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Economics versus emotions

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September 18, 2011 – Comments (16)

I think for the most part a lot of people but their (usually not well though out) gut feelings over economic reality, but that aside, here is something else.  A quick question, what would you do in this scenario?

 

Your name is Tony Spumoni, and you own a brick oven pizzeria.  There is a blackout, and you are the only store selling food because you are not using electricity.  There is a line around the block for your pizza.  The demand is super high and the supply is super low.  You normally sell pizza at $2 a slice.  You will sell out at this price in an hour easily.  You could probably charge $6 a slice and also sell out.  Assuming you have 200 slices left, that is an extra $800.  To me, there is nothing wrong with this...you are providing more value so you deserve to gain more profit.  This is strictly a (correct) economical decision

 

However,a lot of people don't understand these simple economic theories.  They think you are being an "evil capitalist".  They have no choice and pay the $6.  SO you make $800.  But your customers potentially think you a jerk, and you lose a ton of customers in the future, which could lose you way more than $800 in the long run.  Even though you know its ridiculous, its just the way many peoples emotions work.

 

Which would you choose?

16 Comments – Post Your Own

#1) On September 18, 2011 at 4:10 PM, PainterPoker (21.44) wrote:

I wouldn't want to lose any customers over the long run because of a temporary price increase. If you have to charge $2 to keep your customers happy then that's what you do.

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#2) On September 18, 2011 at 4:44 PM, Diagoras (89.30) wrote:

Really, the answer is that it depends. Will the people think that I'm an "evil profiteer", or will they just see me as an honest store owner who was able to provide them with pizza when no one else could, and instead direct ill will towards the power company? How do they view other businesses' reactions to these kinds of events? Will they react to their view of my actions in a meaningful manner? (e.g., people may complain about some service they buy from a provider but not switch, as they don't see a marginal benefit to doing so. In this case, they might not like the price increase, but will continue to buy from the shop.)

 You're absolutely right that consumer emotions matter here, so it's hard to say just from this example, and it would probably be a hard decision in real life. Obtaining the most profit possible involves satisfying people's desires on a marginal basis (providing too much to consumers may be too costly for the potential revenue gain, providing to little may cause a revenue fall), which requires information about the market you serve.

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#3) On September 18, 2011 at 4:50 PM, ETFsRule (99.94) wrote:

This is a question straight out of Game Theory. Your decisions will influence the future decisions of others, and you should prepare accordingly.

In the long term, the customers have all the power. It doesn't cost them anything to boycott this pizza place and go somewhere else. So, take the $800 at your own peril.

I would even argue that the customers in this example wouldn't be acting solely on their emotions if they decided to boycott the pizza place. It's rational for them to boycott, in order to discourage the pizza place (and other businesses) from doing the same thing the next time there was a blackout.

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#4) On September 18, 2011 at 5:06 PM, blesto (32.23) wrote:

Couldn't he be sued or fined for price gouging, depending on the state he's in?

Anyway, that got me doing a Google search and I came upon this interesting view by David W. Meyer

The Virtues of “Price Gouging”

 

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#5) On September 18, 2011 at 7:01 PM, mhy729 (32.20) wrote:

Shouldn't that be "evil free-marketeer" rather than "evil capitalist"?

Also, don't forget what Steve Jobs was forced to do after he tried something like this with the iPhone.  Yes, the customers have all the power.

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#6) On September 18, 2011 at 7:57 PM, whereaminow (20.03) wrote:

This is an entrepreneurial decision that faces any successful business owner, whether he makes pizza or iPads.  Speaking of which, I stopped at the Apple store on my trip to America last month.  The place was packed with customers and eagar sales reps. 

Now, why didn't Apple just start raising the price on all their products?  The answer is because you have to weigh the profits of today against the profits of the future. 

The man out to make a quick buck might just do it, but he does so at the expense of his future revenue.  It is still an economic decision.

David in Qatar

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#7) On September 19, 2011 at 3:35 AM, ikkyu2 (99.27) wrote:

This happened in Manhattan in, I believe, August 2003.  Pizza was indeed $10 a slice.

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#8) On September 19, 2011 at 8:23 AM, devoish (98.62) wrote:

If I was the pizza guy, counting on repeat sales to a local neighborhood with competitors - capitalism says no.

