Comments (13)

• Tom Woods

  I know I'm missing the point, but I think I'm the only person on earth who openly admits to having preferred the new Coke, and finding "Coke Classic" difficult to go back to after the new was scrapped.

  On the other hand, I prefer Pepsi to Coke, so that may explain it.
  

  Published: January 18, 2008 11:54 AM

• Michael G.R.

  If more people understood the simple concept contained in that article, the world would be a better place.

  You'd think that this would be part of the basics taught in schools... I guess that's too much to ask for.

  Published: January 18, 2008 3:28 PM

• Joshua Katz

  Well, it's taught at some schools - for instance, my students all hear it.

  I prefer Pepsi to Coke, by a mile, but still preferred Coke Classic over New Coke.

  Published: January 18, 2008 9:08 PM

• gene berman

  By and large, it's simply a matter of to which one has become habituated, I'd guess. Similar processes are probably at work in the formation of many preferences.

  However, in my earliest cola-drinking days, I quickly formed a preference for the more popular (Coke)--back in the mid-'40s. And that was despite the fact that, in those less-affluent days, a Coke was only 7 oz., while Pepsi was a far more generous 12 (and the price differential was in the jingle: "Pepsi-Cola hits the spot/ 12 full ounces--that's a lot/ twice as much for a nickel, too/Pepsi-Cola is the drink for you!"

  The fact is that current Coke, despite being tagged "Classic," is not the same as in the days of yore. The difference is that, for quite some time, cane sugar has been supplanted by "high-fructose corn syrup." Though I have no certain knowledge, I'd guess this to have diminished the definitive taste difference, helping accelerate Pepsi's catch-up game (I think it's more popular now, at least domestically.)

  The rest of the world is unencumbered by the protective tariff on imported cane sugar. I have no idea whether HFCS is used abroad or not--it may offer undeniable cost-efficiency even in the absence of tariff.

  Published: January 19, 2008 7:36 AM

• IMHO

  I happened upon this website a number of years ago, although it's no longer being kept current. Anyway, it focuses on marketing and innovation.

  Here's a quick article about points to consider when bringing a product to market:

  http://www.biz-architect.com/do_you_have_a_winner.htm

  The website also contains articles about items that may or may not have made it to the marketplace, or may or may not have succeeded once put on the market. I enjoyed using hindsight to see if his predictions for certain products came true.

  http://www.biz-architect.com/chronological_listing.htm

  As for soda...I've found that Wal-Mart's private-label sodas are excellent. I really can't tell the different between their cola and Coke, and the orange soda tastes just like Sunkist. At 67 cents for a 2 liter bottle, you can't beat the price.

  The funny thing about the Edsel...no one wanted to buy the car back then; but the current bid at Ebay for a 1959 Edsel Corsair Convertible – Fully Restored is approximately $29,000! : )

  Published: January 22, 2008 8:20 AM

• josh m

  One often hears the (ignorant) complaint that companies in certain industries are making ‘such large’ profits that they should voluntarily lower the prices of their products to benefit consumers. The rationale is that the companies would still make out just fine and more consumers would benefit.

  What is the economic argument against this?

  Published: January 22, 2008 8:33 PM

• IMHO

  Josh,

  When discussing profit, you take into account not only what the company nets, but also how many units were sold. It may be that very high profits were the result of extremely high volume sold at very low margins.

  I once worked for a small electronic components distributor. From the moment they purchased product, they were under the gun to sell it ASAP because:

  1) the value of their inventory would immediately begin to decline

  due to the fact that

  2) electronic components have a tendency to move towards obsolescence the moment someone signs off on their design.

  It creates a frantic sales environment. Pity the poor product manager who purchases inventory that does not sell until it is worth less than the purchase price. If he/she does that too often, they go out the door!

  So, when people start carrying on about profits without taking anything else into consideration, they don't know what they're talking about.

  Published: January 23, 2008 1:08 AM

• Inquisitor

  Indeed. Often people complain about stores charging so much more than their suppliers, seemingly oblivious of the fact that the store bears many other costs.

  Published: January 23, 2008 10:08 AM

• gene berman

  Josh:

  The reasons given are true. But they're neither definitive nor comprehensive, rather just features of a particular, specific landscape containing many others..

  The overarching explanation, comprehending virtually everything is as follows.

  The objective of business is to generate profit (though it is possible for an individual businessperson to run such--at least partially--as a hobby or even a public service in which the foregone profit is a price he pays for the enjoyment or satisfaction). OK so far?

  Profit is good, losses are bad: these are definitional understandings with which disagreement cannot even be possible. Check?

  More of what is good is better; less of what is good is worse. Also definitional--derived from the preceding. Verstehen?

