Friday, July 15, 2011

price changes

I'm interested in markets, and one of the complicated things about markets is that they involve people. Netflix has gotten itself some flack recently for revamping its price structure, breaking apart (as I understand it) for sale separately (and without a joint discount) two services that were previously bundled, such that the total price of the original package, for those wishing to replicate it, has gone from $10 per month to $16 per month. One of the comments I saw was "this is too big a price change to implement all at once"; if we take this complaint at face value, it might have created less of a stir if they had offered a $3.50 discount on the bundle for a period of time. This is similar to something I heard at the annual meeting of my cooperative apartment; we're being hit with some big expenses in a year or two, so the board decided to increase our monthly maintenance payments this past year so that the increase next year won't be one big jump.

I'm curious as to what kinds of price changes strike people as "unfair" and what kinds don't. Stock prices change quite frequently, but the buyers and sellers are very dispersed and anonymous; I think people have less of an emotional "fairness" response to stock price moves than to other kinds. Gold, at least as traded on financial markets, is similar; so, though, is oil. Most people purchase their oil distillates, though, from recognizable brands, and even though they're usually mercenary about it themselves — most people, choosing between Exxon and BP, will go with whichever is cheaper on the given day — seem to object to higher prices than they're used to. This is likely also a function of the fact that people build their habits around consuming oil distillates at a constant rate, and don't like responding to prices; demand elasticity of gasoline, especially in the short run, is very low (which is precisely why the price is sometimes so volatile).

If the shop on the corner raises its prices, my understanding is that people tend to regard this more favorably if the retailer's costs have recently gone up than if it's simply an attempt to ration rising demand in the face of potential shortages. (It's worth noting in this context, though, that part of Netflix's decision seems to have been related to costs.)

And, as suggested at the beginning, it may be that increases of a certain size produce a certain amount of sympathy, especially in the face of rising costs, but that there are certain breakpoints where the customer would respond less viscerally if the change were phased in. What interests me in particular here is to what extent it's an abrupt change in expectations rather than an abrupt change in prices that creates the angst. If Netflix had announced this change 18 months ago, would it have produced as much complaint then as it is now, or as much complaint now as it is, or would it have spread it out or even reduced it? If the old rates had been (credibly) portrayed, as soon as the bundled items were being sold together, as a special, trial offer, would the new price structure have been more readily accepted? (If you give away an item for free for two months, any increase in price will exceed 60%, but would presumably be more accepted; there would be an expectation that this was a limited-time offer.) I note in this context that O'Hare airport some years back raised its parking rates by announcing, at the beginning of the holiday season, that it was offering "special holiday rates" that equalled the rates in October; they actually raised the rates at the beginning of January by allowing the "special rates" to expire.

Another anecdote: about ten years ago, I was a regular in a sandwich shop, and recognized as such; they increased the price of a sandwich by 10 cents at one point, but comped me a free sandwich when they made the change. I imagine them imagining me thinking, "They're nice people and they like me, so I understand that they have to raise their prices once in a while."

I'm not offering grand theories, but my speculative observations are that upset increases when
  • demand for the good is inelastic
  • price increases result from cost increases, rather than shortages
  • price increases are "big"
  • price increases are unexpected
  • markets are less anonymous.

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