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May 10, 2007

I'm Profound

I really wish more commenters would take my tossed off posts and glean fascinating socio-economic insights from them. As instruction, Burrito Boy takes my post on price discrimination in the wedding industry and writes:

Ezra is actually making a much more serious point than the commentators seemingly imagine. The extremely widespread wedding-related price discrimination is simply not justified by neoclassical economic theory. The wedding industry is now a huge one, and limo driving and rental isn't precisely the hardest industry to get into. There are no massive barriers to entry. So, when a competitor openly announces that wedding-related limo use is xx% higher priced for ludicrous and valueless extras, and simply refuses to do wedding business at the lower price, why aren't other limo companies jumping in to take advantage of this?

Clearly, the higher wedding-related prices are far above that of supplier costs (the much lower non-wedding prices probably aren't that much above cost). Competitors should be lining around the block to undercut what is essentially unearned profit.......but, they aren't (in fact, after investigation, I'll bet you find that everybody's simply setting wedding prices to nearly equivalent levels). Again, something is really quite wrong with neoclassical economic theory here.

And Weboy says:

The real scandal here - pace Ezra's earlier comments on the Silve Palate - is the new sense of "classiness" that has people with no real business spending small fortunes on weddings doing it anyway. The wedding market is madness, but it's our nuptial obssessed culture making a fetish out of big, overstuffed ceremonies that's the bigger problem.

That's totally what I was getting at.

May 10, 2007 | Permalink

Comments

A number of people have told me they regretted their wedding choices (the cost mostly) when they hear that my wife and I got a month long vacation in Grand Cayman for both of our immediate families for much less than a typical wedding. That's right; I got married barefoot too.

Isn't the overpricing for weddings a market failure due to collusion? Normally, collusion occurs between small numbers of producers right? In this case though, producers have a very simple informational cue to follow (the word wedding) and they charge more knowing that everybody else will charge more too. The informational problems that would normally plague price coordination are absent.

On the other hand, it could also be that consumers (brides and grooms, their parents) aren't price discriminating enough because its their wedding. Another instance where rational economic man fails to materialize.

Posted by: Drew | May 10, 2007 5:54:26 PM

Nuptial obsessed? I laugh at this culture's nuptial obsession. Hah. Trying marrying into an Indian-American family.

Again I caveat you with the anecdote and the data and the not the plural and the no monolithic culture and the such and such. But seriously, learning the spontaneous dance numbers is killing me.

Posted by: RW | May 10, 2007 6:15:36 PM

How much gold is transferring hands, RW? (heheh)

Posted by: JimPortlandOR | May 10, 2007 6:48:20 PM

That's right; I got married barefoot too.

Classy.

Posted by: John | May 10, 2007 7:47:43 PM

Drew: as I posted in the original thread, that kind of wedding package (from Caribbean beach to Vegas) seems to represent a different market to the '150 guests including the drunken second cousin' wedding, and one that generally works more efficiently.

Posted by: pseudonymous in nc | May 10, 2007 8:26:06 PM

pseudonymous in nc:

So, if we think of it as one market, many price discriminators (us classy, barefoot beach wedding choosers) are opting out, as you say, leaving only those willing to pay for 'luxury' goods. But its the attachment of 'wedding' that makes a simple cake with nice frosting $500 and I say its collusion based on an easy informational cue combined with a social/psychological obsession with THE BEST WEDDING EVAH! that makes people lose their neoclassical heads.

Posted by: Drew | May 10, 2007 9:06:51 PM

It ain't just weddings. The women's rag trade in general is just amazing. You can get the same schmate for $5000 or $50, depending on who is selling it, and when it is sold. If you know what you are doing, and prefer classical rather than voguish clothing, you can almost always buy well under wholesale. Yes, I said wholesale. And this is with labels attached.

Another interesting example is silverware. In Turkey or Mexico, it is pretty much the price of silver, with a bit of markup. In America? Hah!

If you want a more manly example, take booze. Buy two bottles of vodka: one fairly cheap and the other ultra-expensive. (Don't buy the cheapest, however.) While your eyes are averted, have a friend pour three shots in identical glasses; one from one bottle, and two from the other. You almost certainly cannot tell the difference, much less tell which is the more expensive one. Warning: This doesn't work for other tipple. You will be able to distinguish two whiskeys, although you still might get embarrassed by preferring the cheapo one.

Retail is all about price discrimination.

