Excising the cheapest options

June 13, 2009

Alex Tabarrok wonders why no stores stock cheap (as opposed to expensive) HDMI cables, and Kevin Drum — who used to manage a Radio Shack — recounts his own tale of looking for a simple patch cable:

Last year I made the rounds of every retail store in the area after I got annoyed at the price of a simple Cat-5 network cable, and there wasn’t a single place that sold them for a reasonable price. Not one. It was almost like there was a cartel or something. (And the cartel worked! I didn’t feel like waiting the few days it would take to order online, so I went ahead and bought an expensive one. Their fiendish strategy turned out to be remarkably effective.)

I think there are two very simple explanations of what’s going on here. Kevin hints at the first: if you need an HDMI cable or an ethernet cable or a USB cable, you generally want it now, and you don’t want to faff around with ordering it on the internet and wondering when it might arrive. (Note that Alex’s example of HDMI cables being sold for “virtually nothing” turns out to be one of those examples where next-day shipping — still decidedly less convenient than just walking home with the cable in your bag — costs $30.)

But more to the point, your local retail outlet will quite rationally try to maximize the profit it makes on its HDMI cables. Alex I think is wrong here:

Ordinarily, we would expect competition to push prices down but in this case it seem as if the mere existence of Monster is anchoring high prices everywhere but online.

I think what we’re seeing here has almost nothing to do with anchored expectations. Instead, consider this: most remotely educated consumers will simply buy the cheapest cable on sale, and so there’s a very strong incentive to ensure that item is as expensive as possible.

Why would we expect competition to push prices down? Well, let’s say you’re managing a Radio Shack down the street from a Best Buy. You could, if you were so inclined, start selling HDMI cables at a fraction of the cost of the cheapest cables available at Best Buy. Would that be a good idea? Well, it would get you the business of the kind of people who shop around different stores for the cheapest HDMI cable, and it would improve your reputation as a store which doesn’t needlessly rip people off. On the other hand, people would pretty much stop buying expensive cable from you overnight, and all the associated profits would simply evaporate.

I’ve recently been shopping around for a folding bike — one which (fingers crossed) the security guards at 3 Times Square will let me bring in to the office. There’s a sweet little folding-bike shop in my neighborhood, stocking a pretty wide range of different brands, although they do tend to push Bromptons over everything else. And they don’t stock the cheapest brands. Could it be that the cheaper bikes are simply not very good? Maybe. Or maybe it’s just that if their customers have the option of buying a cheap folding bike for a few hundred bucks, they’ll be much less inclined to drop $1,000 on something else, and the store’s total profits will go down.

I suspect you’ll see the same thing at say kitchen stores: while there might be a big range of pots or knives, most shops selling the high-end stuff will be reluctant to stock very cheap stuff alongside it. Doing so just makes it far too easy for the consumer to decide that the extra cost isn’t worth it.


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