Can the atot economists explain to me how pricing "works"?

[Terzo]

I'm guessing the answer is basically supply and demand, but here goes...

I have noticed that pricing for products (specifically software and electronic accessories) doesn't seem to follow a pattern. It seems like most products drop in price relatively quickly (I think this is the Price elasticity of demand). But some products seem to take forever to drop in price, or don't.
Examples I can think of include Windows (ignoring 7, it seems like retailers who stock Vista/XP have them at similar prices to 7), various games (LittleBigPlanet was released 18 months ago and it still seems to be ~$40, more for the GOTY version), and game accessories (controllers don't seem to drop in price until a new generation of consoles is released).

Shorter version:
Why do some products hold their value so well?

 

[SlitheryDee]

I dunno about the games, but it makes sense to keep OS prices the same forever because there's already often very little incentive for people to upgrade OS's early. They certainly wouldn't do so if they knew that eventually the price would drop. From the company's perspective that would mean bringing a new product to market that is virtually guaranteed to sell very little at first. Since the consumers know that the prices aren't going down, it's easier to convince themselves to buy a new OS when it first launches. This results in a payoff for the creator.

 

[Qacer]

I don't think it's just supply and demand. I think you also have to factor how much money went into the effort of making the product, how much you want to make, the product lifespan, how collectible it will be, and many more..

For example, I was at a Boba tea store today, and they had a small painting (15" x 10"). The artist was trying to sell it for $500. Yeah right. I've seen better paintings at the flea market for $10. The pricing didn't make sense at all. The artist was unknown. The painting wasn't all that. But, somehow, the artist pulled $500 from the rear.

 

[Bignate603]

When product cycles are relatively fast and there is a good deal of competition the prices tend to drop more quickly. When there is only one type of a thing they don't have to drop the price.

There's only one Windows, there is only one LittleBigPlanet. If you want those products you need to pay what they ask.

 

[kranky]

Products which are selling well do not typically get a price cut, especially if there is no direct competition.

 

[ManSnake]

"Why do some products hold their value so well?"

Because the product managers are trying to meet their numbers so they can get a big fat bonus check. It's all about maintaining a certain level of contribution margin to ensure profit.

 

[Babbles]

Pricing is really just a guessing game to see what the market can handle. Costs only factor into price so much that the price of the product needs to cover all of the fixed and variable costs. Outside of that, it's just up to the market.

Also every product in every industry is so different I don't think you can make broad generalizations on what governs prices in general. You could call it "value" or "utility" but that still doesn't explain much of anything in concrete terms.

 

[ElFenix]

Pricing is really just a guessing game to see what the market can handle. Costs only factor into price so much that the price of the product needs to cover all of the fixed and variable costs. Outside of that, it's just up to the market.

Also every product in every industry is so different I don't think you can make broad generalizations on what governs prices in general. You could call it "value" or "utility" but that still doesn't explain much of anything in concrete terms.

well, the cost of the product also determines where your profit maximizing point is given a demand curve

 

[Babbles]

well, the cost of the product also determines where your profit maximizing point is given a demand curve

Yes in theory, but you are not going to have concrete numbers on where you are at on the demand curve. You can go to the whiteboard and draw a fancy supply and demand curve and see where you are at in a hypothetical sense, but not in the I need to sell my stuff to Wal-Mart how much MSRP can I charge sense. If that was the case every company would be making tons of money and the US budget would be perfect.

I don't think that pricing is set relative to a demand function, but rather based on market analysis where people do conjoint analysis to determine what a focus group would consider "value" to them and what utility they drive from certain options.

 

[Lonyo]

I dunno about the games, but it makes sense to keep OS prices the same forever because there's already often very little incentive for people to upgrade OS's early. They certainly wouldn't do so if they knew that eventually the price would drop. From the company's perspective that would mean bringing a new product to market that is virtually guaranteed to sell very little at first. Since the consumers know that the prices aren't going down, it's easier to convince themselves to buy a new OS when it first launches. This results in a payoff for the creator.