Posted by: Joe S. | May 10, 2007 9:12:46 PM

Another similar example of economic irrationality is the market for expensive speaker wire. Double-blind tests have conclusively shown that people can't tell it from zip cord, yet the market persists, and idiots will spend $200 a foot for something that cost the company maybe $1 a foot to produce in bulk.

For that matter, once you get above the really cheap and flawed low-end stuff, no one can tell the difference between CD players in double-blind tests either. (When you think about it, that makes sense; after all, even cheap CD-ROM drives can read bits off a disk with essentially 100% accuracy or else your software wouldn't run, and digital-to-analog sound converters are hardly an exotic technology today.) It might be worth paying some extra money for better build quality and a device that won't fall apart in a year like the cheap Chinese crap will, but if you think you're getting better sound for the money, your ears are almost certainly deceiving you.

Posted by: Josh G. | May 10, 2007 9:20:55 PM

A lot of marriage expense is about parents showing off to one another. This makes economic sense if the parents are in business or professionals and need to keep up appearances.

Posted by: Steve | May 10, 2007 9:47:50 PM

Submitting to price discrimination isn't irrational from the consumer's point of view. It's a signaling function.

Posted by: TJ | May 10, 2007 10:14:08 PM

This post highlights what people don't understand about neo-classical theory.

What neo-classicists are concerned about is the process, not the short term outcomes.

Democracy doesn't function perfectly, but it is still important to protect the process. Freedom of speech sometimes allows bad ideas to take hold, but that doesn't mean we shouldn't continue to protect freedom of speech.

Of course there are many examples of imperfect markets, imperfect information, and imperfect results. But more often than not, it is better to let people make mistakes, experiment, and build on empirical experience to solve these problems rather than using some heavy handed government solution.

Posted by: Jason | May 11, 2007 12:54:14 AM

What neo-classicists are concerned about is the process, not the short term outcomes.

The short term outcomes, you're correct, don't matter, especially since we all know where we end up in the long term. :)

In any case, what burritoboy is pointing out is that the suppositions of classical theory are untrue. Rational decisionmaking is not the norm, people don't have perfect information, and barriers to entry are real. One is free to make the argument that despite these realities, the system shakes itself out as normal, but when some econ 101 idiot waves past all of these screwy phenomena by saying, "supply and demand!" he just needs to be ignored.

Neo-classicalists (neo-classicists?) all too often skirt the edge of tautology when justifying the way things work -- "well, the free market is what the market does, so clearly this is just the result of the free market!" At the same time, the models used to explain why neo-classical economics is the best rely on a bunch of assumptions that just aren't true. Clearly people do stupid things and the predicted outcomes (and, yes, neo-classicists predict outcomes) don't always shake out the same way that their propaganda says they do.

Posted by: Constantine | May 11, 2007 1:10:37 AM

Before everyone starts crapping all over their idea of neoclassical price theory you should consider that price theorists have tried to rationalize this sort of decision.

In this paper Gary Becker tries to explain why identical restaurants, one very popular with long wait times and another that has little wait time don't compete with price.

I find it pretty convincing.

http://scholar.google.com/scholar?hl=en&lr=&safe=off&cluster=11530949759212696481

Posted by: alec | May 11, 2007 1:59:45 AM

"The wedding industry is now a huge one, and limo driving and rental isn't precisely the hardest industry to get into. There are no massive barriers to entry."

Really?

http://www.ij.org/publications/city_study/CitStud_SanDiego.html

"Absent regulatory obstacles, private transportation services can provide an excellent opportunity for entry-level entrepreneurship. Taxi-cabs, jitney vans, and limousines are ideal small enterprises because startup costs are limited to the cost of the vehicle and insurance plus driving skill and knowledge of geography. Moreover, private transportation services benefit consumers by providing safe and efficient alternatives to highly subsidized public transit.

Unfortunately, in many cities this entrepreneurial avenue is thwarted by regulations that exceed legitimate public health and safety objectives. Instead, they protect public transit and established transportation companies from competition. In San Diego, restraints on entry are not as harsh as in some other cities, but they remain unduly restrictive."

Posted by: Tim Worstall | May 11, 2007 7:59:07 AM

I'd think this is really about demand segmentation. If all players can see that some consumer has a high demand for their goods, everyone raises prices for that consumer in lockstep and makes more money. This almost never happens because the high demand needs to be obvious to all players in order to get the simultaneous price raising effect, but as was pointed out in the original post, a woman in a wedding dress is easy to identify.