  The entrepreneur has a (nearly) foolproof method (if he's alert and agile) to know whether he's making too much or too little in his line. Also whether his prices are too high or too low. (Those situations are not mutually
  interdependent.) In the first case, he asks himself "Am I making too much?" and immediately realizes that the question is nonsensical (because "more of what is good is better"--refer to the preceding), stops daydreaming, and refocuses his attention.
  If pondering whether he's making too little, he asks himself or tries to find out what he could do to improve things; when he finds one (or some), he tries it. If it works--good. If it doesn't, he quits doing it, tries something else, and continues until satisfied: everything's "just right." At that time, he usually starts another business--or retires, if he's of that age and mind.

  Whether he's charging too much or too little is a different matter but not the same as whether he's making too much. It's also a simple matter. Just keep in mind that, when it comes to profit, "more is better." Applied to prices, it means that, if your prices are high enough that the lost customers cause a decline in your profits, they're too high. And, at the other end, if a raiising your prices causes you to make more profit, you're right--they were too low.

  Another tip-off for the entrepreneur that he's serving the market at about the proper prices and profit for himself is that he is not overly beset by competition springing up (a sign that at least someone else with money to put where his mouth is thinks you're doing something wrong--like charging too much or too little).
  Another sign is you get good-faith offers to buy your business at more than you think it's worth. Again, that's not proof positive that you're doing something wrong--just that, again, someone prepared to "put up" thinks that way.

  Now, apply your new-found understanding to the specific case you mentioned. If the business or business sectors concerned were actually making "too much" (in relation to their investment and risk), the "greed" of others would seize the opportunity to supplant them by entering the business and charging a lower set of prices or, sometimes, by delivering more or superior product. Happens all the time.

  Now we have to wonder what would happen if the entrepreneurs in a field making "high" profits were all to lower their prices. Remember, it is the consumers willingness to pay such high prices that attracts new entrants (and expansion of existing) into the field, thus forcing rate of profit lower. If the folks in the field lower prices voluntarily, the consumers would have more money left, which they'd spend on other things, which would push up the prices in those other fields and attract capital for the expansion of those fields; some of that capital would come from the field in which the prices and profits had been lowered, so, while the actual ability (capital) to deliver that product would be diminished, part of the money left to the consumers would find expression in increased demand for the product whose price had been lowered at the very same time as the abiity to deliver it had been diminished! That sounds like a recipe for REAL dissatisfaction!

  Published: January 24, 2008 9:36 AM

• gene berman

  An afterthought for Josh:

  No one needs the government to redress what they might see as "too high profits" or "too high prices," whether they're an actual payer of those prices they think are too high or just a bystanding observer with nothing better to do than give voice to whatever they happen not to like. The same remedy will work for both.

  Go into the business yourself. Get your "share" of those "too high" prices (and profits). And, while you don't know diddly-squat
  about starting or running one of those businesses (and even if you think you do whether you actually do or not, you're not in financial position to do so or maybe have other things to do with your time), it's just bone-simple! Buy what you can of the company's (or industries') stock(s). Come to think about it a bit, that's why they're called "shares." Now, you'll get back what you think you've overpaid. Maybe even some of what you or other people think those other people have overpaid. Of course, you might not get everything you thought was overpayment; remember, the people who are going to be working for you, taking care of all the messy details of actually running the businesses, whatever they are, need to get paid--they're your hired help.

  Now you can relax--and enjoy!

  Published: January 25, 2008 8:29 AM

• David C

  Josh said
  One often hears the (ignorant) complaint that companies in certain industries are making ‘such large’ profits that they should voluntarily lower the prices of their products to benefit consumers. The rationale is that the companies would still make out just fine and more consumers would benefit.

  What is the economic argument against this?

  Reply:

  By astounding coincidence, I was discussing this on another forum today ( we were discussing the current electricity shortages in SOuth Africa, which reprise California's experience about a decade ago). The following extract from that discussion should answer your question:

  these are general market principles that are not peculiar to
  energy.

  1. If demand outstrips supply of any product, prices MUST be allowed
  to rise, and profit margins MUST be allowed to widen. If this doesn't
  happen, there is no signal going out to attract new producer entrants
  to the industry experiencing the supply shortfall. Result:
  shortages and empty shelves, and the development of a thriving black
  market stocked by those who were lucky ( or connected) enough to be
  at the front of the queue for the stuff sold at the regulated price.
  Extreme example: all product markets in Zimbabwe. Just because
  government tries to(be seen to) protect 'consumers' from 'inflation'

  2. Conversely, if supply exceeds demand of any product, prices MUST
  be allowed to fall and profit margins narrow. If this doesn't happen,
  there is no signal for the least efficient of the existing producers
  to cease or cut back production and deploy their capital in those
  areas where the best available profit opportunities are seen ( which
  makes them entrants into other markets described by 1 above).
  Result: gluts and huge surplusses of inventory that has to be
  dumped, or destroyed. Example: any one of a number of agricultrural
  produce items subject to control boards up to the 1980s. Remember
  the tons of milk and butter that couldn't even be given away? Just
  because government controlled market price levels to ( be seen to) protect farmers
  from 'price volatility'.

  you can't have one side of this balance and not the other. Few
  politicians understand this, which is why they have been making the
  same mistakes for centuries, and have never learnt from the
  experience. This is because they make, and capitalise on, the populist assumption that profit
  is somehow evil by definition.

