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Real World Competition and Technology

The title of an article "The Wall Street Journal was "Pricing of Products Is Still an Art, Often Having Little Link to Costs." In this article, the following cases were cited:

Vodka pricing: All vodkas are essentially indistinguishable - colorless, tasteless, and odorless - and the cost of producing vodka is independent of brand name, yet price differs substantially.

Perfume: A $100 bottle of perfume may contain $4 to $6 worth of ingredients

Jeans and "alligator/animal shirts: The "plain pocket" jeans and the Lacoste knockoffs often cost 40 percent less than brand-name items, yet the knockoffs are essentially identical to the brand-name items.

a. Do these difference undermine economists' analysis of pricing? Why or why not?
b. What does each of these examples likely imply about fixed costs and variable costs?
c. What do they kiely imply about costs of production versus cost of selling?
d. As what type of market would you characterize each of the above examples?

Soft-drink companies pay universities for the exclusive "pouring rights" to sell their products on campus. In a recent deal, the University at Buffalo signed a contract with Pepsi for $200,000 per year limiting on-campus soft-drink sales to only Pepsi.

a. Why would Pepsi agree to pay such a fee?
b. What would likely happen if there were no pouring rights on campus?
c. Is the sale of pouring rights beneficial to students or harmful to them?

Solution Preview

a. Economically speaking, price is defined by equilibrium in the market, or what buyers are willing to pay. Defined this way these examples do not undermine economics. The more detailed models of pricing are only generalities and are not expected to be applied to every situation.

b. Vodka: Price is based on brand name, with costs affected by advertising. This is fixed cost. Variable costs are probably not a factor in pricing.
Perfume: Variable costs include ingredients, bottles, and labor. The other variable costs may be the reason for the high price, or there could be high ...

Solution Summary

Pricing of goods in the real world and how it differs from economic theory; Knockoff pricing and pouring rights.