Oxymoron: Fixed Prices

Anyone who has been exposed to even the least bit of the dismal science, has been confronted with the core truth of economics, the supply and demand curve. This hoary abstraction lies close to the root of modern economic theory, as first explicated in the 18th century by Adam Smith and others. Note that a supply and demand curve is not a plot of some dataset, say, years of education versus lifetime income. Rather, it is a graphic depiction of qualitative relations between the quantity, price, and demand for commodities.

The statement "the supply of a commodity, the amount that is offered for sale, generally increases as the price increases" ends up on a supply and demand curve as a diagonal line trending upwards from the origin, called the supply curve. The statement "demand for a commodity generally decrease as prices increase" is depicted by a diagonal line trending down to the right, known as the demand curve. The point where supply and demand curves cross defines the price for a particular supply of a commodity.

None of these curves depict particular values or even particular relations between values. Rather, they express qualitative relations between sets of statements about supply, demand and prices. That is, supply and demand curves may seem a lot more rigorous than they really are, wrapping rather feeble assertions in the trappings of mathematics and then using these to make extrapolations that are logically questionable and even unsupportable.

But, this breathless, back-of-the-napkin approach seems to command a lot of respect in economic circles, allied as it is with business, political opportunism and Nobel-seeking academics. Economics, as a "science" seems to inhabit an alternative universe from the usual sciences, hard or soft, and its practitioners have been accorded a respect disproportionate to their real contributions, usually for self-serving, political reasons.

This hardly scratches the surface. Economics and economists should be high on everyone's list of professions to be skeptical of and I'll return to this theme again.

Now, however, I'd like to investigate the all-but-ubiquitous practice of giving products fixed prices. This is so firmly ingrained as to seem a non-issue but, both from a theoretical and practical point of view, prices should not and can not be fixed without being to the continual disadvantage of consumers. Why? The instantaneous price of a commodity is a moving target defined by instantaneous supply and demand. This is illustrated at any moment by the moving prices for stocks, bonds, commodities, futures, etc. on the world's financial markets, wherein computer-assisted trading helps extract the maximum benefit of transactions for both buyers and sellers by allowing them to settle on a mutually-agreeable price.

The world of consumer products and goods is, by comparison, sub-optimal. Prices are set by decree by the seller, and as such will always be higher than if they were directly bid on by consumers. As it is, the only recourse consumers have is is the rather course-grained and inefficient approach of simply not buying or shopping around for prices that are less sub-optimal (cheaper). In both cases, the seller and the buyer would be better off if the sale had simply gone through at a mutually-agreeable price in a timely way. So, why doesn't this happen?

In a market where seller is king, prices can be set arbitrarily high, up to a point. If the seller can afford to absorb costs of stocking and display, he is in a position, with a population of compliant buyers, to skim off the easiest sales, and simply allow less compliant consumers to move on to retailers willing to sell at a smaller margin. This lazy approach may be fine for upscale stores catering to a clientele always willing to pay more than necessary, but such stores would rapidly find themselves on hard times if such customers became more demanding or hard-pressed to make ends meet. It seems altogether more prudent, for both consumers and retailers, to hone closer to prices that would result from haggling between buyers and sellers.

Buyers needn't feel guilty for offering a lower price than marked for items, because the difference in profit can and often is offset by other savings that may accrue to the seller, such as the opportunity costs of having capital tied up on aging inventory, etc. In any case, it is hardly the buyer's role to try to second-guess the best interests of the retailer. Indeed, sometimes it is hard enough to figure out his own interests.

The buyer should not be intimidated by the self-serving "prohibition" on haggling or bargaining to a price often put up by retailers to forestall their having to revise their (always-higher-than-optimal) prices. The main problem facing retailers is that most have crippled themselves with staff without knowledge or competence to enter a meaningful price negotiation. Generally, however, store managers are so empowered and, when approached discretely, will respond to sensible offers, though they are often chary of doing so if it seems that this would trigger a stampede of haggling customers, a nightmare that would surely have grave effects on their career prospects. Usually, offers on cosmetically hurt products are not refused, even offers that are less than a markdown, because such items are compromised and could result in much larger losses if never sold.

Prices, without the active participation of buyer and seller, are a fiction, laughably confused further with the "value" of commodities. One must understand that neither buyer nor seller alone is competent to judge what an appropriate price may be: a certain price may indeed be too low to justify the seller's parting with an item, as it involves more factors than simply the wholesale price and a "reasonable" markup. The buyer's options are not known to any seller, either, so a price offer can be a source of real-world feedback in the face of statistical guesswork.

The key is to not be shy in standing up for your interests as a consumer. It is your role in the marketplace, pure and simple, and doing so can only increase the efficiency of retail transactions and your own satisfaction.