What causes price gouging?

[Underseer]

Many years ago, I bought a Logitech X-530 5.1 speaker system, and I love these things. Years later, and they're still going strong. But the reason I love them is that they sound so good for something that cost me around $60 many years ago.

Today if you go to Newegg, you can find several listings for X-530 speakers being offered for $299.99, $342.99, and $299.99.

Meanwhile, over at Amazon, they're available for $249.99 (Earning it an Amazon's Choice).

Amazon's Choice? Seriously? I like these things, but they're not worth $249.99. For that kind of money, I could buy a used stereo receiver and 5.1 satellite/subwoofer speaker system (which could be connected through HDMI), and that would sound far better.

In fact 5.1 speakers for computers seem ludicrously expensive in general at the usual online retailers. What's surprising is that I can genuinely find similar quality 5.1 speakers for computers at brick & mortar retailers like Best Buy for $50[ent]mdash[/ent]$75. If my speakers blew out tomorrow and I had to replace them, I would be better off going to Best Buy than to Amazon or Newegg. I'm also not seeing very many different models of 5.1 speakers intended for computers.

What the heck happened? The fact that people are willing to spend $300 for $60 speakers should mean that more manufacturers will start making 5.1 speakers, right? Isn't that exactly when manufacturers want to increase production?

At least when GPU prices went through the roof, I understood why. When RAM prices got out of control, I at least understood why. But with the 5.1 speaker thing, I have no clue what's going on with the market.

 

[Bronzeage]

Economics 101: ( I actually the class and scored an A) Transaction costs are whatever is spent to conclude a trade of goods or services. A market is a device, system, or structure which reduces transaction costs.

If the seller has the attention of every person who wants his goods, he will get the best price. Similarly, if a buyer has access to every seller, he will get the best price. In both cases, transaction costs are the lowest possible.

Gouging is what happens when a market is disrupted. This usually means the buyers do not have access to a lot of sellers. There has to be a small number of sellers and a lot of buyers. This is a situation that never lasts long, such as when a natural disaster blocks roads.

I don't think any price offered for any good on Amazon could qualify as gouging.

 

[rousseau]

Chivas Regal Effect?

Perceived value is correlated with price. People judge the quality of what they buy on how expensive it is, rather than how good it actually is relative to other products.

No thinking involved, you just get to tell people the thing you bought cost a lot.

 

[rousseau]

Chivas Regal Effect?

Perceived value is correlated with price. People judge the quality of what they buy on how expensive it is, rather than how good it actually is relative to other products.

No thinking involved, you just get to tell people the thing you bought cost a lot.

So to be a little more clear. Some companies have figured out that they can make *more* money if they charge *more* for the same product.

 

[Underseer]

Economics 101: ( I actually the class and scored an A) Transaction costs are whatever is spent to conclude a trade of goods or services. A market is a device, system, or structure which reduces transaction costs.

If the seller has the attention of every person who wants his goods, he will get the best price. Similarly, if a buyer has access to every seller, he will get the best price. In both cases, transaction costs are the lowest possible.

Gouging is what happens when a market is disrupted. This usually means the buyers do not have access to a lot of sellers. There has to be a small number of sellers and a lot of buyers. This is a situation that never lasts long, such as when a natural disaster blocks roads.

I don't think any price offered for any good on Amazon could qualify as gouging.

Except that right now I can go to a brick & mortar retailer (or web retailer if I'm willing to dig) and find speakers of similar quality for one fifth of what they're asking for. Obviously, someone is paying ~$300 for ~$60 speakers. I just wanna know who and why.

When LCD panels were expensive, it turned out to be a price-fixing conspiracy by the small number of panel manufacturers. In that case, all LCD panels were ridiculously expensive.

GPUs are still coming down in price, but the elevated price was caused by virtual coin miners. GPUs that had a better performance vs electricity consumption (namely high end AMD GPUs) were more expensive. GPUs that consumed too much electricity to get the job done were less expensive.

In the case of 5.1 computer speakers, I'm having trouble seeing what the determining factor is. Clearly someone is willing to pay far too much money for these things.

 

[rousseau]

If it's Amazon might just be some arbitrary condition in their pricing algorithm, basically an error due to low supply, or something like that.

 

[bilby]

Economics 101: ( I actually the class and scored an A) Transaction costs are whatever is spent to conclude a trade of goods or services. A market is a device, system, or structure which reduces transaction costs.

If the seller has the attention of every person who wants his goods, he will get the best price. Similarly, if a buyer has access to every seller, he will get the best price. In both cases, transaction costs are the lowest possible.

