Saturday, April 16, 2016

Selling the Deal in the Deal: Predatory Pricing and Antitrust

I recently wrote an article about modernizing antitrust that only one law review accepted and it may have been charity more than anything else. Part of the thesis was the the neoclassical model depends too much on low prices. A sense of fairness, what people often want and derive utility from, can be advanced in other ways.[More specifically, antitrust economics ignores externalities, most people do care whether prices reflect the exploitation of others, consumer surplus is only tenuously connected to actual welfare, etc.}

Over here in Italy I have discovered a new wrinkle that further puts neoclassical economics in the rear-view mirror of antitrust. There were two incidents.

Walking through a really big market I stopped to buy for 1 euro the cheesiest gift I could find for my friend Amy. For some reason I also picked up a necklace. 25 Euro the seller said. I shook my head. "No grazie," I replied indicating I did not want it. The reponse was "20 Euro." Again,   I said no wanting to buy that great gift for Amy and leave. (I will not disclose what her gift was except to say it includes a magnet which was demonstrated to me many times.) Now I hear 15 euro, and then 11 euro. 11 Euro was a sticking point. He said at 11 he only got 1 Euro profit. I showing him that I only had ten. Finally he said OK to the ten.

I realized the price of the necklace was irrelevant. In all conversations since then it has been known as the necklace that was reduced from 25 to 10. I felt pretty good about getting the lower price but I also felt uncomfortably knowing the vendor needed the money more than I do. Still, if you think about it, everyone came out ahead. I get to feel like I was a really good bargainer and the seller got 10 euro -- 1 euro was for the necklace and 9 were for letting me feel good about the deal. The low price in and of itself meant nothing. In fact, I was happier at 10 than I would have been at 1 Euro because the seller had bundled the necklace and an opportunity for me to feel like a successful bargainer.

Second incident. Walking back to our apartment, a woman is moving along in full out African garb selling bracelets. I see her actually sell one for 5 euro. She gets to me and I say "how much" and she says 10 euro and I looked shocked.  Then she says 5 and indicates that is what the other man paid. I say, "no" and in broken Italian add "I am not that man." Finally I pull out  2 euro from my pocket because that is all I have. She takes it and then makes the SHHH sign and points at the 5 euro buyer.

What I really liked about this was her follow through on the sale to the other man, She wanted me to help preserve his feeling-goodness from the bargain he thought he had made. She sold him a 1 euro bracelet and 4 Euros of feeling good about the deal. For me, there was a discount, I paid 1 Euro for the bracket and only 1 Euro to feel good.

There are many antitrust issues to consider here. There was clear price discrimination with respect to sale of the "feeling good" component of the deal. And sometimes the price of feeling good was cut so far that it seemed it could be predatory. But I have no idea what the seller's marginal cost was of selling the good feelings.


Fred said...

When I was in a south american country last summer I was bartering with some locals at a market for some fabrics. I knew what I wanted and went to every stall asking if they had it and asking what price they were willing to sell it at. I was able to average a price that way and then starting asking for a much lower amount. Eventually someone gave in and sold it to me for that much.The thing is though they made me feel really bad about it. They looked sad, and talked to each other and their neighboring sellers about how low of a price they were selling it to me for. They purposefully deprived me of the feel like a good bargainer experience.

Jeffrey Harrison said...

Fred, if he acted happy it would make you think it was not a good deal for you. So, the are a little behind in the marketing department because they do not understand you not looking for sad either. Which raises the issue of what exactly is the best response to make us happy?