Tuesday, January 29, 2008

Time in a capitalist economy

The American Economic Review has a fascinating article that inadvertently points to a relatively insecure, but significant negative consequence of capitalism. The authors find: "Specifically, households in their late forties pay, on average, 4 percent more for identical goods than households in their late sixties. This is consistent with the fact that market labor hours, earnings, and time demands from children all decline after middle age. Additionally, we document that higher-income households pay higher prices than lower-income households, and dualworker couples pay higher prices than singleworker couples."

Aguiar, Mark and Erik Hurst. 2007. "Life-Cycle Prices and Production." American Economic Review, 97: 5 (December): pp. 1533-59.

Normally, we hear that higher prices are a form of rationing scarce goods, but the scarcity here is a scarcity of customers. Stores try to draw customers in with low prices in order to make more profits, often using loss leaders, so they can charge more for less inelastic goods. Even assuming that the average price is somehow "fair" or "efficient," this strategy costs people time, jumping back and forth to get the best deal.

This time cost falls outside of the typical economic measures, along with wait time on the telephone, standing around in a store until a clerk comes your way, long commutes, and interminable security checks before an uncomfortable and often late plane ride.


YouNotSneaky! said...

Isn't this just do to the prevalance of price-discriminating monopolists? Old people have more elastic demand for Country Kitchen buffet style food than middle aged people. So they get senior discounts.

YouNotSneaky! said...

Also, I totally don't see why this would be peculiar to capitalism, rather than to any system in any complex economy where logistics play a significant role. Ever stood around waiting for a clerk in a socialist economy? I mean, once you got through the line to be able to wait for the clerk? Or tried calling for help in one? Assuming you had a telephone, and that the people you were trying to reach, supposedly, also had a telephone? Often times the difference is/was between spending an annoying hour or two on the phone or taking a whole weekend to physically go and visit whatever place is supposed to take care of your problem. Again, assuming that what you're complaining about (say, problems with your personal computer) is even available in the socialist economy.

R Mutt said...

Interesting. It does seem to me that price segmentation must have significant economic costs.

For instance I buy all my groceries online at UK supermarket Tesco. They have an elaborate discount system, where every month they send me paper discount vouchers, plus vouchers to accumulate points towards other vouchers. To claim them, I have to log on to the right screen and manually type in half a dozen long, cryptic alphanumeric codes.

It's straightforward price segmentation. Only a cost-conscious consumer will go through that process, so they can make a higher profit from the cost-unconscious, and a lower profit from me.

But the cost to my time, and the higher price for the people in a hurry, must have an impact.

Robert D Feinman said...

How does this fit with the Walmart model?
Walmart tries to stay open 24 hours a day, so that even the most time pressed family should be able to find a suitable time to shop.

I don't know if anyone has done a study to see if they alter prices during the course of a day or week. It is certainly true that stores offer senior discounts at off times as a way to even out the peaks. My local liquor store gives a 10% wine discount to seniors on Tuesdays and the bagel shop does something similar on Wednesdays.

I wonder if online shopping will make this less common in the future. I buy a lot online now (except groceries) just because I don't want to chase around looking for things, and I have lots of free time since I'm retired.

Shag from Brookline said...

Paying retail can save a lot of time. I just don't buy too much of anything, and only what I really, really need. Now if only I could go back to paying in cash rather than credit cards.

Anonymous said...

i don't get it. doesn't this just show that capitalism doesn't actually work exactly as an ideal market model? i proved that weeks ago. in my works, i term this 'transaction costs'. arrow internalized this, and even plagiarized from the future.

so, i guess this data shows capitalism gets a 96% grade. do the democrats have an idea to get to 100%? i do. if all 60+ types send me $4 for every 100 they spend, i promise to allocate it to 40's (oz.)

a more interesting idea might be that as people age, their watches run slower, so they spend less $/unit time than younger ones. radiocarbon dating (a popular social networking approach) can be used to prove this. only non-objective observers think they are paying less, dearly. i term this the 'relatives effect' as opposed to twin effect.

