Help me understand modern micro economics.

[sao123]

Ok first...
Why do companies sell things, then offer mail in rebates? It make more sense to me, that to just save the printing costs, postage, peoples salaries, etc...and just lower the actual price paid at purchase?

Second, along the same lines... why do companies always try togive you the "value added" bullshit?
Why not just cut out all the promotional stuff, and just sell the product for the absolute minimum price? It seem that most (not all) "value added" items are not used or even wanted.

 

[CTho9305]

Originally posted by: sao123
Ok first...
Why do companies sell things, then offer mail in rebates? It make more sense to me, that to just save the printing costs, postage, peoples salaries, etc...and just lower the actual price paid at purchase?

Many people forget to send in the rebate. Also, it gets you into the store to browse their other merchandise. With rebates, it's often a manufacturer rebate so the store gets the full price up front. If they dropped the price, they'd collect less up front.

Second, along the same lines... why do companies always try togive you the "value added" bullshit?
Why not just cut out all the promotional stuff, and just sell the product for the absolute minimum price? It seem that most (not all) "value added" items are not used or even wanted.

Because people think they're getting something extra, even though they don't realize they get nothing extra that they want.

 

[furie27]

The mail in rebate also provides a nice, short term loan to the seller and helps boost sales figures.

 

[Kibbo]

Here's the texbook definition:

When a seller has market power, one way to increase revenue is to identify different sub-markets with varying levels of "price sensitivity." One way to do this is to offer rebates or coupons. Their higher-end market won't really care too much about this stuff, but the lower-end will only buy the product at the rebated price. It probably works better on paper than in reality, but the theory is that if the price-sensitive market is more willing to do "work" in order to get a discount, you will maintain your sales in the high-end at the higher price while the lower-end gets the discount. It's called the "self-identification" of the market.

The second case is more interesting, and probably more effective IMO.

The key to the simple case is also market power (meaning monopoly, or to a leser extent having differentiated products, which allows you to operate in a fashion similar to a monopoly. Coke has a monopoly on Coke, even though there is competition in the soda pop market. This is why marketing strives to differentiate itself from its competitors.)

When this market place is present, producers can "force" the buyer to take products they don't want with products they do. A classic example is the cable company "bundling" the Nascar station with the Wanky Artsy station. As long as the total price of the package doesn't pass the maximum amount that the majority of each of these two markets are willing to pay for each station individually, the cable company can effectively sell two stations to two markets, when otherwise they could only sell one product to each market.

A related phenomenon is the "feature creep" that happens in software and tech items. Each feature that is added to the tech adds another tiny wedge to your market, and you can then make everyone in your market buy all of the features, even though most don't want all of them. This leads to greater complexity to your product, and decreased overall quality. But it increases your revenue. The greater your market power, the more you can take advantage of this. Hence all the crap you end up uninstalling in Windows, and why the product overall is crap. The more competition, the more pressure there is to give the market what it wants, at the price it wants, at the quality it wants. That's why cable companies and Windows are good examples. Increased competition is also why cable companies and phone companies are not as bad as they were 10 years ago.

 

[unipidity]

Ive never been happy with the conceptual nature of markets, S/D scheduels etc. As you say, markets exist within markets- the Market for drinks is a conglomeration of th Milk market, the juice market, the soda market etc- and in no way 'actually' exists, in that a price cannot be defined, and people dont buy 'drink'. Breaking it down further, the Soda market is the Coke market, and the 7-up market etc, and the only thing that make it reasonable to lump together is come degree of substitution between the sub-markets.
But then ultimately the Coke market has to be broken down into individual markets based around the spacial location of the physical PoS- there is no one price. What I can say is that there exists a market, at 9:31 tonnight, in Charing Cross station, consisting of Mr Smith and CocaCola, with a market price of 71p. But I have no take on how you mathematically 'combine' this market- or rather, single transaction, to form the market at Charing Cross, the Market in London, UK, world, for soft drinks etc etc. It seems that any (theoretical) market is an approximation to the activities of many transactions, and that the approximation gets worse and worse as the product gets heterogenous, more agents are involved and the sale area increases.

Having said that, market analysis seems fairly accurate in predicing behaviour. But then again, when you take it to far- the market for drink, for example, it seems to break down.

 

[CSMR]

Interesting, Kibbo. The bundling rationale isn't something I'd heard before, and is a nice concept.

 

[Witling]

Estimates are that only about 1/3 of all rebates are ever claimed. I haven't seen any studies but I'll bet the reclaim percentages are less at the $5 end and more at the $100 end.

As for the other question about whether one buys premium, bang for buck, or cheap, for most people it depends on the product line. I happen to be a bike snob and a computer snob. I could care less about clothes and styles. It makes a difference in the way I spend my money.

 

[Tiamat]

If I may add, sometime it takes 2 months - 3 months for the consumer to receive the rebate. As stated above, this allows the seller a "loan" for those 2 months or so. Also, if a product has mail-in rebate, it will have a higher probability of selling, even tho the buyer is still paying the high cost up front.

