Tuesday, August 26, 2008

The Price Is 0.99 Right

Pricing is one of the great mysteries of economics. As Russ Roberts puts it in the latest EconTalk podcast, the marketplace is a spontaneous order that emerge from the voluntary interactions of millions of people, all mediated (and made possible) by the pricing mechanism. It's the closest economists get to being mystical.

And we're still figuring out new things about prices and pricing all the time. Take the latest research into why retailers use price points like €9.99 rather than the more convenient (you would think) €10.00. That 1c difference can influence sales volumes of things like pizzas by 15%. And it isn't just the price of goods or services that is so responsive to small changes: so also is the price of labour aka wages and salaries. Just look at the experience of fruit pickers in England, for instance, who were subject to an experiment by local economists (with the consent of the farmer) that brought about a cumulative increase in productivity of 90%.

But if all this makes consumers look like sheep you couldn't be more wrong. It seems that the general public do as good as job at forecasting the price level (i.e.: the inflation rate) as professional economists. A finding that might do wonders for the productivity of all those economic pundits mind you ...

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