In the first world people haggle by cutting coupons out of the newspaper. This is a form of price discrimination. It is also non-transparent pricing. Coupons also add to the asymmetry of information, ect,ect.
I would argue just the opposite, that we are way past our peak of transparent pricing and as time passes you will see a more byzantine maze develop.
As far as retail goes JC Penney recently failed in such a strategy be transparent.
Part of the problem is that while non-transparent pricing may or may not be self-sustaining (Gabaix—Laibson is not wholly convincing on this point), price discrimination is unambiguously so because it serves a useful economic function, namely defraying intra-marginal costs (including fixed costs and normal profit) in the most effective and least burdensome way. Cutting coupons is a comparatively efficient way of signaling that one is a highly price-sensitive customer and should not bear a significant share of these intra-marginal costs. The JC Penney strategy was affected by a similar issue in that they got rid of most of their discount sales, which also attracted highly price-sensitive folks.
First thank you for the thoughtful response. This is more what I was hoping for when I posted… I don’t agree with you signaling story but it is something I would not have considered.
“price discrimination” I don’t think this is at all a story of signaling. I think it is a story of information/time costs.
My stories: If my wife picks up the circular at the store entrence and tells me that if I rip out this page an hand it to the cashier I will save a buck I do so. Most people don’t do their health savings accounts or mail into NYC to have their metro cards mailed to them so they can save a few bucks by deducting the cost. Do you think most people pay more taxes then they need to because they are signaling? Tell me your signaling story.
To the paper being convincing. Be specific. I bet that your story will involve agents who can not defect or some external structure which alters incentives. My story is very close to that of the paper. That people who care “sophisticated” will prefer systems in which they can obtain an advantage.
I’m expanding the strict definition of price discrimination by including taxes ect but believe they are the same. By doing so I think it can be seen that price discrimination is a supply and demand side. In addition I would argue that because I am talking about systems that it is an emergent phenomena. Agents within a system shroud. Does your car mechanic or IT guy tell you the exact truth or do they pad things just a little. Do teammates working on a project ever slack but make it look like they are doing work?
Do you think most people pay more taxes then they need to because they are signaling?
No; I think they are trading off compliance costs vs. the risk of paying more taxes than they owe. But it’s not clear that the price discrimination story is applicable here.
To the paper being convincing. Be specific.
Basically, the problem with Gabaix—Laibson is that its “myopic” consumers are persistently biased in addition to having bounded rationality. They persistently expect to be charged less e.g. for the hotel stay than they actually are. A boundedly rational consumer would expect to be overcharged for some addons, even if she dosn’t know in advance what the marked-up addons will be or whether she can avoid the surplus charge (unlike Gabaix—Laibson’s sophisticated consumers). This may or may not change her response to efforts at more “transparent” pricing.
That people who care “sophisticated” will prefer systems in which they can obtain an advantage.
Yes, this is fairly obvious. But this also implies that naïve folks will avoid these same systems. In general, it will pay for sophisticated folks to credibly refrain from using such systems, unless the system provides further benefits (say, effective price discrimination).
Does your car mechanic or IT guy tell you the exact truth or do they pad things just a little. Do teammates working on a project ever slack but make it look like they are doing work?
This is an asymmetrical information problem. People expect that a car mechanic will pad costs if she can get away with it; so they try to establish norms under which more info is provided, or else the practice is deterred directly.
“compliance costs vs. the risk of paying more taxes”
—This is why I use health savings accounts and commuter plans as an example.
“myopic” consumers
—There really are no individual consumers there are transactions. Myopic transactions perhaps would be a better description. On aggregate we have lots of myopic transactions. (bounded rationality) To answer you question
—I agree with you second part on myopic’s but don’t see how it is a problem for G&L. Sophisticateds are the ones driving the evolution of the system.
In the first world people haggle by cutting coupons out of the newspaper. This is a form of price discrimination. It is also non-transparent pricing. Coupons also add to the asymmetry of information, ect,ect.
I would argue just the opposite, that we are way past our peak of transparent pricing and as time passes you will see a more byzantine maze develop.
As far as retail goes JC Penney recently failed in such a strategy be transparent.
http://redtape.msnbc.msn.com/_news/2012/05/25/11864178-fair-and-square-pricing-thatll-never-work-jc-penney-we-like-being-shafted
Highlighted by MR
P.S. “You are trying to submit too fast. try again in 3 minutes.” - Is this really needed?
Judging by the quality of your posts and comments, it’s working perfectly.
Part of the problem is that while non-transparent pricing may or may not be self-sustaining (Gabaix—Laibson is not wholly convincing on this point), price discrimination is unambiguously so because it serves a useful economic function, namely defraying intra-marginal costs (including fixed costs and normal profit) in the most effective and least burdensome way. Cutting coupons is a comparatively efficient way of signaling that one is a highly price-sensitive customer and should not bear a significant share of these intra-marginal costs. The JC Penney strategy was affected by a similar issue in that they got rid of most of their discount sales, which also attracted highly price-sensitive folks.
First thank you for the thoughtful response. This is more what I was hoping for when I posted… I don’t agree with you signaling story but it is something I would not have considered.
“price discrimination” I don’t think this is at all a story of signaling. I think it is a story of information/time costs.
My stories: If my wife picks up the circular at the store entrence and tells me that if I rip out this page an hand it to the cashier I will save a buck I do so. Most people don’t do their health savings accounts or mail into NYC to have their metro cards mailed to them so they can save a few bucks by deducting the cost. Do you think most people pay more taxes then they need to because they are signaling? Tell me your signaling story.
To the paper being convincing. Be specific. I bet that your story will involve agents who can not defect or some external structure which alters incentives. My story is very close to that of the paper. That people who care “sophisticated” will prefer systems in which they can obtain an advantage.
I’m expanding the strict definition of price discrimination by including taxes ect but believe they are the same. By doing so I think it can be seen that price discrimination is a supply and demand side. In addition I would argue that because I am talking about systems that it is an emergent phenomena. Agents within a system shroud. Does your car mechanic or IT guy tell you the exact truth or do they pad things just a little. Do teammates working on a project ever slack but make it look like they are doing work?
No; I think they are trading off compliance costs vs. the risk of paying more taxes than they owe. But it’s not clear that the price discrimination story is applicable here.
Basically, the problem with Gabaix—Laibson is that its “myopic” consumers are persistently biased in addition to having bounded rationality. They persistently expect to be charged less e.g. for the hotel stay than they actually are. A boundedly rational consumer would expect to be overcharged for some addons, even if she dosn’t know in advance what the marked-up addons will be or whether she can avoid the surplus charge (unlike Gabaix—Laibson’s sophisticated consumers). This may or may not change her response to efforts at more “transparent” pricing.
Yes, this is fairly obvious. But this also implies that naïve folks will avoid these same systems. In general, it will pay for sophisticated folks to credibly refrain from using such systems, unless the system provides further benefits (say, effective price discrimination).
This is an asymmetrical information problem. People expect that a car mechanic will pad costs if she can get away with it; so they try to establish norms under which more info is provided, or else the practice is deterred directly.
“compliance costs vs. the risk of paying more taxes” —This is why I use health savings accounts and commuter plans as an example.
“myopic” consumers —There really are no individual consumers there are transactions. Myopic transactions perhaps would be a better description. On aggregate we have lots of myopic transactions. (bounded rationality) To answer you question —I agree with you second part on myopic’s but don’t see how it is a problem for G&L. Sophisticateds are the ones driving the evolution of the system.