The one thing that i have noticed to have even greater effect on consumers - but "saves" them even less money are the Sales-Tax Free days. Here in Mass., where the tax is 5%, people flocked the stores this past weekend and bought Computers, TVs, stereos, monitors, and the like from Apple store, BestBuy, etc. It was utter madness to see how many people where laying down the thousands of dollars for merchandise just for a small 5% "discount"

 

[Kibbo]

Originally posted by: unipidity
Ive never been happy with the conceptual nature of markets, S/D scheduels etc. As you say, markets exist within markets- the Market for drinks is a conglomeration of th Milk market, the juice market, the soda market etc- and in no way 'actually' exists, in that a price cannot be defined, and people dont buy 'drink'. Breaking it down further, the Soda market is the Coke market, and the 7-up market etc, and the only thing that make it reasonable to lump together is come degree of substitution between the sub-markets.
But then ultimately the Coke market has to be broken down into individual markets based around the spacial location of the physical PoS- there is no one price. What I can say is that there exists a market, at 9:31 tonnight, in Charing Cross station, consisting of Mr Smith and CocaCola, with a market price of 71p. But I have no take on how you mathematically 'combine' this market- or rather, single transaction, to form the market at Charing Cross, the Market in London, UK, world, for soft drinks etc etc. It seems that any (theoretical) market is an approximation to the activities of many transactions, and that the approximation gets worse and worse as the product gets heterogenous, more agents are involved and the sale area increases.

Having said that, market analysis seems fairly accurate in predicing behaviour. But then again, when you take it to far- the market for drink, for example, it seems to break down.

I agree with you entirely. Market theory, in the basic incarnations one encounters in undergraduate work, is more of a metaphor that allows you to see a story than anything else. It takes rediculously complicated regression models (beyond my current ability) to be able to be anywhere close to predictive. And even then, one assumption that you made that changes in the realworld throws the whole thing out the window. And one factor forgotten means that you could be calculating a complete fiction. It becomes even more complicated with "sticky" prices and imperfect or unequal information. However, often because of the sheer number of random events you can end up with an estimate which is surprisingly accurate. Enough random events can occur as to effectively cancel each other out. Of course, you can't know when that isn't true. But that's basically just saying to take statistics with a grain of salt, which probably needn't be said on this forum.

 

[jai6638]

i had another question ( forgive me if its stupid) ... why do stores price their item as $99.99 or $49.99 ?? why not just price them as $100 or $50 respectively... i realize its coz of taxes but there must be another logical reason for this practice...

thanks

 

[CTho9305]

Originally posted by: jai6638
i had another question ( forgive me if its stupid) ... why do stores price their item as $99.99 or $49.99 ?? why not just price them as $100 or $50 respectively... i realize its coz of taxes but there must be another logical reason for this practice...

thanks

Studies show that while people may be willing to pay $19.99 for a product, they may be unwilling to pay $19 for the same product. People are weird like that.

edit: I do mean nineteen dollars even versus nineteen dollars and ninety nine cents .

 

[everman]

Not everyone will send in a rebate, so you end up getting to sell your product at a higher price to them.
Selling things at .99 annoys me also, It just seems stupid. But supposedly it has a marketing advantage. I think wal-mart actually prices many items around .80 - .99 but I haven't seen a commercial recently.

All of this really just has to do with marketing.
Oh and also rebates are free money in the case that you do send it in. That is, instead of selling an item for $10.00 you sell it for $20 with a 10 rebate. If someone sends in the rebate, you still get to use their money for several weeks before you actually write that check and send it to them.

 

[jai6638]

damn marketing strategy... i hate it

 

[CSMR]

Originally posted by: CTho9305
Studies show that while people may be willing to pay $19.99 for a product, they may be unwilling to pay $19 for the same product. People are weird like that.

Sic? Or are people that weird?

 

[dkozloski]

Nobody ever went broke over estimating the stupidity of the public.

 

[CTho9305]

Originally posted by: CSMR

Originally posted by: CTho9305
Studies show that while people may be willing to pay $19.99 for a product, they may be unwilling to pay $19 for the same product. People are weird like that.

Sic? Or are people that weird?

People are that weird. We covered stuff like this in a psych class, but unfortunately I don't remember any specific studies to cite as evidence.

 

[CSMR]

That is, you meant $19 rather than $20?

 

[Xyrrus]

Rebates are also useful for controlling price fluctuations and now screwing over your distribution chain. If you sell best buy 100 of your widgets for $100, but then your costs drop by $10, you can't turn around and set your MSRP $10 lower because that cuts into best buy's profits. More than likley, best buy will keep your product at the previous list price and consumers will buy a competing product, best buy won't reorder and you move fewer units. Offer a rebate and best buy gets to include the rebated price on their price tag in big bold letters which is all the consumers see, your product moves and you make a bajillion dollars. (And as others have said, not everyone turns in rebates).

Rebates can also help to save face in a prestige market. You make a $1000 widget and your competetor makes a better widget, and also prices it at $1000. Instead of lowering your price and admitting to the market you have a lesser product, you can offer a $100 rebate. People's bottom line will kick in and see two similiar (they must be similiar, they're priced the same!) products but one is a steal at $100 less!

-Xy

 

[jai6638]

Originally posted by: CSMR
That is, you meant $19 rather than $20?

lol i was just gonna ask him that..