Gouging is what happens when a market is disrupted. This usually means the buyers do not have access to a lot of sellers. There has to be a small number of sellers and a lot of buyers. This is a situation that never lasts long, such as when a natural disaster blocks roads.

I don't think any price offered for any good on Amazon could qualify as gouging.

Except that right now I can go to a brick & mortar retailer (or web retailer if I'm willing to dig) and find speakers of similar quality for one fifth of what they're asking for. Obviously, someone is paying ~$300 for ~$60 speakers. I just wanna know who and why.

When LCD panels were expensive, it turned out to be a price-fixing conspiracy by the small number of panel manufacturers. In that case, all LCD panels were ridiculously expensive.

GPUs are still coming down in price, but the elevated price was caused by virtual coin miners. GPUs that had a better performance vs electricity consumption (namely high end AMD GPUs) were more expensive. GPUs that consumed too much electricity to get the job done were less expensive.

In the case of 5.1 computer speakers, I'm having trouble seeing what the determining factor is. Clearly someone is willing to pay far too much money for these things.

I think Rousseau is right about the Chivas Regal effect. Most buyers really don't have any way to judge the quality of different speaker systems, other than the price. The vendors know this, and can structure the market to increase profits by offering a few models at insane prices (expecting nobody to buy those), which makes the next price tier look like it is quality stuff at a 'reasonable' price - when the majority of buyers are using price as their measure of quality, adding high priced offerings to the market will increase the price consumers will pay. Sell speakers for $5,000, $250, or $60, and most people will buy the $250 ones.

An ethical vendor who sells only at the $60 price point will get almost no sales. The $5,000 units won't sell many either, but who cares? They won't manufacture many of those either. Their existence is solely intended to anchor the customer's expectations WAY above the $60 price bracket. Any sales at that insane price are gravy, but zero sales is not biggie for the vendors, as long as the $250 units are flying of the shelves with their $190 'pure cream' profit on top of the reasonable margin they would already have got by selling them for $60.

 

[Tigers!]

Sometimes I wonder if greed on the sellers side and stupidity on the buyers is a large part of the problem.

In Australia at the moment (like many other places) we have absolutely insane house prices. The cost of houses bears no relationship (except in some ridiculous exponential function) to the actual cost.
I grew up on the west side of Melbourne is a suburb that was quiet and reasonably priced. About 1985 it was noticed that this place was beside the sea, had a train station, near the freeway to Melbourne and the surf coast etc. A couple of idiots paid too much for a house. The sellers, estate agents thought, Bewdy - Let's jack up the prices. If there is one idiot there will be others.
And so the cycle began. Repeat for any place along the coast you care to mention.
Nobody bothered to ask it seems if we should be greed nor stupid.

Stupidity, greed, misplaced status all play a role in the pricing.

 

[rousseau]

I think Rousseau is right

Man I wish I could make this into a signature.

 

[Bronzeage]

Economics 101: ( I actually the class and scored an A) Transaction costs are whatever is spent to conclude a trade of goods or services. A market is a device, system, or structure which reduces transaction costs.

If the seller has the attention of every person who wants his goods, he will get the best price. Similarly, if a buyer has access to every seller, he will get the best price. In both cases, transaction costs are the lowest possible.

Gouging is what happens when a market is disrupted. This usually means the buyers do not have access to a lot of sellers. There has to be a small number of sellers and a lot of buyers. This is a situation that never lasts long, such as when a natural disaster blocks roads.

I don't think any price offered for any good on Amazon could qualify as gouging.

Except that right now I can go to a brick & mortar retailer (or web retailer if I'm willing to dig) and find speakers of similar quality for one fifth of what they're asking for. Obviously, someone is paying ~$300 for ~$60 speakers. I just wanna know who and why.

When LCD panels were expensive, it turned out to be a price-fixing conspiracy by the small number of panel manufacturers. In that case, all LCD panels were ridiculously expensive.

GPUs are still coming down in price, but the elevated price was caused by virtual coin miners. GPUs that had a better performance vs electricity consumption (namely high end AMD GPUs) were more expensive. GPUs that consumed too much electricity to get the job done were less expensive.

In the case of 5.1 computer speakers, I'm having trouble seeing what the determining factor is. Clearly someone is willing to pay far too much money for these things.

If you can buy it for that price, so can anyone else.

