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The Sound of Ideas

Pricing Puzzles

Posted Wednesday, June 10, 2009

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Pricing Puzzles Popcorn at the movies, a beer at the game, bottled water at the pool... what do these things have in common? They are often outrageously expensive....at least compared to buying them almost anywhere else. Yet, millions of people indulge in these pleasures of convenience regularly. In today's economy where penny pinching is becoming a national pastime, we'll take a look at the reasoning behind the shameless mark-ups and discuss what...if anything...consumers can do about it. What accounts for concert ticket prices and are "administrative fees" when purchasing a new car just another pricing gimmick? Pricing Puzzles, Wednesday at 9 on 90.3.

Tags

Economy, Regional Economy/Business - Analysis and Trends, Regional Economy/Business - News, Other, Community/Human Interest

Guests

Richard McKenzie, Walter B. Gerken Professor of Enterprise and Society, Paul Merage School of Business, University of California, Irvine & Author of Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles
Alice Simon, James Heisler Professor of Economics, Ohio Wesleyan University

Additional Information

Why Popcorn Costs So Much at the Movies, and Other Pricing Puzzles, by Richard B. McKenzie
More About Price Discrimination
Consumer Reports
Consumer Trends

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Please follow our community discussion rules when composing your comments.

Rob Pitingolo 11:38 AM 6/10/09

I recently found myself in the middle one of these pricing puzzles during a weekend trip to Las Vegas.

I was in the sportsbook at The Venetian ready to place a bet on a Cavs playoff game when I realized my wallet was empty. I approached the casino’s nearest ATM and swiped my debit card. I planned on withdrawing $100, the maximum I had previously decided to let myself gamble for the day. After entering my PIN the fee alert popped up. It would cost $4 to retrieve my money. At first I considered declining the transaction and finding another ATM elsewhere, but I quickly concluded that every ATM on The Strip would probably have equally ridiculous fee structures. Then I did a quick calculation in my head, if I withdrew $100, the fee would account for 4% of my transaction, but if I withdrew $200, it would only be 2%. I withdrew $200.

It wasn’t until the flight home that I realized the implications of what had happened. Making two separate ATM transactions would have cost an extra $4. But walking around with a hundred dollars in my pocket that my rational self had planned not to gamble could have easily cost a lot more if I wasn’t careful. The casinos obviously know this. The higher the fees for ATM withdrawals, the more temping it is to withdraw big amounts of cash that can be given right back on the casino floor.

Stan Davisson 11:39 AM 6/10/09

One of the few things I remember from college economics class is the difference between explicit and implicit price rationing.  Explicit is when retailers raise prices on an item that is unchanged in size. Implicit is when they maintain the price but reduce the size. Either reduces value but explicit seems more honest somehow.

The most aggressive retailers do both. Example: A well known bagel and coffee store raised the price on smaller bagels.

Thanks for your show.

Elizabeth, Strongsville 12:11 PM 6/10/09

Regarding this morning’s discussion of expensive printer cartridges; there is a cheaper solution.  A company called TonerKits sells refill ink for existing printer cartridges.  The ink you purchase from them is just poured into your existing cartridge.  The same cartridge can be refilled several times, and it costs a tiny fraction of the price of a new cartridge.  This is a very cost effective product.

Seth 12:14 PM 6/10/09

Free public events with security that prevent people from carrying in empty containers amaze me.  I don’t drink alcohol and I don’t care for soft drinks full of sugar and caffeine.  All I want is water so that I can remain properly hydrated.  Many venues have water fountains, usually in a “temporary” state of ill repair, but I cannot bring in an empty container to fill.  Instead, I must purchase a recyclable petroleum-based bottle of water for a price considerably higher than the equivalent volume of premium gasoline.  Meanwhile, cities try to pass laws to ban plastic bags and discourage the use of disposable containers.  Perhaps there should be a “right to hydration” that requires all venues to provide, at a minimum, working water fountains.

Doug 12:15 PM 6/10/09

Grocery stores have been mentioned.  Could one of your guests describe the logic behind the grocery frequent shopper cards?  These cards are extremely prevalent and all consumers are encouraged to sign up, which usually doesn’t take too long.

I can’t believe the object of these cards is to increase revenue by creating a markup for all consumers who do NOT have the shopper card.
Anyone who shops at a store more than once will sign up for a card, so the percentage of non-card sales has to be very low.

Is the logic simply to make consumers feel loyal to a particular store in that belonging to this “club” makes saving money easy?  Do stores use the cards to track patterns of particular consumers and use this for marketing and stocking decisions?

John, Ohio City 12:16 PM 6/10/09

Will I ever be able to buy a real 1/2 gallon of ice cream again? 

How far can the manufacturers reduce the product size (at the same price point) before someone realizes that they should re-introduce a product at the original size?

Kym, Shaker Heights 12:22 PM 6/10/09

One morning my large extended family (20+ people) were waiting to go out to brunch (on my Grandfather’s tab). As we gathered and chatted the hour before my Grandfather loudly offered everyone as much Orange Juice as they wanted. “More orange juice? Bert, have some orange juice! Did everyone get some orange juice?” Later we sat down at the table and my Grandfather loudly announced- “No Orange Juice!!” I looked at the price in the menu- $3 per glass!

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