Let’s Talk Price

In Why Are Some Companies Hated By Consumers?The Finance Buff (TFB) describes the reasons why he hates AT&T, Apple, and BlackBerry. He finds frustrating the constraints they impose on users about which devices can be used on which network. He laments the higher prices charged for service plans that offer more features.

Can I get a data-only plan on the BlackBerry? Yes, AT&T has one for $35 a month, but I can’t get the BlackBerry to synchronize with my work e-mails, calendar, and address book. AT&T’s $35-a-month data plan is called BlackBerry Personal, which only gives you access to personal e-mails and web browsing. To use it with corporate e-mails and calendar, you have to buy AT&T’s BlackBerry Enterprise service, which is $50 a month. Come on, data is data.

I feel his pain. I find myself getting angry sometimes when the thing I want costs more than what I want to pay for it, that is when my reservation price is below the market price. Yet there are lots of things I’d like that I think are too costly. Am I angry that I can’t buy a personal jet? That I can’t have a yacht? That I can’t afford live-in staff? No. Why not? What’s going on?

First of all, I never want to pay more than marginal cost. I want every market in which I’m a buyer to be perfectly competitive. If that were the case then TFB could get the BlackBerry Enterprise service for less than the $50/month he doesn’t want to pay. Since, as he says, “data is data,” then in a perfectly competitive market he would only need to pay the marginal cost of transmitting the data. It wouldn’t matter whether it is corporate or personal data.

Most markets aren’t perfectly competitive. So long as the lack of competition isn’t brought about by anti-competitive practices then there is nothing illegal about it. (Whether or not that is the case in the markets TFB described I do not know.) Imperfect competition arises for many legitimate reasons. Markups above marginal cost are to be expected in imperfectly competitive markets and are related to patterns of consumer demand (as I explained in What Is the Source of Price Setting Power).

When I find the market price of a good or service upsetting it helps me to think about the economics. I am calmed by the understanding that the above-marginal-cost price serves a useful role in allocating the limited resource to those who value it most. When my reservation price is below the market price it means I don’t want it as much as someone who’s reservation price is above the market price. Put another way, I cannot extract positive consumer surplus (a measure of satisfaction) from the good or service at the market price while others can (for more on consumer surplus see An Illustrative Welfare Analysis of Google Reader). Shouldn’t those who can extract higher consumer surplus get the good?

So why does it not upset me that I can’t buy a jet or yacht or live-in staff? It isn’t necessarily that my reservation price is below market price. It is the fact that I cannot afford them. That’s a different problem. I’m not upset by things I cannot afford. When I forget the economics I might get angry when something I can afford is literally over-priced for me. I think that may be what is bothering TFB too. It isn’t that the market price is too high (presuming no illegal anti-competitive behavior), it is that his reservation price is too low. He doesn’t value the BlackBerry Enterprise service enough. So he doesn’t buy it. That’s a perfectly reasonable outcome even in an imperfectly competitive market.

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