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Saturday, December 22, 2007

The Undercover Economist by Tim Harford

bought this book from mph bookstore in klcc, kuala lumpur. received some old debt, so after my masters class at open university malaysia in bangunan angkasa raya - went straight to the nearest book store.

the class touched on some economics topic and at this point of time, economics has become trendy. so there were a few books on the front shelf at the book store and this was one of them.

not finished it yet, but the early chapters on coffee and the economic concept of rents had me thinking, "why do bazaar retailers have dual pricing ?" if you are a discerning tourist / traveller you will have noticed that bazaar retailers will usually have different pricing for locals and outsiders.

i am an outsider here, having migrated the family to kuala terengganu from kuala lumpur in august 2007. i love it here, having worked on a project here for a 1 year before making the move. and the terms i agreed with my current employer was good - i take a 50% pay cut but get to do the things i have wanted to do.

okay, back to the bazaar retailer. let us assume that he sells silk batik shirts along with about 30 other retailers in the bazaar.

the bazaar retailer thinks that since the outsider is new in town, he will not have much information on what is the average price for the silk batik shirt, so he will try his luck at a higher price than normal, say rm150 instead of rm100.

the outsider knows nuts about silk batik shirts and the average price. so wanting to get a better deal, he decides to survey all the other silk batik shirt retailers, hoping that 1 of them will offer a lower price.

the retailer next door will have expected that his retailer neighbor will have set a higher price, and since no 2 silk batik shirt is alike, he will probably set his price at rm150 as well. so will the next retailer next door have expected and set a higher price.

now, even if the outsider have gone round to all the retailers, the information that he has indicates that the average price is rm150, not rm100 !

by this time, the outsider have probably shortlisted 3 silk batik shirts that he really liked, so he goes back to the 3 bazaar retailer.

the bazaar retailers will have seen this outsider going round on his survey and anticipates that the outsider have made his choice. but each retailer will not know how is his silk batik shirt ranked - if it is ranked first, then he can afford to maintain the high price, but if it is ranked second, or third, then a lower price may entice the outsider to buy his silk batik shirt instead of the outsider's first ranked choice.

therefore, on this second round, the outsider may find out that the average price has dropped from rm150 to rm120 !

since, i have not seen any case study on this, i am going to call this empirical observation the threaded screw dual pricing. the less information that a customer has, the higher is the average price. if the customer goes enough rounds and collates more information, the marginal price will be lower and lower.

2 comments:

sunaryo adhiatmoko said...

Salam, Apa kabar tuan di Kualalumpur? Saya tertarik bertukar informasi. Silakan singgah di blog saya "Komunitas Lirih". Salam
http://sunaryo-adhiatmoko.blogspot.com

red1 said...

Wow.. it seems that a migrant knows how to gather more info than a local. :-)

Very interesting theory. How about this:

"The less info a guy has on a girl, the more he is going to get screwed"

Sorry, sorry, silap nogori... i will think of something appropriate next time.

Thanks for commenting on my blog. Btw the Asia e University thingy is getting published in their offerings.

All the best!