  Even in the home of capitaliszm, the USA, the howls of indignant
  outrage, led by GWB himself (behaving like a true Democrat O the
  irony) after Katrina , were heard on this side of the planet, because
  some entrepreneurs found that their limited stock of goods were in
  heavy demand, and, quite reasonably, put their prices up in
  response to the changed market conditions.

  'Profiteering' or 'gouging' is not only not wrong, it is NECESSARY
  when shortages arise. Not only because it drives the decisions
  to gear up supply-side response to the shortage with the signalling
  mechanism above, but also to assure that until the new inventory gets
  to market, the constrained supply is rationed the only way that is
  REALLY fair: those who are prepared to pay the most are clearly
  those who want it most deeply. And thats as it should be. If that
  offends your egalitarian sensibilities, remember that any attempt to
  constrain a price increase by law merely opens up the floodgates of
  corruption, as the inventory merely leaves the shelves at the
  administratred price on a first come first serve ( or who's connected best) basis, and promptly
  reappears at a real market price on the black market, where everybody
  else has to pay over the odds anyway. Just like ALL markets in Zimbabwe now.

  Coming back to electricity: freeing up the price and inviting
  freedom of entrance to any companies who want to join the grid as a
  supplier, will resolve these blackouts chop-chop. sure, there
  might have been inadequate planning back in the 90s. And there might
  be some lead time until more capacity is built. But in the
  meantime, we have a product that is in short supply. So the price
  has to go up. Those who are least prepared to pay the higher prices
  will adjust their behaviour to consume less electricity, and those
  who place higher value on the electricity they draw will happily
  pay the higher price, and everybody will still get consistent supply
  because there wont be as much of a capacity problem because demand will be
  lower. And with higher prices on the table, other suppliers and
  innovative engineers will be more interested in having a go at
  contributing supply. And if too many get on and too much supply gets
  built, well then the prices will come down again wont they?

  Compare to the 1990s when the government suddeenly got all excited
  about competition being a Good Thing (without fully understanding the
  rest of the economics behind it), told Eskom it wasnt allowed to
  build more capacity, but invited others to have a go, and then got
  all surprised when nobody responded. Nobody
  responded because they saw no benefit in doing so in a politically-
  driven pricing regime - who wants to invest in a project that doesnt
  yield a return?

  There is simply no way to improve on the self-regulating interplay
  of supply, demand, and prices in a free market, and electricity is
  no exception.

  The market price is the fairest price, whatever it turns out to be,
  (Yes I am aware that I would have to pay more, but this is a matter
  of principle and cant let my selfish interests override that, now,
  can I? - unionists take note) and supply and demand converge on themarket price.It cant
  work any other way. It is not possible to interfere, however noble
  the intention, without generating a higher overall degree of
  hardship among the members of society.

  
  

  Published: January 25, 2008 9:34 AM

• Alex

  Gene: I used to buy Coke for 4 pence in New Zealand. It was my once a week treat as a boy and I still remember how I enjoyed it. But, as I recall, the bottles were 6 oz. Anyway, I still enjoy it. After all, "It's the real thing."

  Concerning your advice to Josh to buy the stock of a company you believe to be earning high profits so that Josh may partake of such profits, that strategy won't work. By the time Josh concludes that a company is highly profitable, all expected future profits have been priced into the stock, and captured by those investors who owned the stock before the high profits were recognized. At any time, the market price of a stock reflects what the market believes will be a normal return on investment for the risk of the investment if the stock is purchased

  
  .

  Published: January 25, 2008 10:27 AM

• josh m

  Many thanks, David C.--I think I get it now. The argument I referenced above was once made by Bill O’Reilly (I know, why was I watching him) vis-a-vis oil companies and the price of their product. The explanation of the free-market guest he was debating on the show was not nearly as convincing or cogent as yours.

  Do you know if this question was addressed by any other Austrian economists (such as Hazlitt or Rothbard, Salerno, etc) ?

  Finally, is Austrian Economics the only school that provides this explanation (did it originate with Austrian Economics?), or do other schools acknowledge it as well?
  

  Published: January 25, 2008 11:01 AM