I haven't seen one priced at 99 cents for a couple of years now. The best price in convenience stores where I live (US) is typically 2/$3.00. The cans don't even say 99 cents anymore, they seemed to start phasing that out after that episode of Atlanta someone else linked.
The negativity here falls a little flat - water, sugar, and tea isn't really something I think of turning my nose up at. Of course I assume it has a lot of sugar and is therefore unhealthy, but your ingredient list isn't exactly offensive.
I think the same is true for most drinks that you can buy ready-to-consume in small packaging. For me at least, the value is mostly in the production and supply chain that ensures the drink is created, bottled, and distributed to a phalanx of locations such that I can walk into any grocery or convenience store and be reasonably sure I can buy the drink I want in a single-serving container for a price I find acceptable.
So I don't think the product cost of the liquid itself really factors into the equation. Or at least it shouldn't. I usually assume most of what I'm paying for the logistics that lead to the drink being available and ready to drink where and when I want it.
I don't think the original comment was offensive, just that "it should probably be cheaper" misses the mark because for most drinks in this category, the price of ingredients shouldn't be a significant factor in determining its value to the consumer.
In college I would buy a can of Arizona Iced tea at the local drugstore and then walk over to the McDonalds and buy two Cheeseburgers for a dollar each. You can still-almost-do this over a decade later (a cheeseburger is usually over a dollar depending on the state).
You may actually be able to get more mcdonald's with the same amount of money now. Their app has all these deals like "free cheeseburger on orders of $1 or more", meaning if you spend $1, you get a free cheeseburger. I guess that requires a smart phone which isn't free, and of course the app will be taking as much data as it can access. But if you enjoy mcdonald's food, it seems to be cheaper than ever.
I was recently looking at a McDonald's drive-thru menu for the first time in probably a decade (road trip, forgot to pack a bite to eat). A Big Mac meal was $11. A large french fry was $4.99. It shocked me a little bit.
I've been scratching my head for the last day and a half wondering how the McDonald's drive-thru near me is always packed. Your comment is illuminating to me because I didn't know that I needed a McApp to get McDonald's prices, though I am not at all surprised.
I was shocked recently by the price of the value meals as well, which has skyrocketed into full meal at restaurant prices.
The trick to McDonalds has, for a long time, been that the value meals are any thing but a value and to buy exclusively from the dollar menu. If you do that you will be hard pressed to find anything cheaper.
They've switched to an interesting (though, to me, annoying and I hope it doesn't catch on but it kinda already has [other fast food places are doing it too] so add it to the list of shit that's terrible about the current world) model where they price really high on the menu but then offer deals and coupons that get you back down to what would have been a sale price before the price hikes.
It's a kind of price discrimination tactic—people willing to clip coupons or use the company's app might pay 1/3 or less the menu price, and those who aren't, pay the full (and crazy-high) menu price.
Like, yes, coupon shopping has always been a thing, but not like this, because the normal menu prices used to already be pretty good. They're super expensive now, but if you burn some time, they'll give you a really good price, consistently, pretty much any time you want it.
The combination of high and very low prices also stuck out to me. I agree it’s interesting, but I personally don’t mind it. It’s not a bad progressive model to have people who aren’t price-sensitive subsidize people who are.
I dislike trends toward finding a way to make you pay as much as possible for your own time & attention, is the reason it bugs me.
[EDIT] More generally, I just prefer my commerce to be fairly straightforward. I don't like having to second-guess whether there are hidden tricks going on to screw me.
> It’s not a bad progressive model to have people who aren’t price-sensitive subsidize people who are.
It is entirely bad. It arrogates consumer surplus to the supplier. The people paying higher prices don’t subsidise those paying lower prices, the supplier pockets most of the gains. They’d like you to believe that the people paying cheaper prices are subsidised, but they’re not selling to them at a loss. And it causes a deadweight efficiency loss.
The fact that businesses can pass this off as some kind of progressive pricing and good for the consumer makes it as disingenuous as it is pernicious.
Can you say where you were seeing those prices? That's wildly different from what I see in my metro area. At my local McDonalds a Big Mac meal is $6, not $11.
The app is crazy. This last week I've been getting two-for-one on sandwiches. If you pick McDouble you can get two of them for $2.19 total (+tax depending on jurisdiction). The large fries are always $0.99 on the app. Plus you get points from it which converts into more free stuff.
And if you're super friendly with the little old Mexican lady who works there, she'll sneak free pies into your bag too.
App / coupons are a decent way to have a little elasticity on price and maximize revenue from people that will pay more and still appeal to a bargain-hunter. At least here there is always a 20% off the total order deal available in the app so that's an immediate discount for a relatively small effort.
Locally they did recently drop their long-time $1 any-size soft drink but it seems to be back now after a few weeks.
I keep multiple food delivery apps on my phone, despite having the $MEMBERSHIP_NAME for one via my credit card(fees on card are cheaper than the membership itself).
This 'pays off', in that I have my default choice, and can choose to use any of the other apps when there's some combination of coupons and deals to be had that make it feel worth it.
Yesterday, I used a "$15 off $22" coupon(for some reason, they gave me two, and I plan to use the other this weekend), combined with two bogo deals from an instance of a small chain restaurant, and paid $20 delivered(fair tip included) for what would have been at least $30 had I driven over and ordered in person, since both deals were only available on the app. As a bachelor, it's enough food to count as dinner for at least 2 days in a row.
I don't know how $COUPON_GIVING_APP can make money while footing that kind of coupon deal, but hey, I'd be dumb to not make use of it if I was already looking to spend some money.
There was also a promotion only on $COUPON_GIVING_APP from Wendy's for a free sandwich of theirs, so long as cart subtotal was at least $15. The discounted sandwich counted towards that, and I ended up feeling very fat and happy with a price of $12 delivered.
Some of that is just that inflation fundamentally changed when we floated the dollar in 1971. We now purposely try to inflate our currency 2% every year. Before then there was inflation and deflation, but not a single trend. A dollar in 1800 was worth essentially the same as it was in 1933--though there were long periods where it was less and long periods it was more.
“I don’t want to do what the bread guys and the gas guys and everybody else are doing,” Vultaggio said. “Consumers don’t need another price increase from a guy like me.”
Integrity like this is rare in the American business landscape. His successor most likely won't feel this way though.
IMO it is more Marketing than Integrity. I would be surprised if this article was completely organic, most likely their PR department reached out to journalists to do a story on how great this CEO/company is.
Not saying he is not due his earnings for the product, but if his concern was fair pricing to consumers the product would likely be about 20 cents, maybe even less.
Also, as the article notes, the company sells more than just these 99 cent cans, and they have not held all prices constant.
It's a nice feel-good piece, but this guy and his sons are not worth $4B because they are looking out for the best interests of their customers above all else.
Prices are sticky and they're betting that their costs will come back down in the future. They don't want to hike prices, ruin their brand and market positioning, just to see things like aluminum prices come back to normal in 6 months and for customers to have moved on.
While other drinks may have hiked prices over the years, I haven't noticed spikes in the price of other soft-drinks over the past few months. Their costs are rising too. I think most companies don't want to alienate their fans over what they're hoping will be transitory cost increases. If Coke hikes prices and people start trying Pepsi, will they come back? If Arizona hikes prices, do they lose the "just a buck" cliff that makes them seem a lot cheaper than anything more than a dollar? Does $1.50 look a lot closer to $2.50 than $1 does to $2? Do people buy a $1.79 Snapple or $1.99 Gold Leaf if Arizona is $1.29 (even if it is still both cheaper and larger)?
Given that they're a private company and the owners are multi-billionaires, it seems reasonably wise to eat some margin over the short-term. It's not like they're struggling and it's not like they have lots of shareholders to appease on a quarter-by-quarter basis. I don't think people expect the cost of aluminum to stay at double long-term and if the Ukraine/Russia war ends, it seems like fuel prices will likely ease (and long-term it seems likely that Europe now has very strong incentive to reduce its dependence on Russian fuel). If costs remain high, they can re-evaluate this decision in 6-18 months while potentially missing out on a small amount of profits.
