Excising the cheapest options

By Felix Salmon
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.

Comments
13 comments so far

Felix, you probably won’t need an HDMI cable for your bike, but if you do I suggest you look at the 2 meter job that Amazon sells for $5.50 (free shipping with Amazon Prime) or 18 cents (plus $2.99 shipping at a dozen Z- shops). An educated consumer is Jeff Bezos’s best customer….

Posted by maynardGkeynes | Report as abusive

Isn’t this the direction every brick-and-mortar store selling non-perishable goods needs to go in? If I’m willing to wait 3-5 days, there is nothing I can’t get cheaper on Amazon, Monoprice (for my cabling needs), or something similar. So the stores only exist to overcharge impatient people.

The fuzzy ground are the bike, clothing, and similar stores where you really want to try it out first, but you might buy it online for less. There is money to be made in finding a good solution to that one.

Posted by David | Report as abusive

Much better than a folding bike is a unicycle. Here’s a link to a decent one with some helpful books, if you can’t ride one, although incredibly intelligent people seem to be able to ride them almost instinctively:

http://www.amazon.com/Torker-Unistar-Uni cycle-Dark-Metallic/dp/B0016MZX6W/ref=sr _1_16?ie=UTF8&s=sporting-goods&qid=12449 40545&sr=8-16

There seldom stolen. For some reason, instead of just carrying them off, most thieves try to escape riding them, find that they can’t, and simply leave the unicycle behind.

Also, if you can learn to ride one wearing a bear costume, you’ll find that you can make some extra money on weekends and holidays. You’ll certainly make enough to no longer have to worry about buying a cable.

I’m glad that modern economists are so productive, spending as much time on the price of a cable as Ricardo did in explaining rent. That’s progress.

That should say “They’re seldom stolen”, proving that I can’t ride a unicycle, or write well in little boxes.

i would agree with don on the unicycle — another advantage is that they are smaller, so your chances of being hit are less.

the other question is why, given a competitive market for jobs, employers aren’t competing to give you bicycle parking.

Posted by q | Report as abusive

My husband and I have been riding relatively inexpensive Dahon’s for the past year (mine cost $250; his $450–he’s 6’5″ and required a stretch model) and they’ve been fantastic.

I’m an avid mountain biker and ride my Dahon hard–it’s done a fantastic job and has been pretty much maintenance free. I fold it and haul it up and down 4 flights of stairs each day with no problems; both our bikes have the full complement of fenders to protect our clothes and racks to hold our work stuff. I even have a really appealing little pedestrian bell.

Seriously–I wanted a Brompton, but didn’t want to wait umpteen months for one to be delivered at the time; it turns out my Dahon works infinitely better than any of my friends’ more expensive bikes, with the result that I actually USE mine, whereas they do not.

Posted by Anne | Report as abusive

It would scare me to ride a bike in a city (but then, it would scare me to drive in a city too). Is this actually a reasonable mode of transportation on a crowded city street? How does it work?

Posted by Curmudgeon | Report as abusive

Actually Walmart and Target both sell HDMI and Ethernet cables for at least non-extortionate prices, vs. the big box gadget places which as you point out sell Monster and Belkin priced for ignorant sheeple.

Posted by Peter Bailey | Report as abusive

I recommend the Dahon also. Mine was $450 and it’s been very reliable, not to mention that I’ve never had a problem taking it to my office. There are lots of stores in Manhattan that have them in stock, but not all stores have them.

Posted by Jack | Report as abusive

Hey felix!

I’ve been commuting on a Montague CX folding bike for the last few years. It folds up compactly and rides smoothly. I got it for about $500. You should definitely check them out (www.montagueco.com).

I don’t know how this affects your theory, but the most convenient and cheap place to buy HDMI cables that I have found is the Apple store. I think they have them for $20, in stock.

Maybe because Apple has strong pricing discipline on their main product lines?

Posted by jake | Report as abusive

There is a long-term issue at stake as well. As consumers wander in with their iphones, etc. and as they shop on the net more, they’ll feel that Best Buy is ripping them off. I had to buy an HDMI cable at that moment, couldn’t find one for less than $30 at Best Buy, took it home, looked up the prices on line, found Amazon sold them for peanuts, carefully unpacked the one from Best Buy, used it, and then repacked it carefully and returned it to Best Buy when the one from Amazon arrived. Moral: I learned to distrust Best Buy. If my experience becomes more common, then more people will be driven away from a retailer who overcharges and toward the net.

Posted by jonathan | Report as abusive

This theory makes pretty good sense, but it still seems like “the power of small” would kick in at some point and someone would offer the cheaper cables to undercut the bigger competition that is only offering the pricier ones. Sort of like how collusion supposedly can’t work because someone will take advantage of the price gouging by pricing below the colluded price. If these cheaper cables exist, someone must sell them, right?

Posted by Rhys | Report as abusive
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