $16,822 for total knee replacements. Patients estimated actual Medicare reimbursement to be $11,151 for total hip replacements and $8,902 for total knee replacements.  Seventy per cent of patients stated that Medicare reimbursement was “much lower” than what it should be, and only 1% felt that it was higher than it should be.

Chicken Wing Pricing Redux

About a year ago, I blogged about how odd the pattern of chicken wing prices was at my local Harold’s Chicken Shack.  Here was what they were charging for their wings:

2-wing meal $3.03

3-wing meal $4.50

4-wing meal $5.40

5-wing meal $5.95

6-wing meal $7.00

It is quite odd because they gave you a big discount on the fourth and fifth wings, but charged you a lot for the sixth wing.  There were many incongruities throughout the menu.

Since that time, Harold’s has invested in a fancy new menu up on the wall above the bulletproof glass that protects the workers from the customers.  I’ve also invested in a fancy new phone that actually takes pictures, unlike the phone I carried a year ago.  So this time, instead of having to write down all the prices, I just snapped a photo.

Economies of Scale in the Cocaine Industry

Brian Palmer of Slate reports that cocaine prices have dropped significantly in the past three decades due to economies of scale. As drug traffickers have become more organized (in processing, transport, and retail networks), the price of cocaine has plunged:

Since [the end of the 1980s], the price has dropped more slowly, down to approximately $140 for a gram of pure cocaine in 2007. (That’s almost 80 percent less than it cost in 1982.)

A Bar With Changing Prices

Reader Thomas Barker writes in about a bar called D Street in Encinitas,CA. that prices its drinks based on demand:

I was recently at a bar for 25-cent wing night that I had not gone to in a while and saw something I thought you guys would be interested in. It was a drink price index ticker and they had them on TV’s all over the bar. It seemed that if a drink wasn’t ordered in a 15-minute time span the drink would go down a few cents. When we showed up my friend had his eye on an irish car bomb which was over $5 at the time, in the hour or so we were there it went down to his target range of about $3.75. As soon as his was ordered it jumped back up over $4.

A Different Kind of Price War: D.C.'s Watergate Gas Station

There’s a gas station near the Watergate Hotel in Washington, D.C. that famously sells very expensive gas. Reporters flock there for the standard sky-high gas price story, and residents have long suspected that the station doesn’t actually want to sell gas

According to a Washington Post article, those residents have the right idea. Apparently, the pricing puzzle at this gas station boils down to a dispute between two gas moguls trying to oust each other.

Differential Pricing in Higher Education

The New York Times of March 30 reported that a California junior college planned to set two levels of tuition for some of its classes.  Many colleges set differential tuition based on in-state residence, level of class, or type of course.  But this plan would have explicitly set tuition differentially in order to fund additional offerings that would not otherwise be provided.  Essentially, the college was trying to move up the supply curve of courses, recognizing that demand far exceeds supply at the current (very low) tuition level.  The plan generated an outcry among people bothered by the pricing of education and was “indefinitely postpone[d].” But higher education requires resources; and if taxpayers refuse to pay taxes but insist on services, this seems like a perfectly reasonable way of meeting demand.  I expect that, as in so many areas, California will once again lead the nation, this time into an expansion of additional differential pricing of course offerings in higher education.

The Pricing Strategy of Omelets

A café in Seattle offers a 3-egg omelet breakfast for $7.99, and a 6-egg omelet breakfast for $9.99. They will let two people split the 6-egg omelet, and even let the two people order one slice of different kinds of toast with the shared omelet. Is this pricing strategy crazy?

Perhaps, but unless each person would order a 3-egg omelet otherwise and pay $15.98, perhaps not. The marginal cost of making the 6-egg omelet is really just the 3 eggs, which cost much less than $2. The good deal on the shared 6-egg omelet induces a couple to split it, and stuff themselves, rather than split a 3-egg omelet, which my wife and I often do. The incentives provided by this pricing decision may actually raise the café’s profits.

(HT to MH)

The Costco Effect: Why Does the Wholesaler Cause Inflation?

There’s a lot of data showing that Walmart causes prices to decline when it enters a local market (see here, here and here). Why then, according to a new study, does Costco have the opposite effect, and cause competitors to raise their prices? The answer boils down to the complex ways that stores choose to compete against each other, and shows that not all big box retailers are created equal. Here’s the abstract:

Prior research shows grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big box retailers – Costco and Walmart-owned Sam’s Club – are quite different. Using city-level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers, and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along non-price dimensions such as product quality or quality of the shopping experience. We find no evidence that Sam’s Club entry affects grocery stores’ prices, consistent with Sam’s Club’s focus on small businesses instead of consumers.

An Apparent Non-Money Pricing Anomaly

The City of Austin offers airport parking in three tiers, from garage ($20/day), to close-in surface ($10/day), to distant surface ($7/day). Frequent parkers accumulate points entitling them to free parking days.
The incentives for redeeming the points are bizarre:

Garage 2500 points

Close In 2500 points

Long Term 2500 points

The “price” of a free parking day is the same for the very desirable garage, where I never park if I have to pay $$, and for the close-in parking (where I park for $$ if staying fewer than 5 days) as well as for the long-term (where I park only if staying more than 4 days). Seeing this, we will redeem our 10,000 points for four days in the garage—parking for “free” anywhere else makes no sense. Now if the airlines would only charge the same number of frequent-flyer miles for a trip to Australia as they do for a trip to New York, I would be even better off!

Sensible Pricing at the Ballpark

When I was a kid, tickets for grandstand seats at Comiskey Park (where my team, the White Sox, used to play) cost the same regardless of who the opponent was (only 7 possible in those days), the time of day or day of week. At a recent Minnesota Twins game I learned that MLB has gotten smart, pricing differentially depending on the identity of the opponent and the date/time of the game.
For games in the same one-week period a home plate view grandstand seat in Target Field ranges from $36 to $45, with a higher price for night games, weekend games and, most important, for more attractive opponents (sadly, higher, other things equal, for the Red Sox than the White Sox). Probably aided by web technology, teams can do a better job of equilibrating demand and the (fixed) supply of seats, although the current price range and the partly-empty stadium in the game I saw (against the last-place Kansas City Royals) still doesn’t seem great enough to accomplish this completely.

Road Blocks: The Strange Things That Cause Traffic

The cause of a lot of the traffic congestion we battle everyday is pretty simple: too many people want to travel at the same time in the same direction to the same place, usually a job center. Since telework has been slow to replace the traditional workplace, it looks like this problem will be with us for a while.
For decades we have known about a way to deal with chronic congestion: levy tolls which vary depending on how crowded the road is. I’ve written about this here and here.
But pricing is not as well-suited for dealing with congestion related to unusual incidents, like breakdowns and wrecks. Even when these are relatively minor, incidents can start shock waves that cause serious amounts of delay as they ripple back through the traffic flow.

Our Daily Bleg: Need Some Startup Strategy, Please

A reader named Patrick Nash needs your advice:

My friend and I have developed a cutting-edge technology for social media. There are other similar technologies out there for social media but we could never compete with their resources. Should we just point blank say we are the cheap alternative as a selling strategy? Sounds cheesy and flimsy but may be our only avenue.

What do you have to say to him? I don’t expect a lot of you to have experience specific to his product, but I know there are a lot of starter-uppers among our readership (yes, both kinds of starter-uppers), as well as what you might call “psychology of pricing” pros. So let’s see what kind of advice you have for Patrick.