$43M in increased aluminum costs over a year doesn't seem that much compared to a $4B net worth - especially if you're still making money, just $43M less. If I were them, I'd weigh it out: raise prices and potentially damage the brand long-term and risk a good bit of what the family has built over decades; or keep prices steady, potentially lose out on profits that would make us 1-2% richer, and still be able to re-evaluate this decision in a year. If I had $4B, I'd much rather keep consumer sentiment thinking that I'm the small quirky outsider offering them great value.
>I haven't noticed spikes in the price of other soft-drinks over the past few months. Their costs are rising too
I haven't noticed any "spikes" in soft drink prices, but I have noticed that sale prices have edged up around 15%. This is for name brand drinks, multi-packs, sold in grocery stores. I don't pay attention to regular prices so I don't know whether it's limited to just sale prices or to regular prices as well.
The midwest happens to have a couple gas-station quickmarts that have deals like
pay $7/month for a free (any size) soda or coffee per day that many people take advantage of, but in the supermarket the price changes are evident.
The real spikes have been in restaraunt/fast food drinks. It's not uncommon to see over $2.75 for a relatively modest drink cup. This has been primarily a tactic for low-margin food businesses to avoid raising their consistently low prices, in comparison to their competition.
Ironically, this has led some market losers (like Burger King) to leap ahead of competition (Carl's Jr/Hardees) as they had to raise prices to survive, leading to incidentally higher quality meals. ie Compare the mc-donalds cardboard quality Carl's Jr famous star to a Burger King burger today.
I'm not sure what your point is. I explicitly mentioned experiencing a 15% rise later in the same sentence. That's pretty much exactly in line with pre-pandemic prices in the chart you linked.
Also, on a purely subjective basis, the chart you linked doesn't show any "spikes" to me. There's a modest rise in early 2022, but it's roughly in line with pre-pandemic price rises.
Price spiking is meaningless without a timeframe and market.
> I'm not sure what your point is.
My point was very clear. There have been spikes. The spikes have been for various reasons, beyond pure inflation.
You can agree to disagree because (maybe you weren't paying attention at the same time periods or to the same markets), but the pricing has changed nonetheless.
The stores near me are phasing Arizona products out for higher priced competitors. I'm assuming they make a better profit off of identically sized $1.99 cans of Monster green tea.
I've been drinking Arizona tea since the 90s. Something they aren't saying they do, but I'm certain they are, is watering down the product. It's the beverage equivalent of shrinkflation. Their green tea in particular lacks flavor.
I kind of wish they would bite the bullet and make a can $1.99 and bring back the full flavor 90s version.
In high school in the 90s I worked at a place that hired lifeguards and then staffed things like condo and hotel pools etc so they didn’t have to. Sometimes we would get stuff like birthday parties and such.
I was a lifeguard at a party for the ceo of Arizona iced tea. Never seen a house like that. Crazy how much money you can make selling sugar and water. From that experience they aren’t lacking.
I find this very difficult to believe. The actual tea that is in an Arizona iced tea I'm guessing maybe costs ~5c or so, if that? Surely the packaging, water, sugar, transportation and storage costs are the vast, vast majority of the cost.
Once you realize that Arizona Ice Tea is basically just a taller can with water in it when compared to a can of pop, it makes more sense how it can still be $.99.
The main additional costs are a bit more aluminum and some more water, everything else is comparable.
And the 99 cents is really tied to their brand; if they break it they get hurt more, so they'll push it as long as they "can" - likely introducing a smaller or larger can at some point.
> And the 99 cents is really tied to their brand; if they break it they get hurt more, so they'll push it as long as they "can" - likely introducing a smaller or larger can at some point.
Coca-Cola had a very similar issue way, way back in the day. I think they were pegged at 5 cents a bottle?
That left them in the even more awkward position of being unable to raise the price without instantly doubling it.
Yeah, pricing is always inflexible near noticeable points, and I suspect a decent amount of the inflation we're seeing is those points breaking down, so prices surge past to a higher bar.
Because they know it’s a convenience sized item. People wouldn’t pay that amount in a grocery store. But soda prices have gone up a lot just since 2020. I find a 12 pack of cans is and 2L is usually the most economical units and they’ve basically doubled for me.
Right there with you, my DDP intake is flat out embarrassing but I've not really switched other than buying in bulk from the value chains and massively stocking up when I see a "good" deal.
This was mostly due to vending and coin amounts. It doesn’t really constrain you in a digital payment reality. If this happened today they would move to 6c, then 7c, etc.
You find it hard to believe that a company would cut cost by reducing the amount of product they use?
Tea, even if it is cheap, is still much more expensive than corn syrup and water. So if you want to cut costs, it makes sense to reduce the amount of tea and make up for it with more sugar.
If you do it a little bit over 30 year years, few people with notice. You get a panel of taste testers compare the current version with a slightly watered down version and see if they can tell the difference. If most can't, you make the change and pocket the savings as profit. It's like making a copy of a copy on a copy machine, you can't tell much difference between the two, but repeating the process over multiple generations and the small differences adds up to be dramatic between the original and the 30th generation version.
This exact situation happens for many food companies. They gradually reduce quality and costs over the years. And once the people who remembered the original product die off or forget, it can be hard to re-establish yourself as anything but a cheap brand.
> You find it hard to believe that a company would cut cost by reducing the amount of product they use?
No, my point is that if you want to cut costs, why would you focus on the cheapest (perhaps not in the overall sense, but in the total value of the product) ingredient that actually gives you the most "bang for the buck".
I would imagine that slight packaging changes could provide much more savings without changing the taste of what actually goes in your mouth.
Because its the easiest knob to turn by far to adjust costs? What is harder, to tell the machines to mix 5% more water in, or to modify packaging in ways that affect all upstream and downstream processes?
They might also have found that people just want sugar water. A lot of mass market food products get bastardized by being made blander and more sugary.
Noodles & Company did the restaurant version of this a few years (... 5ish? 6?) ago. Went from a sensible serving of good and healthy-ish (for a "fast casual" chain restaurant) food for a surprisingly reasonable price, to a heaping mountain of bad food at roughly the same price. I assume some MBA ran some numbers and decided ruining it would make more money.
I suspect the answer to this question lives deep in the supply chain in the form of sugar subsidies. Your taxes work to subsidize the production of overwhelming quantities of corn syrup. other flavours of iced tea like watermelon are sourced from GRAS (generally regarded as safe by the fda) aroma chemicals, similar to the ones in air fresheners. these are cheap to source and efficient to use.
I’m not sure if there’s a formal name for this fallacy, but it’s pervasive in almost all financial reporting: the sticker price has nothing to do with the cost of materials; it’s driven only by how much people are willing to pay.
As a manufacturer, if the cost to produce something is higher than what customers are willing to pay, then you simply don’t sell it.
There are commodities where this doesn’t apply as much because there’s enough competition keeping downward pressure on the price so it floats just above the actual raw materials price, but other than that, this concept applies to most products.
But of course, the money surplus has to go SOMEWHERE... and eventually someone would defect, and take a loss to make up on volume.
I have asked wholesalers this (who produce cars, lighters, etc.) and they say that they have a licensing agreement and can just kick out retailers who sell below MSRP too much. So those retailers would have to then get the goods from other retailers.
i've worked alot in a bunch of company's when i was selling NSN's and mostly it works by your volume. You can sell at whatever price point you want but this is your price based on volume.
Jobber: 500, at $1.30
distriibutor: 1000, at $1.20
wholesale: 10000, at $1.10
partner: 1000000, at $1.00
Sometimes it makes sense to sell some inveentory at a loss to ensure you maintain the 'bucket' and happens all the time.
I don’t know if you’ve even seen a supply and demand graph, but there is a price a supplier is willing to sell at, and a price the buyer is willing to pay. The supplier’s price is based off of their costs. Saying the price is only determined by the buyer makes no sense.
This article is saying the graph isn't enough. This seems obvious on its face, reminds me a friction in physics, where you can ignore it until you cannot. But physics is not incapable of measuring the friction.
The concern is if economists able to account their model's friction.