When I owned a retail store, most of our merchandise was fairly unique. This made pricing a little more complicated, but we developed a system. First, we considered what we had invested in the item. Then, we considered the demand for it. In any case, we tried to keep the sale price at least 5 times our cost. That's the needed mark up when you have a store full of unique items. A mint condition Pink Floyd "Dark Side of the Moon" could sell for $45 on the first day, but it might be the only sale that day, and you don't have another to put in its place.

Someone says, "But Jimmy's Old Recordsnshit down the street has one for $67."
I ask, how long has it been there?
The answer, "A couple years, I think."

It's not obvious that someone is paying $300 for $60 speakers, but maybe they are. As I said above, a disrupted market is necessary for gouging to occur. The item has to be something which is urgently needed, so the window of time for purchase is small. Except for the LCD price fixing, none of your examples fit the description.

Many years ago, I was sort of gouged. Because of various poor choices I made in my life, I found myself in possession of 22,000 bonus points, which allowed me to purchase items from a catalog. Imagine a condensed Neiman Marcus catalog. I quickly figured out two things. First, each bonus point was worth 1 cent. Second, the points value of every item in the catalog was the "Suggested Manufacturer's Retail Price."

If I could convert my points to cash, I could easily get thirty to fifty percent more stuff. However, I had a currency that couldn't be spent anywhere else. I was in the "only one seller" situation. What I finally decided to do was buy stuff that I wanted, but wouldn't put out the cash to own. If I recall, I ended up with a Pulsar Chronograph wrist watch and a Nikon Automatic camera. As these things go, today I wear a $9 Casio wristwatch and my phone has a camera. That's what a free market does.

 

[Loren Pechtel]

I'm going to guess it's no longer being manufactured and you're seeing people trying to sell the ones they have. I've seen this sort of thing often.

 

[Tharmas]

I think Rousseau is right about the Chivas Regal effect. Most buyers really don't have any way to judge the quality of different speaker systems, other than the price. The vendors know this, and can structure the market to increase profits by offering a few models at insane prices (expecting nobody to buy those), which makes the next price tier look like it is quality stuff at a 'reasonable' price - when the majority of buyers are using price as their measure of quality, adding high priced offerings to the market will increase the price consumers will pay. Sell speakers for $5,000, $250, or $60, and most people will buy the $250 ones.

An ethical vendor who sells only at the $60 price point will get almost no sales. The $5,000 units won't sell many either, but who cares? They won't manufacture many of those either. Their existence is solely intended to anchor the customer's expectations WAY above the $60 price bracket. Any sales at that insane price are gravy, but zero sales is not biggie for the vendors, as long as the $250 units are flying of the shelves with their $190 'pure cream' profit on top of the reasonable margin they would already have got by selling them for $60.

I think this line of reasoning may apply in some cases, but not all.

When we were having difficulty selling my mother’s house, one realtor suggested we up the price by a hefty 30%. We didn’t take that advice, incidentally, and did eventually sell the place, but it took several years in a really hot market. Still don’t know what the correct approach would have been.

But in some cases I don’t know that people buy based on price alone. For example, I am someone who just spent several hundred dollars on desktop computer speakers. I didn’t spend my money willy-nilly on the mid range in price. I have no idea if there is a high-end speaker that costs vastly more than what I paid; in fact, maybe what I bought is the high end. In any case, I researched desk-top speakers by reading reviews in appropriate e-zines, user reviews, etc. The most important test was the ear test – actually listening to the different models. Anyway, I made my purchase as an informed shopper.

The result is that I have a pair of speakers that I am immensely pleased with. They are far superior to the last set up I had, for which I paid about a third as much. I test out as someone with sensitive hearing, and I can really tell the difference. I find myself listening to my whole collection of music again, because it sounds new, the reproduction is so much better.

Now if you can find what I got for sixty dollars I’d be really stunned.

I may have splurged on the subwoofer I admit. I bought the one that matched my speakers for the sake of convenience (I knew it would mate properly without a lot of finagling), although some reviewers said you could get one that could be made to work just as well at less cost.

So that’s my story.

 

[bilby]

I think Rousseau is right about the Chivas Regal effect. Most buyers really don't have any way to judge the quality of different speaker systems, other than the price. The vendors know this, and can structure the market to increase profits by offering a few models at insane prices (expecting nobody to buy those), which makes the next price tier look like it is quality stuff at a 'reasonable' price - when the majority of buyers are using price as their measure of quality, adding high priced offerings to the market will increase the price consumers will pay. Sell speakers for $5,000, $250, or $60, and most people will buy the $250 ones.