Plus with a controller there are fixed hardware costs (obviously not equal to the sale price, but more than for a game), and the product as you say doesn't get replaced. Why drop the price when there is no competition?
For games, you sell on release when people want it, but further into the product life, people want it less, or they already have it, plus there is more competition from other games which are newer (and sometimes better), so you drop the price to compete, or to entice those who haven't bought to buy.
Specific games aren't like controllers or operating systems, they are not "essential". Sure they are the point of a console, but there are hundreds to choose from, so there is a more competitive market.

 

[Pollock]

As far as consoles, game controllers, iPods, etc. holding their value well...the manufacturers basically forbid the resellers from lowering the price below MSRP or else they won't receive anymore consoles, etc.

 

[Terzo]

So I'm going to try and summarize what I've heard so far.

Some products (windows, controllers) hold their value to a) entice immediate adoption and b) because there is a lack of "competition". For the latter idea, I'm guessing the existence of linux and third party controllers aren't enough to dent demand for the originals?

Some products hold their value because the company thinks they are at a price point which will net them the most income. However, these price points are merely educated guesses...so doesn't that mean companies would adjust their prices to find a more profitable price point?

Similar to the above point, the price holds because sales are satisfactory. Still, wouldn't it behoove a company to see if they could increase sales by offering a lower price point? I understand this isn't a perfect comparison, but Steam does this all the time with their special sales. They reduce price (even if temporarily) and get a significant increase in sales (reference). I understand that is with digital distribution but I assume the idea would carry over.

To phrase it in a new question, even if companies are making a respectable profit at their current prices, wouldn't they want to see if they could make more profit (higher volume at lower price) by adjusting the MSRP? Initially I assumed that a company would do all it can to maximize profits and would have done this if it worked, but it sounds like a lot of sales pricing is guess work.

 

[Terzo]

As far as consoles, game controllers, iPods, etc. holding their value well...the manufacturers basically forbid the resellers from lowering the price below MSRP or else they won't receive anymore consoles, etc.

Doesn't this make third party solutions more attractive? I'm pulling these numbers out of my ass, but if you can get an official controller for $50, or a third party knock off for $20, wouldn't the official version lose sales to the cheaper version?

 

[dmcowen674]

Can the atot economists explain to me how pricing "works"?

I'm guessing the answer is basically supply and demand, but here goes...

There is no such thing as supply and demand.

It's all made up and by design by the Corporations that own the Government.

 

[kranky]

Similar to the above point, the price holds because sales are satisfactory. Still, wouldn't it behoove a company to see if they could increase sales by offering a lower price point? I understand this isn't a perfect comparison, but Steam does this all the time with their special sales. They reduce price (even if temporarily) and get a significant increase in sales (reference). I understand that is with digital distribution but I assume the idea would carry over.

To phrase it in a new question, even if companies are making a respectable profit at their current prices, wouldn't they want to see if they could make more profit (higher volume at lower price) by adjusting the MSRP? Initially I assumed that a company would do all it can to maximize profits and would have done this if it worked, but it sounds like a lot of sales pricing is guess work.

Well, if you deliver your product online, you can change the price every hour if you want, and go up or down as much as you want. If you sell your product in retail stores, you can't. All you can do is reduce the price you sell to wholesalers and after that the retailers can charge whatever they want (of course, you can always offer a rebate). Once you lower the price, it's very hard to move it back up because people remember it used to be cheaper, and they will just wait until you lower it again. Online, people seem to be more tolerant of prices moving up and down. Generally once you lower the price you're stuck with it.

Online you can offer different prices to different people (can't do that in retail). People have found some online sites offer them lower prices and/or coupons after they have deleted their cookies, so they appear to be a first-time visitor.

There's no doubt people analyze whether they can increase profits by lowering the price, and if you see the price stay the same they probably have concluded it is the best strategy for them.