I think what everybody is missing is the 'tends' qualifier. Price tends to rise with increased demand; price tends to drop with increased supply. It's true, but simplified, and can be influenced by a near infinite amount of other factors, like most other behavioral laws.
This just means the demand curve is very price sensitive, but it doesn't mean the supply curve doesn't exist. There is an element of survivorship bias to all of this. Products on the market exist because there is a point the supply and demand curves intersect. It's totally that the price people are willing to pay for Arizona ice tea will be less than the cost to produce it, at which point Arizona ice tea will cease to exist.
The fallacy is you stating something that's just plain wrong. The basic law of economics is that price is determined by BOTH supply and demand, whereas your statement is that price is determined only by demand.
The cost to manufacture a product is one of the key components that determines the supply of a product; the higher the cost to produce, the lower the supply and hence assuming demand doesn't change then the price will increase. Of course demand may not stay the same, could increase or decrease.
I think the point he was making is that change in supply doesn't necessarily lead to a change in price. I don't know if that's what they teach in basic economic s, but it's certainly true.
The post I replied to doesn't mention supply either directly or indirectly, rather it states the following:
"[prices are] driven only by how much people are willing to pay." Emphasis theirs.
That statement is false, prices are a function of both supply and demand and supply is a function of manufacturing costs. The cheaper something is to produce, the more of it one can produce and hence the greater the supply.
I think that quote is fine if you read 'how much people are willing to pay' as meaning the whole order book (as it were) - i.e. how many people are willing to pay how much.
The price is usually (an attempt at) optimising profit, where that may mean selling for more dollars to fewer people.
Ceteris paribus a reduction in the cost of supply doesn't change that calculation.
(Though, as the economist in my family says, 'ceteris never bloody is paribus'!)
> I think that quote is fine if you read 'how much people are willing to pay' as meaning the whole order book (as it were) - i.e. how many people are willing to pay how much.
It's really not though.
If I give you the full detailed order book of a secret product and ask you to set the price we should use as a company, you won't be able to do it. You need at least a rough idea of the production cost first.
If people will buy 10x as much at $100 compared to $200, then we should probably price at $100 if our cost is $40, and we should definitely not price at $100 if our cost is $120.
If you want to set a price off of one data lump, you need to replace the revenue numbers in that order book with margin per unit.
The cheaper something is to produce, the more of it one can produce and hence the greater the supply.
This only affects the price if there are competitors. If I want a widget, the total supply of widgets is irrelevant. For example Insulin, the fact that you have tons more of it won't make the price go down, you have it and I need it. You can sell it for whatever I am willing to pay irrespective of supply or production costs.
> The post I replied to doesn't mention supply either directly or indirectly
The post you replied to doesn't mention demand either. It only talks about price.
There is a difference between demand and price, and there is no generic function from price to demand. Even such basic assumptions as "demand falls as price goes up" fail in some situations.
All else being equal, a change in supply will change the price, except in perfectly elastic demand, in which case less would just be sold at the same price.
Sure not everything is always equal, but the relationship is clear
The point of Arizona iced tea is volume sales, and they maintain or increase that volume by pricing under Coke/Pepsi. Bigger can, smaller dollars.
That business is all about scale. They probably make more per unit than coke as they spend zero dollars on marketing.
I did this with an email service. We had runway and sold at 30% under cost. After about two years in our little niche, we had pushed enough volume that we were making a healthy profit. Then we sold the business to a bigger fish.
It's not a law. It's a model. A very simple model. Of a very complex system.
Computer Scientists never invoke Turing machines or the simply typed lambda calculus in debates about specific pieces of hardware or compiler implementations, except in cases where those models are actually applicable and in ways that comport with the pieces of those systems for which the model is usefully faithful.
The Econ 101 "supply & demand curve" is way simpler than TMs/lambda calculi, AND it's modeling a much more complex system than a computer/compiler. Yet, somehow, the model is constantly invoked.
There's a really good reason that every single financial analyst in the world goes directly to "pricing power" whenever they are asked to analyze the effect of "supply chains".
GGP said the price is only determined by how much people are willing to pay. This is obviously false. If the cost of producing a product rises above the current price, even if the price people are willing to pay doesn't change, the price has to increase or else the business will start losing money.
We saw that when oil prices went below many producers' extraction cost. They continued selling at the lower price, because they had to service existing debt, and accumulated more debt until the price went back up.
Also sometimes supply or production is inelastic and not possible to scale down and up. Thus to have chance to generate money in future they had to accept loss now.
My understanding with respect to the oil industry is that they have relatively high capital costs, and lower marginal costs. If prices drop so that they become unprofitable, it still makes sense to drill because the fixed costs are already sunk. It could also make sense if you expect the low prices to be a temporary situation, and shutting down and restarting would be expensive. Either way, producing at a loss is not sustainable in the long run, so without costs falling or prices increasing, they would eventually go out of business.
This isn't really a factor for Arizona, since as a brand, not a commodity, they can set their price, and since they're cheaper than many of their competitors, they have room to work with here, too. If their unit cost is higher than their unit price, they don't expect costs to decrease, and they don't intend to raise their price, they would simply make more money by not making the product.
They will never raise the price higher than people are willing to pay or else they won't sell the product at all. Sometimes they will sell at a loss temporarily and sometimes they will just sell off all remaining product at the highest amount people are willing to pay. Even if at a loss because getting something is better than the product sitting on shelves. Some products are sold at a loss permanently as a loss leader. Like hot dogs or roast chicken at Costco.
> They will never raise the price higher than people are willing to pay or else they won't sell the product at all
That isn't true, at least for some definition of "people". They will raise the prices until selling is profitable even if most people aren't willing to pay that, since there will be some who want the product more who pay the premium. If it was profitable to sell for the lower price they probably would make more money thanks to higher volume though, which is why they had the price originally.
Supply vs demand isn't always right, but it is closer to right than wrong in most cases. You can look at profit margins to see how well supply/demand works in a specific field, in software supply/demand doesn't exist no. But in most fields profit margins doesn't look like that, they are sub 10% meaning that for every 10 dollars you pay less than 1 dollar goes as profits and the rest goes to pay for the service you bought, that wouldn't be true if prices usually followed what people are willing to pay instead of being a mix of supply/demand.
Different people have different prices they're willing to pay for a product. That's the theory behind a demand curve. And in reality, if they raise the price to $1.29 or $1.49, there will still be people buying it. If the unit cost of Arizona tea ever went above the unit price, it simply would not make sense to continue manufacturing the product and selling it at that price, outside of contractual obligations.
Loss leaders are a different analysis, and in order for that to work, Arizona would have to convince all retailers to sell the product at a loss; Costco's business is not selling hot dogs or rotisserie chicken, and that's why they can afford a loss on those. Even these, they still put in a lot of work to keep costs low (e.g., making the hot dogs themselves instead of buying from Hebrew National), so the loss in recent years has been either small, or they break even. But obviously even this isn't something that could be kept up forever, given long run trends in inflation; the purchasing power of a dollar was ten times greater in 1950, and if in 2090 they keep selling hot dogs for $1.50 when a comparable meal costs $15, it might make sense to have a Costco membership just for hot dogs and rotisserie chickens (unless they set the membership cost so high that it's unrealistic to recoup the cost in a year without, e.g., eating there every single day), and at that point their loss leader just becomes a loss.
One final note I'll make is that average hourly earnings over the last couple decades have outpaced the rise in prices for most goods, even as the price of services outpace average hourly earnings; intuitively, the former should make sense, since with improved technology, the same good requires less labour to make. So food has gotten cheaper in real terms over the last few decades, as has shipping, while the opposite effect happens with services because of Baumol's cost disease. Because of this, even with inflation, more efficient products has somewhat blunted the impact on these manufacturers' costs, even though they too will one day have to increase their prices as well.
Laws in the sciences are all components of models. Newton's three laws are a component of Newtonian mechanics, so are the laws of thermodynamics. Arguing semantics about what a law is is the least interesting aspect of this discussion, with that said you are free to use whatever term you want but should at least be familiar that in general the term law of supply, law of demand, and that much of economics uses the term law to codify a set of common observations that are used as the basis for further derivations:
The important difference I'm commenting on is that engineers and physicists rarely get confused about when Newtonian mechanics or thermodynamics are useful models. Even when they do, their "belief" in these laws is not taken as religious or political. Beliefs in models are quickly dispelled when it becomes obvious that the model is too wrong to be useful.