If I was the pizza guy in a small town with no competitors - capitalism says maybe a small increase.

If I was the pizza guy at disneyworld and I would never see these people again - capitalism says bang them.

But I'd rather live in a world where decisions are not entirely guided by fear of their customers, as in the first or second answers, or guided by fear of not maximizing profit as in the third.

I'd rather live in a world where I was secure enough to just be nice to neighbors whose lives had been disrupted.

Please don't ignore that I said "entirely guided" to allow room for something between redistributing wealth exactly equally with no regard for contributions and unfettered capitalism.

Best wishes,

Steven

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#9) On September 19, 2011 at 10:21 AM, eldemonio (98.80) wrote:

I'd limit people to 1 slice each and give the 200 slices away for free. 

Since my credit card machine is down, and more and more of my customers don't carry any cash, I'd have a hard time getting any money out of this pizza crazed mob anyway.

I'd pacify the mob and get the flock out of dodge before the crowd gets unruly and starts breaking my stuff.

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#10) On September 19, 2011 at 10:42 AM, catoismymotor (46.88) wrote:

I know now what I'm having delivered for lunch.

I think I'd give the slices away at no charge. With each slice that walked out the door I'd say, "Don't forget your new favorite pizza shop when the lights come back on." I'd would then apply the loss of revenue for the night against my advertising budget for the next month or two.

Good will goes a long way. It keeps people loyal and honest.

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#11) On September 19, 2011 at 11:54 AM, leohaas (31.96) wrote:

I would not buy any pizza in this scenario. After all, all food in my fridge or freezer would be at risk of spoiling. I'd use my own stove or grill to cook whatever I have left in my fridge/freezer. Perhaps even throw a block party with my neighbors!

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#12) On September 19, 2011 at 12:04 PM, EnigmaDude (93.42) wrote:

If my name was Tony Spumoni and I owned a pizzeria in New York City it would be a front for a Mafia money-laundering operation so who cares what I charge for a slice!

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#13) On September 19, 2011 at 12:42 PM, outoffocus (22.76) wrote:

TBQH I think the store owners choice neglects 1 thing, the effect of demand.  Price is determined based on what people are willing to pay for a good, not what "you think you can sell it for". 

So lets put the scenario another way.  Keep the same scenario but lets say theres a millionaire in line waiting for the pizza.  He gets tired of waiting in line so he walks all the way up to the front and say, "I'm really hungry and I'm tired of waiting in line, so I will pay $10 for one slice of pizza, as long as I dont have to wait in line".  Then what will the store owner do? Well, he could choose to create an "express line" for people willing to pay $10 a slice.  If he decides to capitalize on this, is he a bad person? Or is he merely taking advantage of an opportunity. 

I think the difference between my scenario and yours is your pizza shop owner is merely price-gouging while my pizza shop owner is responding to the market.  Which pizza shop owner will have better results?

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#14) On September 19, 2011 at 2:02 PM, FreeMarkets (90.33) wrote:

Always choose the most profitable option.  Marketing is part of business, so you better know how your customers will react to $6 pizza slices.  You also better know your competition, who may put in a brick oven after this incident and slap a sign outside that says "If we lose power again we will NEVER over charge our customers like Spumoni's!"

That's why I LOVE freedom.  Decisions aren't so simple and profitable today may be out-of-business tomorrow.  No government regulations necessary.

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#15) On September 19, 2011 at 2:05 PM, FreeMarkets (90.33) wrote:

Let me add - what's so FU$%NG sad about our system today is that you can't put out a grill and start cooking for these starving people (at least you couldn't charge for the food), without permits to open a restaurant.

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#16) On September 20, 2011 at 8:05 AM, lemoneater (81.71) wrote:

Neat scenario, Valyooo. Some years back we had a bad ice storm here in SC and power was out in most neighborhoods and businesses. However there was a Duncan Donuts that still had electricity--a little oasis in the midst of a gray commercial landscape. Everyone remained civilized. The power had only been off in our neighborhood for a short time, but there was a long wait on orders. If I remember right, it took my husband and his dad about two hours to get our order filled. The price was just the same as usual.

@ #10 Cato, goodwill is hard to put a value to.

@ #11 Leohaas, I'd bring a huge fruit salad to your block party.

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