There may be some truth to the explanation classical economics offers about how prices are established in a free market, but the social role of that explanation is to make us as consumers feel better about the total mystery that a price represents to us. When we notice that the price of eggs has jumped by 30% from the last time we bought, we assume that there is a good reason—we have no knowledge that would lead us to that conclusion, but the law of supply and demand tells us that it is so. Or we pick up a Lunchable and wonder how five cents worth of food merits a $2.99 price tag—but even if we can’t figure out why it does, we know that it in fact does, because apparently people value the contents enough to pay the price being asked. And so we buy our eggs and Lunchables knowing that, even though we don’t understand the prices being charged, those prices have been established as fair. By the free market.
This is how a consumer society encourages consumers to think. Whether or not a producer thinks this way as well, he will find such thoughts to be absolutely no help when trying to set a price himself. As close as it comes to being helpful is when there is a “going price” in the area for a particular item. For example, we sell our eggs for $1/dozen, because everyone sells their eggs for $1/dozen, and it has been that way for a long time. This may look superficially like supply and demand at work, but it really isn’t. All the relevant inputs have varied widely over the years—feed costs, interest in locally grown produce, area incomes—but the price has stubbornly stayed at $1, judging from the fading paint on the homemade signs that pepper the roadsides. And we didn’t do any sophisticated calculations to figure out what our per-dozen price ought to be, aside from some back-of-the-envelope work that convinced us we wouldn’t be losing money at that price. The fact that there is a going price around here saved us a lot of thinking; either we were willing to sell for that price, or we weren’t. But the price itself was not established by the aggregate of a bunch of ongoing supply-and-demand negotiations. People decided awhile back that $1 was a fair price for a dozen eggs, and haven’t yet seen a need to revisit that decision.
Ed Sossen, host of a Christian radio talk show in Austin, once told how before coming to Austin he had a small side business involving calligraphy, mostly hand addressing wedding invitations. It was profitable, but his other activities were more profitable. Eventually he decided to get out of the calligraphy business, but instead of just shutting it down (and having to explain that decision to old customers) he decided to instead discourage business by raising his rates dramatically. But instead of scaring off customers, he found that his business increased dramatically. That was enough to keep him at it for awhile, but soon enough he wanted to put an end to it, so again he raised rates dramatically. And experienced another dramatic increase in business. At which point he simply shut down the business.
This echoes the story that Tom Wolfe tells about Marshall McLuhan, who was just becoming known as a media guru:
The phone rings in Gossage’s suite and it’s for McLuhan. It is a man from one of America’s largest packing corporations. They want to fly McLuhan to their home office to deliver a series of three talks, one a day, to their top management group. How much would he charge? McLuhan puts his hand over the receiver and explains the situation to Gossage.
“How much should I charge?”
“What do you usually get for a lecture?” says Gossage.
“Five hundred dollars.”
“Tell him a hundred thousand.”
McLuhan looks appalled.
“Oh, all right,” says Gossage. “Tell him fifty thousand.”
McLuhan hesitates, then turns back to the telephone: “Fifty thousand.”
Now the man on the phone is appalled. That is somewhat outside the fee structure we generally project, Professor McLuhan. They all call him Professor or Doctor. We don’t expect you to prepare any new material especially for us, you understand, and it will only be three talks—
“Oh—well, then,” says McLuhan, “twenty-five thousand.”
Great sigh of relief. Well! That is more within our potential structure projection, Professor McLuhan, and we look forward to seeing you!
Here’s a similar tale, taken from the home business column in Countryside magazine (Sept/Oct 2006). (The writer makes wooden tankards to sell at renaissance faires.)
One time, in a silly mood, we made something we called a ‘barrel purse.; It was literally two wooden half-circle barrel halves hinged together and hung with a leather strap. It weighed around ten pounds. If you wanted to access the inside and weren’t holding it right, it slapped open and dropped all the contents on the floor. It was stupid, silly, absurd, and we priced it at something like $5 and kept it as a gimmicky thing. We toted that barrel purse to no less than ten different shows over a period of six months and hung it from a center pole of our booth so no one could miss it. Of course, it never sold. Who would buy something so stupid?
Then one day at a show, in a moment of levity, we added a zero to the price tag so that it read $50 rather than $5. We sold it within half an hour.
Don’t get me wrong—we told the customer everything that was wrong with it. It didn’t matter—she loved it, had no qualms about paying the price, and walked out ten pounds heavier and $50 lighter. My husband and I couldn’t believe it. […]
Many years ago, in another moment of levity (we have a lot of those), we took an ordinary tankard, cut it up at funny angles, twisted the pieces around, and glued it back together. The result was a crooked tankard that looked drunk. We put it on display at a show for a ridiculously low price, something like $5. People mostly ignored it.
Then we put it on prominent display and upped the price to $45. Within minutes we had two people literally arguing over who would buy it. We settled the argument by promising one of the customers that we would make him another one just like it, which we did. We have made crooked tankards ever since, and they have become one of our best sellers.
During holiday car rides one of the moments I enjoy comes when ads for particular sorts of gifts come on the radio. The kids are usually baffled at the idea that someone would pay, say, $80 to Vermont Teddy Bears to have them deliver a $3 stuffed toy to a wife or girlfriend at her place of business, especially when they hear the toys described. I point out to them that what is important in the transaction is not whether it was worth $80 to have that $3 toy delivered, but that the gift-giver was willing to fork over $80, and that the recipient (and her friends, I suppose) are well aware that the gesture cost $80.
But my favorite all-time holiday gift radio commercial is for the International Star Registry, who for $54.95 will name a star after a loved one. These folks have been around for at least twenty years, and it is well known that they are no more authorized to name stars after people than any random person. They “register” these star names by printing them up in a booklet and sending them to the U.S. Copyright Office, just like you are free to do with any book you write yourself. But despite the fact that they provide absolutely no service at all, they still find enough customers at $54.95 to make it worth their while to blanket the holiday airwaves with costly national radio commercials.