Hey, as I shared on Twitter, this was a great read. I saved it to hit up in the morning and had a few follow up questions/thoughts:
1. “The prediction of the efficiency wage hypothesis is that companies with a higher wage relative to market clearing should have an easier time inducing effort, and that is indeed what they found. The rate of job dismissals was lower when the outside option was worse.” Isn’t there a confound that the highest compensation jobs will select for the most able, ambitious, and conscientious within a vertical? That leads me to question how much of an effect size can be attributed to the suggested hypothesis.
2. “If prices are set uniformly by a chain, however, it will tend to reduce the apparent size of trade costs. In the extreme, if prices are set by one firm, then we will apparently have no trade costs whatsoever!” Yes, and that sets an upper bound on arbitrage for any aspiring middlemen at ≤0. If you factor in the consideration that the existence of middle men removes price certainty from the mind of the consumer, it’s a small fee to prevent buyer hesitation.
3. “Because all firms set prices based upon the average demand, and the effect on average demand is 0 owing to it being divided by infinity, we would believe that prices are perfectly inflexible and that monetary policy would be much more stimulative than it actually is.. Second, we cannot infer national level responses from local responses to shocks.”
Tempting to play the real analysis game here but I think it’s more useful to focus in on a) considering any national stimulus impacts a ‘region’ of such stores, you have to take the integral over the continuum range defined by the range of stores, yielding a finite, >0 elasticity effect raising prices & b) what you allude to in the closing advantages of whole chains relying on a single price point per good acts like a dampening/insurance effect. I’m mentally thinking of it as a collection of similar assets sharing the same liquidity pool as the spreads between any two of them are fixed. The end result is that vicissitudes, which can hit the store more existentially than consumers (who can shop elsewhere) effectively have their risk of going out of business due to tiny PNL moves vis a vis the correct price hurting them ->0. As the market is infinitely thick, it takes infinitely much to move a price. This would be something macro scale, effecting a region/continuum of nonzero measure like tariffs or taxes or sudden macro demand destruction. This isn’t rigorous but the intuition maps out.
Appreciate your thoughts on any/all of these. Will be deleting this comment after a while because I think I made it obvious what I do, what my background/approach is, and that I’m not formally trained in economics. Genuinely enjoying reading your posts.
"The median chain could raise its annual profits by $16.1 million a year – or 1.3% – by switching to the optimal varied pricing strategy. This naturally increases inequality considerably"
what's the channel by which inequality increases? wouldnt charging higher prices to higher income customers reduce inequality (as a first order effect)?
the innattentive manager theory seems hard to square with pricing being uniform instead of just surprisingly similar. like i could buy that a manager in san francisco doesn't realize he could charge 2x as much as the store in omaha and so he charges 20% more instead, but to explain *uniform* prices the SF manager has to not even realize he could charge 2% more than the store in omaha
Pricing is set nationally, and the argument that corporate can't set all these prices to different amounts in different locations when they're due to differences in demand.
sure, but the problem remains. why doesn't corporate pick a baseline price and then set the price 1% higher in SF and 1% lower in omaha?
semi relatedly i wonder whether this fits with the price matching literature? maybe they set it at the SF price nationwide and rely on price matching to local chains to get down to the omaha price?
Hey, as I shared on Twitter, this was a great read. I saved it to hit up in the morning and had a few follow up questions/thoughts:
1. “The prediction of the efficiency wage hypothesis is that companies with a higher wage relative to market clearing should have an easier time inducing effort, and that is indeed what they found. The rate of job dismissals was lower when the outside option was worse.” Isn’t there a confound that the highest compensation jobs will select for the most able, ambitious, and conscientious within a vertical? That leads me to question how much of an effect size can be attributed to the suggested hypothesis.
2. “If prices are set uniformly by a chain, however, it will tend to reduce the apparent size of trade costs. In the extreme, if prices are set by one firm, then we will apparently have no trade costs whatsoever!” Yes, and that sets an upper bound on arbitrage for any aspiring middlemen at ≤0. If you factor in the consideration that the existence of middle men removes price certainty from the mind of the consumer, it’s a small fee to prevent buyer hesitation.
3. “Because all firms set prices based upon the average demand, and the effect on average demand is 0 owing to it being divided by infinity, we would believe that prices are perfectly inflexible and that monetary policy would be much more stimulative than it actually is.. Second, we cannot infer national level responses from local responses to shocks.”
Tempting to play the real analysis game here but I think it’s more useful to focus in on a) considering any national stimulus impacts a ‘region’ of such stores, you have to take the integral over the continuum range defined by the range of stores, yielding a finite, >0 elasticity effect raising prices & b) what you allude to in the closing advantages of whole chains relying on a single price point per good acts like a dampening/insurance effect. I’m mentally thinking of it as a collection of similar assets sharing the same liquidity pool as the spreads between any two of them are fixed. The end result is that vicissitudes, which can hit the store more existentially than consumers (who can shop elsewhere) effectively have their risk of going out of business due to tiny PNL moves vis a vis the correct price hurting them ->0. As the market is infinitely thick, it takes infinitely much to move a price. This would be something macro scale, effecting a region/continuum of nonzero measure like tariffs or taxes or sudden macro demand destruction. This isn’t rigorous but the intuition maps out.
Appreciate your thoughts on any/all of these. Will be deleting this comment after a while because I think I made it obvious what I do, what my background/approach is, and that I’m not formally trained in economics. Genuinely enjoying reading your posts.
"The median chain could raise its annual profits by $16.1 million a year – or 1.3% – by switching to the optimal varied pricing strategy. This naturally increases inequality considerably"
what's the channel by which inequality increases? wouldnt charging higher prices to higher income customers reduce inequality (as a first order effect)?
[Uniform pricing] increases inequality.
the innattentive manager theory seems hard to square with pricing being uniform instead of just surprisingly similar. like i could buy that a manager in san francisco doesn't realize he could charge 2x as much as the store in omaha and so he charges 20% more instead, but to explain *uniform* prices the SF manager has to not even realize he could charge 2% more than the store in omaha
Pricing is set nationally, and the argument that corporate can't set all these prices to different amounts in different locations when they're due to differences in demand.
sure, but the problem remains. why doesn't corporate pick a baseline price and then set the price 1% higher in SF and 1% lower in omaha?
semi relatedly i wonder whether this fits with the price matching literature? maybe they set it at the SF price nationwide and rely on price matching to local chains to get down to the omaha price?