Posted by: Dennis | May 11, 2007 9:49:13 AM

If you want a more manly example, take booze. Buy two bottles of vodka: one fairly cheap and the other ultra-expensive. (Don't buy the cheapest, however.) While your eyes are averted, have a friend pour three shots in identical glasses; one from one bottle, and two from the other. You almost certainly cannot tell the difference, much less tell which is the more expensive one.

I can Absolutly tell the difference, but the expensive one is not always the best. Grey Goose and Ciroc are much better than the field at large, but mostly high price doesn't indicate quality with vodkas.

I direct all of you to Pinnacle vodka, made in France from, as far as I can tell, moonbeams. It's half the price of anything else, and better than any other vodka I've ever tried.

Posted by: Nick | May 11, 2007 9:50:19 AM

"Again, something is really quite wrong with neoclassical economic theory here."

Well, it might be in the realm of models with simplistic frictionless planes, but it's pretty much exactly what you'd expect from game theory and price theory, givne that you have a pretty well-defined subsegment of the market that vendors can exercise price discrimination against.

That's the thing about economics. In the economics faculty, they teach market imperfections as these awful things that muck up Pareto optimality and make the modeling difficult. But cross the road to the B-school and market imperfections become competitive advantages and are these cool things to be exploited, [c.f. Michael Porter's transition from working in the economics department to the B-school].

You've a one-off transaction, so attempts to gouge don't carry a penalty save the opportunity cost of losing that particular piece of business. Plus, there's an aversion on the buyer's part to nickel-and-diming on individual items (do you really want to piss off your would be spouse by suggesting you could get a cheaper cake at CostCo), and the bride may be spending her parent's money, and so is less price sensitive. [Also, limo or meeting room rental for weddings will mostly be at the weekends, so the reason it's cheap to rent banquet halls during the week is because the opportunity cost is lower.]

Posted by: Sock Puppet of the Great Satan | May 11, 2007 10:20:38 AM

There is a deep problem with price discrimination. It is not consumer irrationality. Instead, it is intersubjective preferences (what TJ might have called "signalling.")

Intersubjective preferences are those in which my utility depends on yours. One example is altruism. Another example is envy. And a third (most relevant to this thread) is the flip side of envy: the happiness a person can get from being envied. And a fourth is sadism.

As a matter of logical mechanics, neoclassical economics can cope with intersubjective preferences. But as a matter of politics, it cannot. The politics of neoclassical economics is a form of bounded libertarianism. State intervention is permissibly only where an externality or other market failure exists. This is very attractive, if you are not concerned with initial wealth distributions, and ignore intersubjective utility.

But intersubjective utility includes monsters such as envy and sadism. Exchanges that maximize these monsters--even if uncoerced (in the libertarian sense)--do not satisfy our moral intuitions. Hence, most of us do not like prostitution, and most of us are queasy with the luxury market, in which much of the value of the goods is contained in the high price.

Posted by: Joe S. | May 11, 2007 10:28:39 AM

"I really wish more commenters would take my tossed off posts and glean fascinating socio-economic insights from them."

Raise my salary first.

Posted by: Sam L. | May 11, 2007 10:59:23 AM

One has to wonder how low the barriers to entry actually are for a limo company. First, one must acquire the car, which can’t be cheap, and the license – I image most areas have some sort of regulatory body sanctioning limos. Then you need to build a book of business. Here’s where it really differs from taxis. A taxi driver can just drive around, marketing himself just by being out there. But a limo driver needs to put out ads, market themselves and drive brand recognition. This isn’t rocket science by probably enough to preclude any Tom, Dick and Harry from entering.

The next question is: how much of this growth in the wedding-industrial complex has really trickled down to limos? I bet the answer is: not a lot. Limos have always been core to the wedding. I venture to guess most of the additional spend has gone to things that are part of the “presentation” such as the dress, flowers, the reception location, the band. Honestly, who really remembers the limo? My wife and I had a really large wedding, with gobs spent on the dress, flowers, etc….. but no limo. We got a bus, and it was cheap.

So the reality is: there’s probably not a lot of incentive for people to be jumping into the limo business. It’s a commodity, with little room for one to differentiate ones self from the competition.

Posted by: DM | May 11, 2007 2:39:49 PM

Umm... Thorstein Veblen, anyone?

Posted by: Jack Roy | May 11, 2007 6:28:10 PM

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