An ethical vendor who sells only at the $60 price point will get almost no sales. The $5,000 units won't sell many either, but who cares? They won't manufacture many of those either. Their existence is solely intended to anchor the customer's expectations WAY above the $60 price bracket. Any sales at that insane price are gravy, but zero sales is not biggie for the vendors, as long as the $250 units are flying of the shelves with their $190 'pure cream' profit on top of the reasonable margin they would already have got by selling them for $60.

I think this line of reasoning may apply in some cases, but not all.

When we were having difficulty selling my mother’s house, one realtor suggested we up the price by a hefty 30%. We didn’t take that advice, incidentally, and did eventually sell the place, but it took several years in a really hot market. Still don’t know what the correct approach would have been.

But in some cases I don’t know that people buy based on price alone. For example, I am someone who just spent several hundred dollars on desktop computer speakers. I didn’t spend my money willy-nilly on the mid range in price. I have no idea if there is a high-end speaker that costs vastly more than what I paid; in fact, maybe what I bought is the high end. In any case, I researched desk-top speakers by reading reviews in appropriate e-zines, user reviews, etc. The most important test was the ear test – actually listening to the different models. Anyway, I made my purchase as an informed shopper.

The result is that I have a pair of speakers that I am immensely pleased with. They are far superior to the last set up I had, for which I paid about a third as much. I test out as someone with sensitive hearing, and I can really tell the difference. I find myself listening to my whole collection of music again, because it sounds new, the reproduction is so much better.

Now if you can find what I got for sixty dollars I’d be really stunned.

I may have splurged on the subwoofer I admit. I bought the one that matched my speakers for the sake of convenience (I knew it would mate properly without a lot of finagling), although some reviewers said you could get one that could be made to work just as well at less cost.

So that’s my story.

That's a nice story. But there's no reason to imagine that you represent the typical consumer; Nor even to accept your post facto claims about your motivations and degree of research. There's a reason why anecdotal evidence is not considered valuable, and why clinical trials are considered very weak if not blinded.

The fact is that most people in the market have neither the time nor the skills to properly assess the quality of the offerings on the market, and that even reviewers are likely to be influenced by price. Reviews from people who bought one product are not really reviews; They are testimonials, and are valueless. Reviews from independent reviewers who are exposed to a very large sample of the market may be a little better; But to get a genuinely unbiased set of reviews of the quality of the products, those reviewers need to have tested and rated their quality blind - with no knowledge of either the brand or price of the units they were listening to until after they had scored and ranked them for sound quality.

Few people have the time (or inclination) to do this. And vendors know it.

And this isn't a dig at you - or at the computer speaker market. Every purchaser (myself included) in most markets is subject to these kinds of distortions. That's why so much of economics totally fails to predict real world behaviour.

Some people really do do in depth and valuable research before making some purchases. Perhaps you are one of them. But we observe that most do not; and that most claim to have done so after the event. So we can be sure that most such claims are incorrect, false, or mistaken. Humans suck at this kind of thing.

 

[Kharakov]

Try this. Look around trying to "sell" something.

1) search for prices on the thing
2) do it again the next day, and search "shipping costs"
3) next day search "sell blah blah blah"
4) next time you search for the item, lower prices miraculously appear in your search results

 

[steve_bank]

The paradigm is 'charge whatever the market will nare'.

Distrusters adjust price based on volume of sales. Lower price gets more sales and higher overall profit. Sometimes distributer pricing is a loss leader designed to induce other sales. In general distributer pricing depends on volume and demand. Lower price leads to more volume and higher profit, but not always.

Amazon puts a lot of effort into customer analysis. When you se pricing schemes on a distributor site it is based on data analysis.

Internationally distributer volume, taxes, tariffs, and shipping factor in. Manufacturers can also have a say in distributor pricing to prevent high volume outlets from undercutting competition..

In manufacturing increasing volume decreases costs, but to a point. There is a point at which profits can fasll.

Apple limits yearly production of wireless devices at a sweet spot that maximizes demand and profit.

Technically price gouging is when you have a corner on a commodity in demand and arbitrarily raise prices.

Raising prices of gasoline or bottled water in a hurricane.

 

[Loren Pechtel]

I think this line of reasoning may apply in some cases, but not all.

When we were having difficulty selling my mother’s house, one realtor suggested we up the price by a hefty 30%. We didn’t take that advice, incidentally, and did eventually sell the place, but it took several years in a really hot market. Still don’t know what the correct approach would have been.

I suspect the realtor was right--if the price is too low for what it appears to be people will assume there's a problem and unless they're interested in a fixer-upper they won't even look.