YouNotSneaky! said...

"It does seem to me that price segmentation must have significant economic costs."

And who bears these (presumably, net) costs? You? But then why in the monkey heck do you do it? The cost-unconscious consumers? They get charged the same price whether or not you enter them annoying alpha numeric codes into the computer (I say this as a fairly cost unconscious consumer. What can I say? I value my time). The firm obviously makes more profit, so where exactly are the loosers in this?

This is just a confused, imprecise, and inaccurate argument that somehow the existence of lower prices (alongside higher prices) is bad for consumers. And then trying to blame that on capitalism. Ay ay ay.

R Mutt said...

And who bears these (presumably, net) costs? You? But then why in the monkey heck do you do it?

First, consider an ideal case where a market was very efficient, with very transparent pricing. In that simple model, the supermarket would have to charge the lowest prices it can, (making the minimum profit) to everybody.

Make up some numbers: say the supermarket in that case buys the washing power at £1, and sells it at £1.05, making a 5p profit.

I suspect what they do now is to sell the washing powder at £1.10 to the price-unconscious, making 10p profit from them. For me, they change £1.05, but impose another 2p of unnecessary time costs on me. I'm now paying effectively £1.07. I still do it to "save" 3p on the inflated costs, but I'm still paying more than I would in a truly efficient market.

Remember that they are obviously still making a profit at the discounted price, or they wouldn't sell at that price. The time costs I am paying in excess of that are therefore excessive profit. In total, I am paying more than I would in an efficient market.

Also, consider the waste and environmental costs. It would be trivial to automatically give me the points/vouchers, as it's all computerized. However, they are physically mailing pieces of paper around the country... just to waste peoples time with paperwork.

R Mutt said...

Also, remember the 2p's worth of time costs I'm subjected to is not going back into the economy. That's not even going into the supermarket's pocket where it gets recirculated. It's dead time that I could have spent either earning more money, or doing something fun, but is now wasted.

YouNotSneaky! said...

Well, it seems like your willingness to pay is 1.07 and the price unconscious person's willingness to pay is 1.10. So why would the firm ever have charged 1.05 in the first place? I understand you're just picking numbers to illustrate the story, but where do these numbers come from? It seems like you're basically saying 'the market would be more competitive in the absence of these kind of discounts' and it may be so - there's always a way to set up a model to get this kind of result and there is a literature out there on price-discriminating oligopolies (it wouldn't work with monopoly) - but it really needs more for the argument to work.

R Mutt said...

Yes, I do think this is an oligopoly. Because prices are not transparent and it takes time and effort to find the lowest price, they are able to maintain higher prices and higher profits.

But even aside from that issue, I still think this is worse for the economy as a whole.

Taking your example, let's suppose that the choice is between them charging me £1.07 (without price segmentation) and £1.05 in money plus £0.02 worth of wasted time (with price segmentation, as happens now.)

In the £1.07 case, I could use that time to work more and earn more. Tesco has an extra £0.02 which circulates in the wider economy.

In the £1.05 + £0.02 case, that two pence is a dead loss to both them and me.

Anonymous said...

Is it sensible, in economic terms, to separate (a) passive market segmentation on the basis of price-consciousness from (b) intentional cost-obfuscation? (I'm not sure).

An example of (a) are mailed out coupons, or the ubiquitous "member cards" at American supermarkets. You can get quite substantial discounts by signing up for a card. The 'rational' justification I've heard for this is that the company gets information on buying habits, which is probably true. But it's also a de-facto tax on the lazy, the stupid, and the out-of-town (given the absence of national brands).

For (b), I think of phone companies' pricing strategies after the end of regulation. The companies appear to have figured out that the more complex their plans and options and changing packages are, the harder it will be for most consumers to make a 'rational' economic choice. Moreover, once lured in, most consumers don't pay enough attention to new options. (Otherwise, the proliferation of prices that come with asterisks and tiny print that say the price will triple after 6 months would not work). The consumers with the time and energy to keep calling, waiting on hold, and updating their packages will get 'good' prices, but the time investment is prohibitive for many, and sheer laziness or obliviousness hinder others from managing their expenditures for 'rational' efficiency.