I rarely see economists invoke Econ 101 models such as [1],[2] except in extraordinarily constrained settings.
If you aren't invoking theorems about beta reduction for the simply typed lambda calculus to reason about C's memory model, then consider also refraining from using [1],[2] to analyze pretty much anything in a real economic system.
This isn't pedantic. This is a real difference in how engineers and software people treat laws in the natural sciences vs how laws get treated in economics by the same set.
You can call it a law, or a model, or whatever. The point -- and, not a pedantic one -- is that [1],[2] are almost never accurate enough to be useful and calling them laws doesn't change that fact.
I'm no expert myself, but my layman's understanding of some of the pushback behavioral economics has for the field of economics is relevant for your point.
Specifically, from what I've seen, behavioral economics precisely wishes to reject predicting behavior via these simple economic models in favor of more nuanced understandings of complex behaviors, derivable only through empirical observation of what consumers really do, not what they should do or a simplistic law predicts they should do.
Particularly since the first behavioral economist to get a Nobel was also an early pioneer in many fields which are now housed in CS departments: programming languages, artificial intelligence, theorem proving.
You're not wrong, but GP's error is much more object level than that. The neoclassical paradigm has flaws; claiming that all markets are perfectly competitive is not one of them. Sweet tea is a textbook case of monopolistic competition, and short run inelasticity is to be expected.
The answer is the legislature, via copyright and patent law. You know this, you know the point I'm making. Your choice to be coy and unserious makes me wonder if you even sincerely hold the position you're arguing.
I'm very serious. My Linux system is my main dev system. I didn't pay a dime for any of the software on it. I write and distribute, for free, software. It's all copyrighted and legal. You can distribute it, too, at zero cost. You don't even have to ask my permission. Feel free!
You asked for an example of the legislature writing the laws of supply and demand, on the forum at least in large part about the software industry. An industry whose primary product has zero marginal cost but is none-the-yet scarce due to the acts of legislative bodies.
Supply, demand, and price can all be manipulated, including in ways that divorce one from the other two. Either by governments or by sufficiently large private actors. This... isn't controversial, even among the most staunch of neo-classical economists.
> How about you being more specific?
Believe it or not, there exists non-free software. So, to be more specific, I am referring to literally any machine that is not running a completely FOSS stack. Or even any machine that IS running an entirely FOSS stack but is being used in commerce and where some parts of that software stack are patent-protected!
I.e., basically every machine used for commerce and the vast majority of consumer machines. 99% of the global install base? More?
Again, this whole thread is an excellent demonstration of my original post. This is the Econ equivalent of getting into an argument with a political scientist over whether NVIDIA's latest chip is really just a <insert idealized model of computation>. These arguments don't even happen, except in econ with non-economists, because nobody has strong ideological attachments to Newtonian mechanics or the number of tapes on a turing machine or whatever.
> You asked for an example of the legislature writing the laws of supply and demand
Rent control is an obvious example. Minimum wage laws, another. Anti-gouging laws, still another. All of them fail.
You appear to be arguing that S&D only applies to the marginal cost of reproduction. This is not the case.
Let's take an extreme example. You need some custom software for your business. You come to me. I'm going to charge you what it takes to develop the software plus a profit. Not the cost of reproduction of the software. Whether you and I agree on the price or not is a function of S&D.
And there's every point in between that and Linux.
BTW, I bet you're using a free browser to access HackerNews (I am - Chrome), and HN itself makes itself available for free.
As for copyright law, it is not setting prices any more than a law making it illegal to steal apples from my orchard is interfering with S&D.
> nobody has strong ideological attachments to Newtonian mechanics
S&D is not an ideology. It's the Law. Just like NM is the Law. It applies whether you believe it or not. You can't escape it. The communists tried really, really hard to deny the existence of S&D. They had about as much success as the flat earthers. Today's Progressivists are currently doing their best to deny S&D, with as little result as the communists.
And yes, I know NM is an approximation of Quantum Mechanics.
Thank you. This post perfectly demonstrations my observation. I have never seen a physicist get viscerally frustrated because he knows some small minority of folks who use Newtonian mechanics in regimes where most other physicists concur it's a bad model.
This is so true. The problem is that the price people are willing to pay can go to really, REALLY high for some items because there really is no alternative. (Cars, Wood/Housing, Raw materials like steel)
Theories in economics are not falsifiable, thus economics is not hard science. Some would argue it’s not science at all, since it provides no objective information.
It’s fun to look up economists opinions on markets, since you can almost always find opposing views. It’s like the weather people, where there’s no downside to being wrong.
That's what basic economics theory says, yes, but not what happens in practice to make Arizona Iced Tea $0.99. Nor why a baggie of 5 screws at Lowes costs $2.99. Supplier costs are important in commodities, especially where easily compared alternatives are readily available, but that's not true of all products.
There are a lot of factors that go into pricing, but for many consumer goods the vendor is able to set prices pretty much independently of the costs.
The supply curve you are thinking about exists when you are talking about a market with multiple suppliers. If we’re discussing a single product from one supplier, the supply curve becomes a vertical line.
No it doesn't... You don't think Arizona Iced tea would produce more cans if everyone started wanting them for $2? Marginal costs increase as the company expands due to bureaucracy.
Arizona will sell you as many cans as you want, and as many as they can supply, at their asking price.
Their overhead costs per unit decrease as a company grows.
The increase as you travel right on a supply curve represents the entry of more participants offering supply. You can think of a supply demand curve like a bunch of dots, representing different suppliers asking prices.
Imagine you’re graphing a bid/offer spread chart for a stock. Arizona’s product offering is a single “offer”.
Sure, technically speaking, it’s not an infinitely vertical line, it has an lower and upper terminus, and might begin again at another y value.
But we’re already misusing the model to begin with. The line is intended to represent multiple suppliers participating in a market for a good with a fungible source. It is not and never has been a model for pricing decisions at a single company.
Most of economics teaching is about exploring just how wildly wrong econ101 is.
E.g. who passes on insulin since the last price increase?
E.g. why does a basic black and white rolex daytona cost around £12k at an authorized dealer? (For non-watch people there’s a 10 year wait list to buy at that price but you can buy 2nd hand immediately for a LOT more)
People certainly pass on specific kinds of insulin when their price increases.
Note that the "old" kind of insulin is available for 25 $/vial. It sucks in a lot of ways (requires more frequent dosage, and has a smaller margin of error), but it is dramatically cheaper than the newer and better kinds.
So financially strapped diabetics do have a trade off available to them.
This is why the other poster got frustrated with you. The current watch market is a terrible example of supply and demand as a traditional model. Do you think S&D effectively models NFT marketplace? Because the watch market is a lot more like that, too complex to be models effectively by traditional S&D.
"The basic law of economics is that price is determined by BOTH supply and demand"
That is one basic law of economics, but in some markets price isn't only determined by supply and demand.
I think a similar/analogous example for the price on the can is minimum wage. Yes, in a lot of cases wages are set by the intersection of supply and demand, but if that intersection is below a minimum wage then the "price" of labor (the wage) is the minimum wage. Now there's economic implications of that too, but at the end of the day in the US you can't pay a McDonalds employee $2 an hour and a corner store can't sell an Arizona tea for $2.
If you're talking about actual drinkable content, then yes. The majority of the costs are in packaging and logistics - and those are getting expensive.
That law of economics applies to a market of products and assumes that supply decreases as additional manufacturers of the product find it less profitable at a given price and drop out of the market.
When applied to a single consumer packaged good product, the supply curve is 0 at a point below the manufacturing cost and then rises to infinite at some point shortly above that price.
eg: If I an providing dollar bills and it costs 10 cents for me ship one to you, I will sell you an infinite quantity of them if you're willing to buy them at $1.11.
