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Geico ad beautifully illustrates the problem Roy Childs pointed out to me 40 years ago.
"You economists are so careless in your thinking. You use so many metaphors without really thinking about them."
So said my friend, the late Roy A. Childs, Jr., in one of the first conversations I ever had with him. This was early in our friendship, while I was in graduate school at UCLA.
Already a strong believer and defender of economics, I reacted defensively. "Ok," I said, "name one metaphor we use that is unjustified."
"Auctions and bidding," he said. "You economists often say 'So consumers bid up the price of goods.'"
"What's wrong with that?" I said.
"What's wrong?," said Roy. "What's wrong is that they don't."
I went silent for a few minutes and then noodled it over the next few days. I decided he was right. I quit using that metaphor. Maybe I've slipped a few times, but very few.
Here's a good way to remember not to use the auction metaphor: the Geico ad about how auctioneers would make bad sales clerks.
why is the analogy wrong?
Watch the ad.
I believe that the analogy is incorrect because consumers rarely 'bid' against one another per se, but only agree to buy or not buy at the given price. For example, I don't bid against other consumers to buy bread, but only decide how many loaves to buy (if any) at the given price.
Think multi-unit, usually uniform price Dutch auction. Though that, in and of itself, probably indicates that the metaphor requires a broader understanding of auctions than is common.
If the second guy does not bid, the price would have not changed. Now, you could argue that the premium paid by the winner should be split between the auctioneer and the first shopper since the guy who won the auction is not just buying groceries but also the right not to have to shop for those groceries. In any case, having watched the video, I still ask why the video might prove the analogy wrong. Given that ALL analogies break down at some point, I wonder why one would avoid the analogy.
I would answer you, but I’m going to leave it to other commenters.
Though quite possibly my confusion is that my first exposure to bidding came from watching my father haggle.
At your local Safeway the head butcher notices that the cuts of beef he puts out in packages disappear quickly from the refrigerated cases. He calls his wholesaler and orders more beef.
The wholesaler calls his supplier to order more to meet the increased demand from the retailer. Eventually the message gets to the cattle auction....
How is it illegitimate to say that consumers bid up the price of beef?
I'm not seeing it either.
When I go to a local event (sports or theater), the parking lot goes from $5/day to $20/day. "Event pricing", they call it.
Why does it cost more?
Sure, when I pull in, I'm not literally bidding on the space with the person behind me.
But you can bet, if the lot was empty, the price would be lower. And you can bet if the guy was turning away cars show after show, the price would go up.
The rate may have been set at a flat rate before I got there, but it was done in anticipation of a virtual/imaginary auction. There doesn't have to be a literal auction, for consumers to be bidding up the price.
Nobody bids prices up in a dutch auction.
No - the price falls until someone (or enough someones) pay it.
Which is exactly how books, movies, electronic devices, clothing, automobiles etc. are sold to consumers.
The confusion stems from the fallacy of division. No, a consumer at a checkout counter doesn't bid up a price. But 1000, or perhaps just 100, consumers may bid up a price without intending to simply buy buying up all the inventory. The store manager, and hence the product manager back at headquarters, will figure out that the price should be raised from the fact that supplies keep running out.
I'm not sure I agree with you that this is the way goods are sold to consumers. Some suppliers start high and drop their price as you said, but some start low and raise their prices until their inventory leaves the shelves at a sustainable rate.
But either way, my point was that if a Dutch auction is the correct analogy, then customers bidding up the price is most definitely not a correct analogy. (Since dutch auctions don't allow bidding up)
@Patrick R. Sullivan,
Same thing I said to GabbyD: watch the ad.
Um, David, in the ad the price of the bag of groceries gets bid up from $23.50 to $26.
@Patrick R. Sullivan,
Exactly. And is that what happens when you go to the supermarket? Are you bidding for your groceries?
but david, its an analogy/metaphor, not a precise description of the mechanics of price changes.
I think you and your friend think analogies ought to be the same thing as the thing the analogy pertains to. I dont think thats right.
I think you are bidding for your groceries, or at least it's still a good analogy. The grocery store is announcing a given bid, and many people are willing to pay it. If the grocer tries raising the price, but demand hasn't risen, then consumers are unwilling to raise their bids (or at least insufficiently many are willing, such that the grocery store's profits do not rise), and the price falls back down to equilibrium. Similarly, if demand goes up, consumers buy more aggressively, and the grocery store is able to raise prices.
It's not literally bidding, but that's why it's a metaphor. It's like bidding, and just like in an auction, when everyone increases their willingness to pay for the good in question, the price rises. (It helps to think of the auctioneer as constantly bringing a stream of the good to the auction, rather than selling off a one-of-a-kind item once and for all).
So I guess I'm still in the "it's a decent metaphor" camp. I don't see the problem.
A few years ago, I had 16 identical hockey cards for sale. They were truly identical: came out of the same case, slabbed by the same company, same grade.
I auctioned the first one on eBay. $16. I auctioned the second one. $15.50. The third one: $16. The fourth one: $17.
After that, I listed the rest with a fixed price of $16, and they sold.
Even for the cards that sold at a fixed price, isn't it true that buyers "bid up the price" to $16, just as they (literally) did on the first four?
I just sold at the what they bid the price up to, even though, as a massive group of strangers, they may not even have realized they were participating in bidding up the price. In fact, some of the collectors bidding up the price never even visit eBay!