I find the post's larger point very persuasive: in an advanced consumer economy, prices should be measured with an additional component that quantifies the time investment required to actually receive the advertised price. Wonder how the economic measuring offices do this?

Myrtle Blackwood said...

Pquincy said: "..in an advanced consumer economy, prices should be measured with an additional component that quantifies the time investment required to actually receive the advertised price."

Well what account does market theory take for time? Time is not measured at all, is it?

Infinite evil (species extinctions , genocide, war, disease, pollution) is traded for a temporary, limited, measureable benefit in capitalism.

"What Shall It Profit A Man To Gain The Whole World And Lose His Soul" --Mark 8:36
"For what is a man advantaged, if he gain the whole world, and lose himself, or be cast away?"--Luke 9:25

"..The white men are bad school-masters; they carry false looks, and deal in false actions; they smile in the face of the poor Indian to cheat him; they shake them by the hand to gain their confidence, to make them drunk, to deceive them, and ruin our wives. We told them to let us alone; but they followed on and beset our paths, and they coiled themselves among us like the snake. They poisoned us by their touch. We were not safe. We lived in danger. We were becoming like them, hypocrites and liars, adulterers, lazy drones, all talkers, and no workers..

Black Hawk Surrender Speech

"the worth of the soul is an ever-growing, and in this sense a boundless, or infinite quantity, and can, therefore, never be estimated."

Proft and Loss; or the worth of the soul.

YouNotSneaky! said...

r mutt,

Sorry for not replying. I actually sat down and tried to write this down as a model but then got bogged down in the details.
Anyway, this mostly seems to me like the standard monopoly problem and Michael did include the caveat in his post that "average price is somehow "fair" or "efficient,"".

R Mutt said...

Well, how about framing the same situation slightly differently.

Suppose instead it was the government imposing this paperwork as part of some nanny-statism or other. The same numbers apply. To buy groceries online I now have to do paperwork which consumes time to the value of £0.02 on top of a £1.05 packet of washing powder. Alteratively, I could pay a fine which raises the value to £1.10, but I choose not to do so.

Now according to me, this £0.02 worth of time which I could have spent earning, spending or just having fun is a dead loss, which harms the overall economy.

According to you, is it harmless for the government to impose this burden of paperwork?

Or if it's harmful in one case, but not the other, why?

YouNotSneaky! said...

"According to you, is it harmless for the government to impose this burden of paperwork?"

It depends.

In some sense, it doesn't matter whether this is government or private firms. But in another it matters because it depends on what the available alternatives are and what the standard of comparison is.

You could get rid of this whole problem - in the case of private firms - by just making the market perfectly competitive and then each firm would just charge price equal to mc and you couldn't improve on that. But, here as often, a perfectly competitive market might not be a possibility (due, say, to entry costs, increasing returns to scale, product differentiation or whatever). So the comparison isn't between a low-price-for-everybody and a low-price-for-time sensitive and a high-price-for-others, which would of course favor the low price. The comparison is between a high-price-for-everybody and a low price for some (+ wasting of time) and high price for others.

Presumably a firm could charge the whole 1.10 and keep the extra two cents or whatever. But this would make some folks drop out of the market. So by segmenting the market some folks who would not otherwise purchase the product do so, gaining some surplus.

Also, there's definitely some instances where a government providing a public service should do the same. The problem here is that of imperfect information and that constrains the gov as much as private firms. So for example, gov might wanna to separate out the folks who really value a particular public service from those who just sort of value it, by letting people perform some self-selecting task, like filling out some form or something (usually this kind of problem in the context of public finance arises more with who will pay for a public good rather than who will consume it though).

After all, nobody's forcing you to use those online coupons.