Friday, January 2, 2009


I first used the term "microspeculation" to refer to people topping off their gas tanks in advance of a coming hurricane; clearly some of the demand for gasoline was being driven not by a consideration of immediate need as weighed against the current price but by the expectation that future needs could be better met now than at the price at which any gasoline might be available a few days later. The phenomenon is much more pervasive, though, in less blatant terms; many people will buy something because its price is lower than what they consider typical for the item, and, to the extent that this is rational, it is often on the presumption that one would like to consume some of the item occasionally at the given price, and that the given price is low relative to an alternative price at which one might be able to buy it at the future. Perhaps more clearly, someone will forego a purchase at a higher price than was expected, not because that price exceeds its value to the purchaser, but in anticipation of being able to get a better deal later. If the current price were expected to prevail for a long period of time, the buyer would be better off purchasing it immediately, but is holding off in speculation that the price will come down. By and large, microspeculation is characterized by its size (small), its pervasiveness, and by the lack of intention to sell; one is substituting a purchase at one time for a purchase at another time, rather than performing an actual sale on the visible market.

For goods that can be stored in a straightforward manner microspeculation can be effected through "stocking up" on an item at what seems to be a temporarily low price; insofar as an item cannot be stored, the only way this comes into play is in a taste for diversification over time. Consumption of fresh fruit, for example, may be more sensitive to price changes in the short run than in the long run because one can gain more pleasure from eating apples during some portion of the year if one is comparatively deprived of them the rest of the year than if consumption is steady. Canned fruit, on the other hand, can be more readily stored, and short-run price elasticity can be driven higher (relative to long-run price elasticity) because one can "stock up" in anticipation of rising prices; while the response of fresh fruit sales to price changes is limited to one's willingness to consume it now, canned fruit can be purchased now to be consumed later.

To some extent this is a question of technical substitutability; it is easy to turn a can of canned fruit now into a can of canned fruit tomorrow (just wait 24 hours), while fresh fruit will start to deteriorate, and can not be so substituted. This is different from the question of consumption substitution, but from the standpoint of the visible market, it looks the same, and any attempt to measure substitution of consumption is likely to include this as well.

While some price-stickiness is surely "behavioral", in the sense that it probably can't be put on a strictly rational basis, I imagine that a fair amount of price-stickiness originates in microspeculation on the part of market participants' responding much more elastically to changes in conditions than they might if they believed that every change was permanent.

No comments: