May 18th, 2005


Eco 200: product differentiation

(group) The attempt by sellers to make their product more attractive to consumers is sometimes called product differentiation.

  1. Is product differentiation a wasteful process, imposing costs on sellers that are greater than the benefits conferred on buyers? Think of cases where it probably is wasteful in this sense and other cases where it is not.

    Product differentiation can be used to identify quality products. For instance, my employer brands many hotels we sell as Expedia Special Rate. While the hotel room you get is exactly the same as one sold elsewhere, it tells the consumer that we guarantee the price is the lowest (or the difference back). A bad use of product differentiation could be viewed as branded bottled water. All bottled waters are essentially the same. The government doesn't allow these products to be different really. On the other hand, even if the product isn't different, if it gives the customer piece of mind that the company isn't trying to get around government regulations, then it's still a small benefit in less fretting.

    I personally look at all branding skeptically, but then I have a huge distrust for corporations.

  2. Evaluate the following argument: New practices initiated by sellers to differentiate their products are liable to be wasteful from the social point of view. But this only means that producers have already made use of the low-cost/high-benefit techniques of product differentiation; it does not show that the whole proces of product differentiation is wasteful.

    Generally I agree with the statement. I prefer product differentiation based on actual product differences rather than based on marketing product without much actual difference.


Eco 200: too many choices?

(group) A survey by a New York advertising agency found that many consumers consumers thought there were too many different brands available for sale in several product categories. For example, 72 percent of the consumers surveyed thought there were too many brands of dry cereals, and 60 percent thought there were too many brands of bar soap. How many is too many from your point of view if you know exactly what you want? How man is too few if you can't find what you're looking for?

If I know exactly what I want, the concept of "too many" doesn't exist. The only trouble for me is finding it among the other ones. That's a low cost, since I know what it is I seek.

If I don't know what I want, too many is when the number of variables I need to consider becomes greater than my ability to process the information. It's not the number of choices, but the multi-variate nature of the choices. Is a triple shot grande soy latte with caramel sauce better than a tall decaf Americano? I have no objective way of knowing other than trying them (and the 3 billion other combinations I can get at Starbucks). However, it's relatively easy for me to determine at a truck stop whether I want the coffee or water.


Eco 200: good character

(group) A study pointed out that 73 precent of the professions licensed by a populous midwestern state required entrants to have good character. Why? How can good character be determined? Who is best able to determine whether morticians' characters are sufficiently blameless to entitle them to a license.

My group all suggested other morticians are the best positioned to judge good character. I disagreed. The best person to determine if someone has good character is the customer. Other morticians have a vested interested in keeping additional morticians from entering the market.

The only legitimate reason to require good character in my view is to prevent rip-off artists. This could be done by the state (or the BBB) documenting the professional's record (either in other professions or under other names), or by administering a test and publicizing the results. I'm generally not in favor of requiring good character so much as exposing bad character and letting consumers and the market decide.


Eco 200: cab cartel

(individual) When the Seattle City Council stopped setting taxicab rates, efforts quickly began to compel the city to resume regulation. Are you surprised to learn that those efforts were financed and promoted by the owners of taxicabs? Do you believe their statement: We're doing it to keep people from being ripped off?

No. Because it's unlikely that the city council will allow a regulated price to drop below marginal costs. As gas prices rose recently, the city mandated that prices rise. It doesn't allow anyone to undercut the cab cartel.


Eco 200: cosmetology

(individual) An advocate of state regulation of cosmetologists and barbers argued that the state cosmetology agency had taken in $756,805 in revenue in the preceding year while spending only $589,014, thus providing a net benefit to the state. Where would you look to locate some additional costs created by the agency?

Licensing cosmetologists likely reduces the supply of hairstylists. This will increase the cost to consumers. The law of demand says that they will purchase fewer hairstyling services. This will reduce tax revenue for the state government.


Eco 200: below cost

(group) Which of the following products are being sold below cost? With what other products are they competing? Is the competition unfair?

  1. Coffee offered by a bank to its customers without charge
  2. As many cups of coffee after dinner as the diner in an expensive restaurant requests, at no extra charge
  3. Commcercial television programs
  4. Soft drinks on an airline flight
  5. A roll of film given to each adult customer during a pizza shop's first week of operation

None of them seem to be sold below cost, if one considers the proper opportunity cost. Each of these is being offered to bring in more customers. The opportunity cost of the television show, for instance, is the advertising revenue. It may not even be advertising shown with the show itself. It may even be advertising revenue shown on the show following it (for instance, friends).

In none of the cases illustrated is there really a restraint on trade, so I wouldn't personally characterize them as unfair.


Eco 200: reducing prices for customers or monopoly

(individual) What is the difference between reducing prices to attract more customers and reducing prices in order to monopolize?

Only in intent. If the intent is to be able to raise prices again later once competition is lessened, it's to monopolize. Of course, once prices are raised again, the opportunity for competition returns. It's somewhat self-correcting. If the monopoly never raises prices again, who cares if it's one business or two selling the product? There's still the opportunity to compete on differentiated product or on substitute product.


Eco 200: business costs

(individual) Chuck Waggin owns and operates a small tax-accounting firm, which he runs out of the basement of his home.

  1. The basement was just wasted space until Chuck turned it into an office for his business. He says his firm is more profitable than most tax-accounting businesses because he doesn't have to pay any rent. Do you agree that rent is not a cost of production for Chuck?

    Whether he pays it to someone else, or doesn't rent the space out to someone else, he's still giving up some money. The money lost by not renting the space out may be less than what he'd pay by renting out a proper storefront though.

  2. Chuck recently turned down an offer to go to a work for a larger firm at a salary of $45,000 a year. Chuck's personal income from his business runs about $35,000 a year. Would you say that Chuck's firm is profitable?

    Yes. Because not reporting to some corporate schmuck is worth $10K a year easily. I'd still consider it profitable. Just not as profitable as the alternative. It could be considered losing money on the opportunity cost, but it's not how most people understand the term.

  3. Chuck says he liked being his own boss, and that he would be willing to sacrifice at least $25,000 a year in income to avoid working for someone else Does that information change your answer to part b?

    Heh. Apparently not.

  4. Chuck recently invested $10,000 of his savings in an office comuter. How would you include the effects of this investment in his costs?

    Depreciation. While the monetary cost of the computer is incurred all in one swoop, it's really a cost over the life of the computer. The balance isn't a cost, but an asset to be used later. even at the beginning, it's value is more than what he paid for it, so it's really not a net cost. Otherwise, why would he have bought it?

  5. Chuck could have earned 12 percent per year on his savings had he used them to buy the computer. If he had not had these savings, he still would have bought the computer, using a loan from a bank at 18 percent annual interest to finance the purchase. Is the opportunity cost of owning the computer really less for Chuck because he had savings of his own from which to buy it? If Chuck had been required to pay 18 percent interest to the bank rather than give up 12 percent interest, for what would the additional 6 percent have been a payment? Does Chuck reduce his costs by financing the computer purchase himself?

    The addition 6 percent is for the risk that Chuck will default. If he wouldn't have defaulted, it would likely be better off for him to pay for the computer up front. If he would default, it's better to borrow. But even those answers depend. Most likely reason for default is his business isn't doing well. In that case, if he financed it himself, he'd still have a computer to sell, though he'd be out the money. If he borrowed, he's likely to have it repossessed. If he defaults because he takes the computer and runs to Mexico, he's better off for having borrowed the money. In the end, it'd probably be mostly a wash.