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From: DECWRL::"Love-Hounds@gaffa.MIT.EDU"
To:   Love-Hounds@EDDIE.MIT.EDU 
Subj: How is a "fair" price determined? 

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The text of your failed mail message follows:

Really-From: "Andy Gough, x4-2906, pager 420-2284, CH2-59" <AGOUGH%FAB6@sc.intel.com>
 
 
>Date: Thu, 20 Dec 90 11:10:23 PST
>From: derek%sunstroke@sdsu.edu (Derek Langsford)
>Subject: Re : Variable Pricing
>
>Andy Gough stated:
>
>>     You also say, "The only justification for such prices is because it is
>>what the market will bare.  I personally believe that consumers deserve more
>>respect."  I wonder what alternative to the free market system you are
>>proposing?  If you were EMI, or an owner of a record store, what policy would
>>you use to price the box set?  Would you sell them for $125 when you could
>>sell just as many for $175?
>
>I do not advocate a completely free market. And no I am not a Communist.  
>There has to be some regulation or we'd be choking on polluted air as we die 
>of poisoning from unregulated products.
 
Well, yes, one doesn't want a completely free market, as it can lead to
undesirable things (externalities).  Child labor, for example.  But, we're
talking about a record store!  A simple merchant.  One wants a free market
in this case.
 
>  I think there should be a balance 
>between the free market and regulation.  I am not going to suggest what that 
>balance would be.
 
Fair enough.  
 
>  Ideally if I were running a business I would strike a 
>balance between making a fair profit to maintain business and perhaps growth 
>but I would not try to rip off the customer.  It is likely I probably would 
>not stay in business long, I suppose.
 
Ah, but what is a "fair" price?  As a buyer, one is going to want the lowest
price possible (free, of course).  As a seller, one is going to want to obtain
the highest possible price.  This is worked out by the buyers' demand curve
and the suppliers' supply curve--our old buddies supply and demand.
 
So I assert that whatever price paid by the buyer is, for that buyer, a 
"fair" price.  Otherwise, why would he have bought it?  No, the buyer determined
that it was a fair exchange: his money for the product.  Any dissatisfaction
after the sale at paying too much is normal--everyone would like to pay as
little as possible, right?  BUT IT WAS BOUGHT!  Again, the buyer determined that
it was a fair exchange.
 
>  I think adequate profit for the boxed 
>set should be approximately the same percentage that is made on other regular 
>import CDs.  Cost of a normal import is on average $16 to a store.  It sells 
>for around $20.  Thus 25% seems appropriate. At $125 cost I would charge 
>approx $155.  That is a lot cheaper than what most stores charge in the US.  
>Anything above that is excessve profit making IMHO. Extra shipping costs to 
>the store might add a little extra so perhaps $160 is also fair.  Still, this 
>is far less than the average US price.  I commend those who are being 
>competitive with this price.
 
"Excessive profit"?  Profits are GOOD.  "Excessive" profits are even BETTER.
One should feel comfortable with PROFITS--they are essential to our economy.
 
>I believe that establishing a good relationship with a clientele and expansion 
>of said by word of mouth due to fairness and good service is ideally how a 
>business should be run. 
 
Well, there is really no economic model for this.  This falls into marketing
and accounting.  Marketing in the sense that you would pass the benefits of a
price reduction (price promotion) to your customers in order to generate more
business.  Accounting in the sense that you could earn the same rate of return
on your investment by charging a lower price and turning over your inventory
faster.  
 
>In the UK I am convinced that CD prices are artificially high due to excessive 
>profiteering by various links in the chain from manufacturer to customer.
 
Sigh.
 
 
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Subject: How is a "fair" price determined?
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