By Chris | July 15, 2009
In the current hard economic times, most businesses have been lowering their prices. Burger King reduced the price of their daily specials from $4.50 to $3.99. Car companies are offering to forgive your monthly payments if you lose your job. Frito Lay is putting more chips in their bags for free. However, I’ve also noticed two price increases recently.
My university raised the price of the 20-oz pop bottles in its vending machines from $1.00 to $1.25. The move makes a lot of sense given that the convenience stores on campus have been selling the same bottles for close to $1.50. I never understood why anyone bought them from the convenience store when they could save fifty cents by walking downstairs to the pop machine. But, I digress. In microeconomics we learn that a monopolist (the university in this case) can maximize profit by setting marginal revenue equal to marginal cost. The only problem for the university is that it doesn’t know the exact demand for its product. Selling the same good at different prices allows the university to practice price discrimination. Price sensitive students like me can go out of our way to save a little money. Everyone else just pays the higher price. But, different prices also help the university learn about demand for it’s product in general. If no one is buying the cheap pop out of the machine, the university probably can raise it’s convenience store prices. Alternatively, if vending machine sales are high relative to convenience store sales, it might be prudent to lower convenience store prices. They took the opposite approach in this case and raised the vending machine prices. This should increase convenience store sales, but they lose out on gains from price discrimination. I’m bringing my own pop to school from here on out.
My laundromat also raised it’s price recently. It now costs $1.75 to wash a load. Up from a $1.50. Normally, I wouldn’t think much of this. But, about 6 months ago, a new laundromat moved in to the neighborhood. From day one, it charged $1.75. It is still in business and sees its fair share of use. I can’t help but wonder if the owner of my laundromat decided to raise it’s price in response to its competitors entrance. If the competitor was being successful at $1.75, maybe college students were less price sensitive then the owner originally anticipated. Maybe students will go to the closest laundryman even if it’s a little more expensive. The menu costs at a laundromat are high. It takes a lot of time to change the machines to accept a higher payment. And if the response is negative, you may lose customers even if you roll back the prices to their original level. Competition helps remove asymmetric information. Most of this time this is good for the consumer who is rationally ignorant. But, when the producer guesses incorrectly, a little more transparency is a good things.