Coca Cola's willingness to supply Coke at $2 is infinite, if demand doubled overnight, CC would build whatever factories it needs to meet that demand and would do it for each successive doubling until it started hitting material planetary constraints like consuming all of the world's sugar.
Yes but in a modern industrialized economy if there is a profit to be had the supply will create itself, without barriers to entry. However in beverages there is a big barrier to entry in consumer brand awareness and in retail shelf space especially for refrigerated products.
Cost definitely impacts the price. In a perfect competition, the price would be the marginal cost to produce an additional unit. This would result in maximizing the revenue. Even in a monopoly, the price is where the marginal cost and marginal revenue intersect, but the price charged would be the average revenue. In both cases cost impact the price charged.
There are other things that affect price, including consumer demand. But cost is absolutely a factor. Saying "the cost is what people are willing to pay" is a tautology and not very useful.
Except there is no perfect competition, and none for Arizona Iced Tea: only Arizona sells it, no one else.
They are, of course, engaged in competition with Pepsi, and also with water, food, and rent. If they were to raise their price, some number of people may decide they don't need any Arizona Iced Tea.
Except, the cost of a substitute might, where the substitute participates in a real or regulated market. So, price under a rail monopoly may be bounded by the cost of trucking.
Price might be depressed below "whatever the market will bear" by trying to be a less attractive target to potential competition, or to fend off anti-trust enforcement. But those are not driven by your own costs.
i remember learning this in college. It's absolutely false now though. Late-stage capitalism has different ideas as those basic graphs don't take into account any amount of game theory. There's perfect competition in coffee but marginal cost the the end user does not anywhere approach marginal cost.
Individually modeling any single actor in a market (whether a monopolist or not) accurately is tough, because they can make decisions for reasons other than profit maximization. As your source mentions:
Economic models are more descriptive of behavior than they are prescriptive of behavior. It is possible that a factor in a model is not considered by the participants. Vanishingly few, if any, companies are going to be drawing profit maximization curves to make pricing decisions. Most of them don't have the information to draw it even if they wanted to. For most companies that do follow that model, it's by an accident of the invisible hand, not because they made a decision that way.
There is no perfect market for "Arizona ice tea". Arizona Ice tea is available in most locations, has a consistent flavor, and is easy to access.
The customer isn't deciding which tea to buy based on price, they are deciding whether it's worth buying an Arizona ice tea at the current moment of time. Changing the price of Arizona ice tea will influence this decision, but so will marketing, and shelf placement.
Counterexample: Suppose I'm selling a product with zero cost and I've determined the profit-maximizing price to be $1.00. This means profit as a function of price is maximal and therefore the slope is zero, i.e. raising the price by 1% makes sales go down by 1% and vice versa.
Now suppose my cost to produce goes from zero to $0.99 per unit, which drops my profit to $0.01. Now that 1% increase in price that only drops sales by 1% is well worth it because my profit per unit doubles. The profit-maximizing price is now likely well over $1.
Then one must still consider demand and how buyers value the product.
Max profit becomes far more complex!
A second order view might be:
Say at $1.99 one gets X sales, Y sales at $2 (and yes, that is a real thing), Z at $3, $5 etc...
Clearly, selling for the $5 maximizes profit per unit sale, but if volume is more than double at $3.99, overall profit will be maximized by far higher unit sales.
The buyers will weigh product benefits vs their time, liquid dollars and competing products.
Fewer of them see a favorable value proposition at $5 than do at $3.99. Maybe more see it at $2.50, but not enough more to make more profit over the life of the product.
And a third order strategy could be:
One layer above that is time. Early on, if the product is well differentiated, has a strong value proposition, max money may in fact linked to a price ramp downward.
Start at $5, then drive new sales at $4.50, etc, until late in the cycle to sell against competition, one is selling down at $1.99. While this is being done, cost reductions and other product enhancements can keep margin high.
Yes, this is what I (thought) I was saying, but you seem to have expressed it more clearly. Thanks.
However, the fallacy I’m referring to is related to how they report on these things, usually saying something like “the price of the materials went up, therefore the price to the consumer will also go up (by some corresponding amount)”. In reality, the price will only go up if the seller thinks the consumer will pay it. It makes one wonder if this type of article is a move by the company to preemptively plant the justification for the price increase in the public consciousness.
It’s not so much a fallacy as it is a further relationship between prices and supply or demand, called elasticity.
A change in prices will produce differing marginal changes in demand for different goods/services, depending on many factors such as whether the good is an essential or a luxury, the availability of substitutes, competition in the marketplace, and others.
This relationship is part of the information used when deciding MSRP, so it’s not entirely unexpected that an increase in costs doesn’t translate to an increase in retail price, if profit margins allow it.
I've worked at a company now for 14 years - where we change what it cost plus a margin to make a fair living. Other competitors have started to 'charge based on the value made by the product'. We're winning by becoming the more 'fair and honest value' brand.
I think 'looking into customers wallets' and charging them for the value they will create with your product is a bit lame. I understand my opinion is in the minority of at least other high level managers or owners of companies.
> “I’m committed to that 99 cent price — when things go against you, you tighten your belt,” Vultaggio said on a Zoom call in early April from his headquarters on Long Island, N.Y.
One of the primary target markets appears to be tweens and teenagers, judging by the soft drink buying patterns of my kids and their friends. 99 cents means a lot to them (still).
This brand offers frequent discounts ... I've seen them discounted to 75 cents at the local CVS, but that was during the early part of COVID when sales tanked.
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[ 5.3 ms ] story [ 279 ms ] threadI think in Canada they're $1.29 now, though.
[1]: https://drinkarizona.zendesk.com/hc/en-us/articles/150000325...
So I don't think the product cost of the liquid itself really factors into the equation. Or at least it shouldn't. I usually assume most of what I'm paying for the logistics that lead to the drink being available and ready to drink where and when I want it.
I don't think the original comment was offensive, just that "it should probably be cheaper" misses the mark because for most drinks in this category, the price of ingredients shouldn't be a significant factor in determining its value to the consumer.
Maybe put the faces of several recent/current presidents on it.
I've been scratching my head for the last day and a half wondering how the McDonald's drive-thru near me is always packed. Your comment is illuminating to me because I didn't know that I needed a McApp to get McDonald's prices, though I am not at all surprised.
The trick to McDonalds has, for a long time, been that the value meals are any thing but a value and to buy exclusively from the dollar menu. If you do that you will be hard pressed to find anything cheaper.
It's a kind of price discrimination tactic—people willing to clip coupons or use the company's app might pay 1/3 or less the menu price, and those who aren't, pay the full (and crazy-high) menu price.
Like, yes, coupon shopping has always been a thing, but not like this, because the normal menu prices used to already be pretty good. They're super expensive now, but if you burn some time, they'll give you a really good price, consistently, pretty much any time you want it.
[EDIT] More generally, I just prefer my commerce to be fairly straightforward. I don't like having to second-guess whether there are hidden tricks going on to screw me.
It is entirely bad. It arrogates consumer surplus to the supplier. The people paying higher prices don’t subsidise those paying lower prices, the supplier pockets most of the gains. They’d like you to believe that the people paying cheaper prices are subsidised, but they’re not selling to them at a loss. And it causes a deadweight efficiency loss.
The fact that businesses can pass this off as some kind of progressive pricing and good for the consumer makes it as disingenuous as it is pernicious.
https://en.wikipedia.org/wiki/Economic_surplus
https://en.wikipedia.org/wiki/Price_discrimination
https://en.wikipedia.org/wiki/Deadweight_loss
I installed the app to take a look. My local McDonalds, in Orange county, through the app, has the Big Mac meal for $9.19.
And if you're super friendly with the little old Mexican lady who works there, she'll sneak free pies into your bag too.
Locally they did recently drop their long-time $1 any-size soft drink but it seems to be back now after a few weeks.
This 'pays off', in that I have my default choice, and can choose to use any of the other apps when there's some combination of coupons and deals to be had that make it feel worth it.
Yesterday, I used a "$15 off $22" coupon(for some reason, they gave me two, and I plan to use the other this weekend), combined with two bogo deals from an instance of a small chain restaurant, and paid $20 delivered(fair tip included) for what would have been at least $30 had I driven over and ordered in person, since both deals were only available on the app. As a bachelor, it's enough food to count as dinner for at least 2 days in a row.