 

[Babbles]

Doesn't this make third party solutions more attractive? I'm pulling these numbers out of my ass, but if you can get an official controller for $50, or a third party knock off for $20, wouldn't the official version lose sales to the cheaper version?

Not everybody competes on price (else we would all shop at Wal-Mart and Whole Foods would not be in business).

Still, wouldn't it behoove a company to see if they could increase sales by offering a lower price point?

Some companies realize higher sales after increasing the price.

Here is a take-away for you. The value a customer gets out of a product or service is nearly completely irrelevant. It is the perceived value that matters. If the perception is that a product is better because it is priced more, then that is all that matters. Even if the utility between two similar but differently priced product is effectively the same, the perception of what one product offers over the other is what actually matters.

 

[tokie]

If the sector is innovation-intense (e.g. CPU's, etc) the prices tend to drop rather quickly because they have a relatively short lifespan on the shelves.

Other factors include the market power of the firms involved. For example, Microsoft can keep the price of an Xbox 360 controller at the same price for 5 years because they have a very high degree of market power.

 

[dbk]

http://www.youtube.com/watch?v=MNiEHvw6TTg

 

[Terzo]

http://www.youtube.com/watch?v=MNiEHvw6TTg

Thanks for the link. That was much easier to understand than the Wiki article.

 

[Qacer]

well, the cost of the product also determines where your profit maximizing point is given a demand curve

Not necessarily. Some companies will sell a product at a loss to ensure gains in other products. Take for instance video games or printers. The money made is in the games and cartridges and not necessarily the game systems or printer.

 

[ElFenix]

If that was the case every company would be making tons of money and the US budget would be perfect.

well, the OP did want an economics answer. first thing to do in economics is assume away reality. "let's pretend we're physics and we can describe mass psychology in precise mathematical terms."

<--- B.A. Economics 2001
(UT doesn't offer a B.S.)

Not necessarily. Some companies will sell a product at a loss to ensure gains in other products. Take for instance video games or printers. The money made is in the games and cartridges and not necessarily the game systems or printer.

and how does that at all violate what i said? if you're building an ecosystem you want to maximize profit on the ecosystem, not necessarily on individual pieces.

Here is a take-away for you. The value a customer gets out of a product or service is nearly completely irrelevant. It is the perceived value that matters. If the perception is that a product is better because it is priced more, then that is all that matters. Even if the utility between two similar but differently priced product is effectively the same, the perception of what one product offers over the other is what actually matters.

the best example is corona beer. it used to be dirt cheap. no one bought it.

 

[Ruptga]

I am lazy, so figure it out yourself, but in regard to what you're specifically asking about it boils down to this

http://en.wikipedia.org/wiki/Oligopoly#The_kinked_demand_curve_model

 

[0roo0roo]

I'm guessing the answer is basically supply and demand, but here goes...

I have noticed that pricing for products (specifically software and electronic accessories) doesn't seem to follow a pattern. It seems like most products drop in price relatively quickly (I think this is the Price elasticity of demand). But some products seem to take forever to drop in price, or don't.
Examples I can think of include Windows (ignoring 7, it seems like retailers who stock Vista/XP have them at similar prices to 7), various games (LittleBigPlanet was released 18 months ago and it still seems to be ~$40, more for the GOTY version), and game accessories (controllers don't seem to drop in price until a new generation of consoles is released).

Shorter version:
Why do some products hold their value so well?

xp vs win7 demonstrates supply vs demand just fine. supply is dwindling, and knowing that the people who shop for xp are in a special position have backed themselves into a corner where they either have to get xp for compatibility or preference, they know they got you over the barrel. if basically everyone dropped xp for win7 then perhaps the xp would be so worthless that they could charge almost nothing for it. its like ram prices, older obsolete ram once the supply goes down actually goes back up in price per mb

games unless heinously over priced compete against themselves. little big planet competes against little big planet, not the sims