Friday, February 24, 2012

Things that have bugged me lately

1. The way changes to consumer surplus are discussed with respect to a price ceiling in intro classes. When you have a price ceiling, anyone wiling to pay at the level of the price ceiling can be in the market. You can't just assume that the people to the left of the point where the price ceiling intersects the supply curve are the ones who get the good. It's quite possible that those with lower reservation prices will get it. So the consumer surplus gains associated with price ceilings are almost certainly overstated. It's true that if you have a higher reservation price, you'll probably exert more (non-price) effort towards getting the product. But to the extent that is true, the actual cost expended to get the project will begin to approach the market price. This is basically the discussion of scalping.

2. I hate the argument by retailers that you have to make a minimum purchase with a credit card because there's a fee for each credit card transaction. The argument is bullshit. It would be trivial to spread that fee cost by raising the retail mark-up. This is no obstacle whatsoever for them. That's not the reason they have minimum credit card purchases. The reason why they have these minimums is to get the guy that doesn't have cash to frantically purchase three bucks worth of extra stuff to meet the minimum requirement. They know enough people are going to do this, rather than leave the store without a purchase. Push back on this - they can run your credit card, after all. Say "but the cashier I had the other day let me run it" or complain about how prominently they post the minimum requirement.


  1. 2. This is the argument about whether stores should make people with cash pay for people with debit cards. I think there are two real world issues that make your solution not possible. First, these stores are small and already at a price disadvantage. Second, changing prices is a lot more work than just not letting people use cards under $10.

    Also, I think another reason why stores want a minimum purchase is becuase the fee itself isn't the only cost. The diffusion of debit cards in small stores has been very very slow in NYC. I have always blamed the relatively high sales tax (8 1/4 or something like that). Stores are more likely to have to pay sales tax on transactions where there is a paper trail.

    Anyway, i remember hearing/reading somewhere that people start dramatically changing their behavior to avoid sales tax when the sale tax hits around 10% I assume it works the same for business too.

  2. "It would be trivial to spread that fee cost by raising the retail mark-up."

    In which case, one loses business to those who keep a minimum or who don't accept credit cards.

    My experience here in Brooklyn runs counter to your diagnosis: big chains like CVS or Lowe's accept credit cards for purchases as low as their products go -- because they can adjust their margins as you say. It's little merchants, like the wine shop down the street, who set minimums: and it's very doubtful I'll but another bottle of wine to use my card, when I can just walk three doors down to the ATM. He's worried about the fees, pretty clearly.

    1. Ah, okay. The triangulation of store examples you used made me think you live in south slope.

  3. The time I usually run into #2 is at campus coffee shops (those that even take credit cards). I feel bad pushing the credit card issue there, because it's usually small and student-run, so I usually buy something extra... on the bright side, it's a good excuse to get a sticky bun!

  4. Daniel: The idea that the Harberger triangle with a price ceiling is a lower bound on the deadweight loss, because, as you say, it assumes that those who get the limited amount of the good all have higher WTP than those who don't is explicitly discussed in Krugman's Essentials of Economics. Ditto for price floors: some sellers who succeed in selling may well have higher cost than some who do not succeed so the Harberger triangle is again a lower bound.

    My problem with this topic in Principles is the way in which, implicitly or explicitly, they encourage the following fallacious reasoning: the market allocation is efficient, while the allocation under price controls is inefficient: therefore, someone is better off and no one worse off if price controls are lifted.


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