I don't know how $COUPON_GIVING_APP can make money while footing that kind of coupon deal, but hey, I'd be dumb to not make use of it if I was already looking to spend some money.
There was also a promotion only on $COUPON_GIVING_APP from Wendy's for a free sandwich of theirs, so long as cart subtotal was at least $15. The discounted sandwich counted towards that, and I ended up feeling very fat and happy with a price of $12 delivered.
"Bebidas $1 Cualquier Tamaño"
You can get a hot dog and drink for $1.50 and a whole rotisserie chicken for $5.
https://www.youtube.com/watch?v=-YZnORoAWkA
Integrity like this is rare in the American business landscape. His successor most likely won't feel this way though.
Not saying he is not due his earnings for the product, but if his concern was fair pricing to consumers the product would likely be about 20 cents, maybe even less.
Also, as the article notes, the company sells more than just these 99 cent cans, and they have not held all prices constant.
It's a nice feel-good piece, but this guy and his sons are not worth $4B because they are looking out for the best interests of their customers above all else.
While other drinks may have hiked prices over the years, I haven't noticed spikes in the price of other soft-drinks over the past few months. Their costs are rising too. I think most companies don't want to alienate their fans over what they're hoping will be transitory cost increases. If Coke hikes prices and people start trying Pepsi, will they come back? If Arizona hikes prices, do they lose the "just a buck" cliff that makes them seem a lot cheaper than anything more than a dollar? Does $1.50 look a lot closer to $2.50 than $1 does to $2? Do people buy a $1.79 Snapple or $1.99 Gold Leaf if Arizona is $1.29 (even if it is still both cheaper and larger)?
Given that they're a private company and the owners are multi-billionaires, it seems reasonably wise to eat some margin over the short-term. It's not like they're struggling and it's not like they have lots of shareholders to appease on a quarter-by-quarter basis. I don't think people expect the cost of aluminum to stay at double long-term and if the Ukraine/Russia war ends, it seems like fuel prices will likely ease (and long-term it seems likely that Europe now has very strong incentive to reduce its dependence on Russian fuel). If costs remain high, they can re-evaluate this decision in 6-18 months while potentially missing out on a small amount of profits.
$43M in increased aluminum costs over a year doesn't seem that much compared to a $4B net worth - especially if you're still making money, just $43M less. If I were them, I'd weigh it out: raise prices and potentially damage the brand long-term and risk a good bit of what the family has built over decades; or keep prices steady, potentially lose out on profits that would make us 1-2% richer, and still be able to re-evaluate this decision in a year. If I had $4B, I'd much rather keep consumer sentiment thinking that I'm the small quirky outsider offering them great value.
I haven't noticed any "spikes" in soft drink prices, but I have noticed that sale prices have edged up around 15%. This is for name brand drinks, multi-packs, sold in grocery stores. I don't pay attention to regular prices so I don't know whether it's limited to just sale prices or to regular prices as well.
From fountain soda to 2-liter there have been spikes.
https://fred.stlouisfed.org/series/APU0000FN1101
Walmart: https://www.walmart.com/ip/Pepsi-Cola-Soda-Pop-2-Liter-Bottl... (1.98)
The midwest happens to have a couple gas-station quickmarts that have deals like pay $7/month for a free (any size) soda or coffee per day that many people take advantage of, but in the supermarket the price changes are evident.
The real spikes have been in restaraunt/fast food drinks. It's not uncommon to see over $2.75 for a relatively modest drink cup. This has been primarily a tactic for low-margin food businesses to avoid raising their consistently low prices, in comparison to their competition.
Ironically, this has led some market losers (like Burger King) to leap ahead of competition (Carl's Jr/Hardees) as they had to raise prices to survive, leading to incidentally higher quality meals. ie Compare the mc-donalds cardboard quality Carl's Jr famous star to a Burger King burger today.
But that's just my observation.
>From fountain soda to 2-liter there have been spikes.
>https://fred.stlouisfed.org/series/APU0000FN1101
I'm not sure what your point is. I explicitly mentioned experiencing a 15% rise later in the same sentence. That's pretty much exactly in line with pre-pandemic prices in the chart you linked.
Also, on a purely subjective basis, the chart you linked doesn't show any "spikes" to me. There's a modest rise in early 2022, but it's roughly in line with pre-pandemic price rises.
> I'm not sure what your point is.
My point was very clear. There have been spikes. The spikes have been for various reasons, beyond pure inflation.
You can agree to disagree because (maybe you weren't paying attention at the same time periods or to the same markets), but the pricing has changed nonetheless.
I kind of wish they would bite the bullet and make a can $1.99 and bring back the full flavor 90s version.
I was a lifeguard at a party for the ceo of Arizona iced tea. Never seen a house like that. Crazy how much money you can make selling sugar and water. From that experience they aren’t lacking.
[0]No ill will, just an observation and generalization.
The main additional costs are a bit more aluminum and some more water, everything else is comparable.
And the 99 cents is really tied to their brand; if they break it they get hurt more, so they'll push it as long as they "can" - likely introducing a smaller or larger can at some point.
Coca-Cola had a very similar issue way, way back in the day. I think they were pegged at 5 cents a bottle?
That left them in the even more awkward position of being unable to raise the price without instantly doubling it.
Their most profitable unit is the 20oz bottle that was $1 in 1999 and $2+ today.
I love this colloquialism.
(Grew up in Western PA. Sounds like home.)
Tea, even if it is cheap, is still much more expensive than corn syrup and water. So if you want to cut costs, it makes sense to reduce the amount of tea and make up for it with more sugar.
If you do it a little bit over 30 year years, few people with notice. You get a panel of taste testers compare the current version with a slightly watered down version and see if they can tell the difference. If most can't, you make the change and pocket the savings as profit. It's like making a copy of a copy on a copy machine, you can't tell much difference between the two, but repeating the process over multiple generations and the small differences adds up to be dramatic between the original and the 30th generation version.
This exact situation happens for many food companies. They gradually reduce quality and costs over the years. And once the people who remembered the original product die off or forget, it can be hard to re-establish yourself as anything but a cheap brand.
Five cents is a big cut of a $0.50 product.
No, my point is that if you want to cut costs, why would you focus on the cheapest (perhaps not in the overall sense, but in the total value of the product) ingredient that actually gives you the most "bang for the buck".
I would imagine that slight packaging changes could provide much more savings without changing the taste of what actually goes in your mouth.
As a manufacturer, if the cost to produce something is higher than what customers are willing to pay, then you simply don’t sell it.
There are commodities where this doesn’t apply as much because there’s enough competition keeping downward pressure on the price so it floats just above the actual raw materials price, but other than that, this concept applies to most products.
I have asked wholesalers this (who produce cars, lighters, etc.) and they say that they have a licensing agreement and can just kick out retailers who sell below MSRP too much. So those retailers would have to then get the goods from other retailers.
i've worked alot in a bunch of company's when i was selling NSN's and mostly it works by your volume. You can sell at whatever price point you want but this is your price based on volume.
Jobber: 500, at $1.30 distriibutor: 1000, at $1.20 wholesale: 10000, at $1.10 partner: 1000000, at $1.00
Sometimes it makes sense to sell some inveentory at a loss to ensure you maintain the 'bucket' and happens all the time.
This article is saying the graph isn't enough. This seems obvious on its face, reminds me a friction in physics, where you can ignore it until you cannot. But physics is not incapable of measuring the friction.
The concern is if economists able to account their model's friction.
points
Arizona Ice tea. Unchanging price, changing costs.
I think what everybody is missing is the 'tends' qualifier. Price tends to rise with increased demand; price tends to drop with increased supply. It's true, but simplified, and can be influenced by a near infinite amount of other factors, like most other behavioral laws.
This just means the demand curve is very price sensitive, but it doesn't mean the supply curve doesn't exist. There is an element of survivorship bias to all of this. Products on the market exist because there is a point the supply and demand curves intersect. It's totally that the price people are willing to pay for Arizona ice tea will be less than the cost to produce it, at which point Arizona ice tea will cease to exist.