Another way I think about it: if I had sold the cards at (say) $10 instead of $16, they would have been snapped up immediately, and quickly sold for a higher price. The subsequent buyers would *literally* bid up the price to $16, as they approached the $10 buyer and asked if he wanted to sell.
The way I think of it: if the supermarket auctioned off their ground beef, the winning bids would be the customary price (subject to random fluctuation). In real life, that's what happens invisibly: customers everywhere are bidding up the price, but implicitly. The store knows in advance what the winning bid will be, and sells for that price.
So, I don't get why the analogy is wrong. If you mean that the store doesn't auction off every grocery on the spot like in the ad, sure, of course not. They set their prices to the *expected value* of the winning bid, not the actual winning bid at 4:37pm on January 28. But, close enough, no?
Am I wrong about this?
I have to say I'm baffled by the point David Henderson thinks he's making. As are others, because, yes, by the act of purchasing you are 'bidding'. Maybe we should review Bastiat's lesson on the 'seen v. the unseen'?
Or, better, read Stan Liebowitz's explanation of why haggling and auctioning have largely disappeared in modern society (p. 87, The Evolution of the Current Pricing System) in Re-Thinking the Network Economy.
As Stan points out, auctioneers make lousy sales clerks because they're way too costly to use. Which I'm sure David knows, because he has contributed a blurb praising the book, on its back cover.
Anyone that thinks a grocery store works like an auction has never been to an auction. It isn't a good metaphor.
I have never had a clerk ask everyone else in the store over the intercom system if anyone would like to pay more than me for a 3lb steak, but I ask the entire crowd over a high powered PA system if someone would like to pay more than $107,000 for a comic book before I sold it to the high bidder.
I have never had a clerk at the store tell me that he was selling some can goods apiece times the money and that I was going to have to by all 200 of them, but I have sold many items that way including sets of crystal where the high bidder had to multiply his bid by 35.
I have never had the clerk try to sell me the right to choose which orange I want or how much I will have to pay for an an orange, but I sell choice at my auction all the time.
I've never heard of a grocery store selling its beef by the hundredweight and raising the price by dimes and quarters to the buyers in machine gun staccato style, yet that is how beef gets to the grocery store.
No a store is a store and an auction is an auction and that is why the commercial is funny.
Anyone that thinks a grocery store works like an auction....
No one is arguing that grocery stores operate like an auction. The argument is whether or not consumers bid on goods and services. Their purchases have that effect, it's just hidden (and subtle).
If economists are to avoid using metaphors because they aren't immediately obvious, well...there go the Laws of Supply and Demand.
Yeah I still don't get it.
"No a store is a store and an auction is an auction"
Is a metaphor is a metaphor?
Nobody claimed it was a literal auction. The claim is that it operates like an auction, and that conceptualizing or modeling it as an auction provides useful insight.
The quote is "You economists are so careless in your thinking. You use so many metaphors without really thinking about them."
So if you think this is a bad metaphor, I'd like to know why.
Cattle are literally auctioned. And if you don't think that the auction price is ultimately being driven by the price consumers are paying at the store, I don't know what to tell you.
"I have never had a clerk at the store tell me that he was selling some can goods apiece times the money and that I was going to have to by all 200 of them"
I buy Cheerios by the box, not by the ounce (or by the individual Cheerio). The per ounce price is listed though, so arguably I do have to buy all of the ounces in the box. Heck, much like bidding on a storage unit, I don't even get to peer inside of the box of Cheerios before I buy it...
Or.... sometimes bundling is efficient, auction or not... and bundling is not unique to formal auctions...
I would say that anybody who doesn't see the validity of the auction analogy has never been to an auction. Having been to quite a few, I am still waiting for someone to explain why the bid thing is a bad analogy. In fact, having gone to auctions, I even feel the analogy is even stronger than most people think.
And if you don't think that the auction price is ultimately being driven by the price consumers are paying at the store, I don't know what to tell you.
You don’t need to tell my anything, Jay, because you set up a straw man. I know that an increase in demand, given an upward-sloping supply curve, causes the price to increase. That doesn’t mean that consumers are bidding.
You told Rob Weiman, "I would say that anybody who doesn't see the validity of the auction analogy has never been to an auction.”
Check his link. He’s clearly been to an auction or two. So your statement is wrong.
Do we not see consumers bidding up the price of goods a la "price gouging" during natural disasters?
It makes me think that bidding has already occurred to the point of equilibrium given "normal" supply and demand in a given market. Any "normal" fluctuations are minimal and are absorbed throughout the process since there's a cost to changing the sign on a good or service every day/minute/second for consumer information conveyance. (There's also a beneficial role that sticky prices have in consumer purchases. What would life be like if every purchase fluctuated like the purchase of stock?) But when something tips the balance outside "normal" market expectations, then consumer bidding takes a more noticeable role in finding the new equilibrium point most quickly.
Essentially, in a mature market (groceries) consumer bidding doesn't move the needle enough to make a difference. But in an immature/off-balance market, bidding is more noticeable and has greater impact.
Also, what about Ebay when thinking about this metaphor?
Is my understanding/logic flawed?
@David R. Henderson
No, it would not change the validity of my statement. Why would you think it does?
@David R. Henderson
Of course I am being a bit technical since the statement I said I would say is wrong but at the time I wrote it, I would say it. Still, I am confused as to why anyone, especially one that has been to an auction, would think it is a bad analogy.
Still, I am confused as to why anyone, especially one that has been to an auction, would think it is a bad analogy.
If the Geico ad doesn’t clear up your confusion, then, I fear, nothing will.
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