The cost to manufacture a product is one of the key components that determines the supply of a product; the higher the cost to produce, the lower the supply and hence assuming demand doesn't change then the price will increase. Of course demand may not stay the same, could increase or decrease.
"[prices are] driven only by how much people are willing to pay." Emphasis theirs.
That statement is false, prices are a function of both supply and demand and supply is a function of manufacturing costs. The cheaper something is to produce, the more of it one can produce and hence the greater the supply.
The price is usually (an attempt at) optimising profit, where that may mean selling for more dollars to fewer people.
Ceteris paribus a reduction in the cost of supply doesn't change that calculation.
(Though, as the economist in my family says, 'ceteris never bloody is paribus'!)
It's really not though.
If I give you the full detailed order book of a secret product and ask you to set the price we should use as a company, you won't be able to do it. You need at least a rough idea of the production cost first.
If people will buy 10x as much at $100 compared to $200, then we should probably price at $100 if our cost is $40, and we should definitely not price at $100 if our cost is $120.
If you want to set a price off of one data lump, you need to replace the revenue numbers in that order book with margin per unit.
The optimisation I describe is on profit, not revenue, and (as you say) you need to know the fixed and variable (marginal unit) costs to do that.
This only affects the price if there are competitors. If I want a widget, the total supply of widgets is irrelevant. For example Insulin, the fact that you have tons more of it won't make the price go down, you have it and I need it. You can sell it for whatever I am willing to pay irrespective of supply or production costs.
The post you replied to doesn't mention demand either. It only talks about price.
There is a difference between demand and price, and there is no generic function from price to demand. Even such basic assumptions as "demand falls as price goes up" fail in some situations.
Sure not everything is always equal, but the relationship is clear
That business is all about scale. They probably make more per unit than coke as they spend zero dollars on marketing.
I did this with an email service. We had runway and sold at 30% under cost. After about two years in our little niche, we had pushed enough volume that we were making a healthy profit. Then we sold the business to a bigger fish.
It's not a law. It's a model. A very simple model. Of a very complex system.
Computer Scientists never invoke Turing machines or the simply typed lambda calculus in debates about specific pieces of hardware or compiler implementations, except in cases where those models are actually applicable and in ways that comport with the pieces of those systems for which the model is usefully faithful.
The Econ 101 "supply & demand curve" is way simpler than TMs/lambda calculi, AND it's modeling a much more complex system than a computer/compiler. Yet, somehow, the model is constantly invoked.
There's a really good reason that every single financial analyst in the world goes directly to "pricing power" whenever they are asked to analyze the effect of "supply chains".
We saw that when oil prices went below many producers' extraction cost. They continued selling at the lower price, because they had to service existing debt, and accumulated more debt until the price went back up.
This isn't really a factor for Arizona, since as a brand, not a commodity, they can set their price, and since they're cheaper than many of their competitors, they have room to work with here, too. If their unit cost is higher than their unit price, they don't expect costs to decrease, and they don't intend to raise their price, they would simply make more money by not making the product.
That isn't true, at least for some definition of "people". They will raise the prices until selling is profitable even if most people aren't willing to pay that, since there will be some who want the product more who pay the premium. If it was profitable to sell for the lower price they probably would make more money thanks to higher volume though, which is why they had the price originally.
Supply vs demand isn't always right, but it is closer to right than wrong in most cases. You can look at profit margins to see how well supply/demand works in a specific field, in software supply/demand doesn't exist no. But in most fields profit margins doesn't look like that, they are sub 10% meaning that for every 10 dollars you pay less than 1 dollar goes as profits and the rest goes to pay for the service you bought, that wouldn't be true if prices usually followed what people are willing to pay instead of being a mix of supply/demand.
Loss leaders are a different analysis, and in order for that to work, Arizona would have to convince all retailers to sell the product at a loss; Costco's business is not selling hot dogs or rotisserie chicken, and that's why they can afford a loss on those. Even these, they still put in a lot of work to keep costs low (e.g., making the hot dogs themselves instead of buying from Hebrew National), so the loss in recent years has been either small, or they break even. But obviously even this isn't something that could be kept up forever, given long run trends in inflation; the purchasing power of a dollar was ten times greater in 1950, and if in 2090 they keep selling hot dogs for $1.50 when a comparable meal costs $15, it might make sense to have a Costco membership just for hot dogs and rotisserie chickens (unless they set the membership cost so high that it's unrealistic to recoup the cost in a year without, e.g., eating there every single day), and at that point their loss leader just becomes a loss.
One final note I'll make is that average hourly earnings over the last couple decades have outpaced the rise in prices for most goods, even as the price of services outpace average hourly earnings; intuitively, the former should make sense, since with improved technology, the same good requires less labour to make. So food has gotten cheaper in real terms over the last few decades, as has shipping, while the opposite effect happens with services because of Baumol's cost disease. Because of this, even with inflation, more efficient products has somewhat blunted the impact on these manufacturers' costs, even though they too will one day have to increase their prices as well.
[1] https://en.wikipedia.org/wiki/Law_of_demand
[2] https://en.wikipedia.org/wiki/Law_of_supply
[3] https://en.wikipedia.org/wiki/Category:Economics_laws
I rarely see economists invoke Econ 101 models such as [1],[2] except in extraordinarily constrained settings.
If you aren't invoking theorems about beta reduction for the simply typed lambda calculus to reason about C's memory model, then consider also refraining from using [1],[2] to analyze pretty much anything in a real economic system.
This isn't pedantic. This is a real difference in how engineers and software people treat laws in the natural sciences vs how laws get treated in economics by the same set.
You can call it a law, or a model, or whatever. The point -- and, not a pedantic one -- is that [1],[2] are almost never accurate enough to be useful and calling them laws doesn't change that fact.
Specifically, from what I've seen, behavioral economics precisely wishes to reject predicting behavior via these simple economic models in favor of more nuanced understandings of complex behaviors, derivable only through empirical observation of what consumers really do, not what they should do or a simplistic law predicts they should do.
(It's an interesting comparison to CS too.)
Particularly since the first behavioral economist to get a Nobel was also an early pioneer in many fields which are now housed in CS departments: programming languages, artificial intelligence, theorem proving.
Possibly referencing https://en.wikipedia.org/wiki/Herbert_A._Simon
Thanks for your input in this thread!
They're always wrong.
Feel free to prove me wrong with a case history.
What constrains the supply of copies of a piece of software?
Nothing. Nearly all the software I use is free.
How about you being more specific?
Supply, demand, and price can all be manipulated, including in ways that divorce one from the other two. Either by governments or by sufficiently large private actors. This... isn't controversial, even among the most staunch of neo-classical economists.
> How about you being more specific?
Believe it or not, there exists non-free software. So, to be more specific, I am referring to literally any machine that is not running a completely FOSS stack. Or even any machine that IS running an entirely FOSS stack but is being used in commerce and where some parts of that software stack are patent-protected!
I.e., basically every machine used for commerce and the vast majority of consumer machines. 99% of the global install base? More?
Again, this whole thread is an excellent demonstration of my original post. This is the Econ equivalent of getting into an argument with a political scientist over whether NVIDIA's latest chip is really just a <insert idealized model of computation>. These arguments don't even happen, except in econ with non-economists, because nobody has strong ideological attachments to Newtonian mechanics or the number of tapes on a turing machine or whatever.
Rent control is an obvious example. Minimum wage laws, another. Anti-gouging laws, still another. All of them fail.
You appear to be arguing that S&D only applies to the marginal cost of reproduction. This is not the case.
Let's take an extreme example. You need some custom software for your business. You come to me. I'm going to charge you what it takes to develop the software plus a profit. Not the cost of reproduction of the software. Whether you and I agree on the price or not is a function of S&D.
And there's every point in between that and Linux.
BTW, I bet you're using a free browser to access HackerNews (I am - Chrome), and HN itself makes itself available for free.
As for copyright law, it is not setting prices any more than a law making it illegal to steal apples from my orchard is interfering with S&D.
> nobody has strong ideological attachments to Newtonian mechanics
S&D is not an ideology. It's the Law. Just like NM is the Law. It applies whether you believe it or not. You can't escape it. The communists tried really, really hard to deny the existence of S&D. They had about as much success as the flat earthers. Today's Progressivists are currently doing their best to deny S&D, with as little result as the communists.
And yes, I know NM is an approximation of Quantum Mechanics.
In physics, we are able to isolate systems to the point where this caveat is true and the law can be experimentally validated.
In economics, we do not get such affordances, because it is not and cannot be a "laboratory science".
There are a lot of factors that go into pricing, but for many consumer goods the vendor is able to set prices pretty much independently of the costs.
Indeed—and one might well see that price remain stable even if the cost of producing the screws doubled, because the margin's already insanely high.
Their overhead costs per unit decrease as a company grows.
The increase as you travel right on a supply curve represents the entry of more participants offering supply. You can think of a supply demand curve like a bunch of dots, representing different suppliers asking prices.
Imagine you’re graphing a bid/offer spread chart for a stock. Arizona’s product offering is a single “offer”.
This is correct to an extent, at Arizona's size it is wrong. It would cost them a lot to increase production.
But we’re already misusing the model to begin with. The line is intended to represent multiple suppliers participating in a market for a good with a fungible source. It is not and never has been a model for pricing decisions at a single company.
Most of economics teaching is about exploring just how wildly wrong econ101 is.
E.g. who passes on insulin since the last price increase?
E.g. why does a basic black and white rolex daytona cost around £12k at an authorized dealer? (For non-watch people there’s a 10 year wait list to buy at that price but you can buy 2nd hand immediately for a LOT more)
Note that the "old" kind of insulin is available for 25 $/vial. It sucks in a lot of ways (requires more frequent dosage, and has a smaller margin of error), but it is dramatically cheaper than the newer and better kinds.
So financially strapped diabetics do have a trade off available to them.
Because they're buying a status symbol, not a watch.
> For non-watch people there’s a 10 year wait list to buy at that price but you can buy 2nd hand immediately for a LOT more
An excellent demonstration of Supply&Demand at work. Your example doesn't refute S&D at all :-)
>> why does a basic black and white rolex daytona cost around £12k at an authorized dealer?
> Because they're buying a status symbol, not a watch
QED?
Source: am a reseller.
> Do you think S&D effectively models NFT marketplace?
Of course it does. The supply is one item, and so the highest bidder gets it. I am baffled why you think it is not S&D.
If you have more questions, fire away!
The highest bidder is around £30k but the person who got it paid £12k.
You can walk into an AD and bid all you want, they’ll let you try it on or find your favourite colour version. You aren’t buying it though.
That is one basic law of economics, but in some markets price isn't only determined by supply and demand.
I think a similar/analogous example for the price on the can is minimum wage. Yes, in a lot of cases wages are set by the intersection of supply and demand, but if that intersection is below a minimum wage then the "price" of labor (the wage) is the minimum wage. Now there's economic implications of that too, but at the end of the day in the US you can't pay a McDonalds employee $2 an hour and a corner store can't sell an Arizona tea for $2.
They both have ridiculously high incremental profit margins, so talking about finite supplies doesn't make sense.
When applied to a single consumer packaged good product, the supply curve is 0 at a point below the manufacturing cost and then rises to infinite at some point shortly above that price.
eg: If I an providing dollar bills and it costs 10 cents for me ship one to you, I will sell you an infinite quantity of them if you're willing to buy them at $1.11.
Coca Cola's willingness to supply Coke at $2 is infinite, if demand doubled overnight, CC would build whatever factories it needs to meet that demand and would do it for each successive doubling until it started hitting material planetary constraints like consuming all of the world's sugar.
There are other things that affect price, including consumer demand. But cost is absolutely a factor. Saying "the cost is what people are willing to pay" is a tautology and not very useful.
http://www.sanandres.esc.edu.ar/secondary/economics%20packs/...
They are, of course, engaged in competition with Pepsi, and also with water, food, and rent. If they were to raise their price, some number of people may decide they don't need any Arizona Iced Tea.
Except, the cost of a substitute might, where the substitute participates in a real or regulated market. So, price under a rail monopoly may be bounded by the cost of trucking.
Only if that monopoly is actively being substantially abused.
If you're only slightly taking advantage of a monopoly, then your price is mostly tied to normal supply and demand rules.
Which means you base the price off of cost and demand, like a normal product.
Think about it in the extreme. Suppose the cost to produce the product goes up above the current price. Obviously the price will have to go up.
Or imagine the cost goes to nothing. Then depending on the elasticity of demand, you might make more money selling more for a lower price.
Stop trying to reinvent economics.
http://www.sanandres.esc.edu.ar/secondary/economics%20packs/...
This has nothing to do with late stage capitalism. The parent post misunderstands cost to the producer and the price charged for the end product.
> There's perfect competition in coffee but marginal cost the the end user does not anywhere approach marginal cost.
This is 100% bullshit if you actually care about coffee.
Some examples: Various video game consoles, grocery store loss leaders, Black Friday doorbuster deals, inventory liquidation.
http://www.sanandres.esc.edu.ar/secondary/economics%20packs/...
Economic models are more descriptive of behavior than they are prescriptive of behavior. It is possible that a factor in a model is not considered by the participants. Vanishingly few, if any, companies are going to be drawing profit maximization curves to make pricing decisions. Most of them don't have the information to draw it even if they wanted to. For most companies that do follow that model, it's by an accident of the invisible hand, not because they made a decision that way.
The customer isn't deciding which tea to buy based on price, they are deciding whether it's worth buying an Arizona ice tea at the current moment of time. Changing the price of Arizona ice tea will influence this decision, but so will marketing, and shelf placement.
Now suppose my cost to produce goes from zero to $0.99 per unit, which drops my profit to $0.01. Now that 1% increase in price that only drops sales by 1% is well worth it because my profit per unit doubles. The profit-maximizing price is now likely well over $1.
Max profit becomes far more complex!
A second order view might be:
Say at $1.99 one gets X sales, Y sales at $2 (and yes, that is a real thing), Z at $3, $5 etc...
Clearly, selling for the $5 maximizes profit per unit sale, but if volume is more than double at $3.99, overall profit will be maximized by far higher unit sales.
The buyers will weigh product benefits vs their time, liquid dollars and competing products.
Fewer of them see a favorable value proposition at $5 than do at $3.99. Maybe more see it at $2.50, but not enough more to make more profit over the life of the product.
And a third order strategy could be:
One layer above that is time. Early on, if the product is well differentiated, has a strong value proposition, max money may in fact linked to a price ramp downward.
Start at $5, then drive new sales at $4.50, etc, until late in the cycle to sell against competition, one is selling down at $1.99. While this is being done, cost reductions and other product enhancements can keep margin high.
Supply shocks affect prices differently from demand (typically, preference) shocks as well.
However, the fallacy I’m referring to is related to how they report on these things, usually saying something like “the price of the materials went up, therefore the price to the consumer will also go up (by some corresponding amount)”. In reality, the price will only go up if the seller thinks the consumer will pay it. It makes one wonder if this type of article is a move by the company to preemptively plant the justification for the price increase in the public consciousness.
Grossly underestimating these other costs is a major reason why new businesses fail.
A change in prices will produce differing marginal changes in demand for different goods/services, depending on many factors such as whether the good is an essential or a luxury, the availability of substitutes, competition in the marketplace, and others.
This relationship is part of the information used when deciding MSRP, so it’s not entirely unexpected that an increase in costs doesn’t translate to an increase in retail price, if profit margins allow it.
I think 'looking into customers wallets' and charging them for the value they will create with your product is a bit lame. I understand my opinion is in the minority of at least other high level managers or owners of companies.
> “I’m committed to that 99 cent price — when things go against you, you tighten your belt,” Vultaggio said on a Zoom call in early April from his headquarters on Long Island, N.Y.
This brand offers frequent discounts ... I've seen them discounted to 75 cents at the local CVS, but that was during the early part of COVID when sales tanked.