Bryan Caplan  

The Consumer Gratitude Heuristic

Why Predatory Pricing is Highl... Antiestablishmentarianism...
In the real world, prices often seem far above marginal cost.  Yesterday, for example, I bought a pair of tweezers for $14.99.  But it's hard to see how the marginal cost - metal, electricity, transportation, miscellaneous - could even reach $1.00.  That's a markup well in excess of 1000%.  If you're steeped in the perfectly competitive model, where price always equals marginal cost, it's easy to feel "ripped off" whenever you make a purchase.

The obvious rebuttal is to point to all the fixed costs of production.  While the marginal pair of tweezers costs pennies to produce, the first pair plausibly costs millions.  Factoring in fixed costs, tweezer producers are probably roughly breaking even.  So how is that a "rip-off"?

But on reflection, this greatly understates what a fantastic deal we consumers get.  To see why, I often invoke my Consumer Gratitude Heuristic.  Here's how it works.  When I bought my tweezers, I asked myself, "How much would it have cost me to make these tweezers all by myself?"  On reflection, the answer is... more than my lifetime wealth!  I'd have to spend years learning the basics of mining and metallurgy to acquire minimal competence.  And after a lifetime of training, I still probably wouldn't have the skill to make a single tweezer as good as the one I bought at Wegmans.  $14.99 versus more time than I have on Earth: that's what I call a bargain.

Nor is this an exceptional case.  When I apply my Consumer Gratitude Heuristic, the modal answer is: a lifetime of single-minded toil would fail to yield a product comparable to what I buy at the store.  One day on the lake might yield some fish as good as Wegmans.  With years of effort, I might be able to grow some vegetables or bake some bread as good as Wegmans.  But most of the items I buy are simply beyond the limits of my potential skill. 

Taking your wonderful life for granted is the path of least resistance.  It comes naturally.  But it's a terrible mistake.  I have so much to be grateful for - and so does everyone else lucky enough to live in an industrialized, commercial society.  My Consumer Gratitude Heuristic helps us see - and live - this great truth.

COMMENTS (18 to date)
Joel writes:

You can tell all the stories you want about why you're happy to have paid $15, but a pair of tweezers *is* $1 at e.g. Walmart.

Matthew Moore writes:

Whenever I start to feel ungrateful, I just remind myself that dental anesthesia is a thing now

Daniel Klein writes:

I share the sentiment, but three suggested changes:

1. I'd say appreciation or contentment or satisfaction, not gratitude. To whom exactly are you grateful? I suppose "grateful" is fine if you knowingly talk allegorically, and your listeners understand that.

2. I'd contrast with what you'd be willing to pay if it were you're only way to get a tweezer, not with the full cost of making a tweezer yourself.

3. Why introduce the word heuristic? Dump that.

Don Boudreaux writes:

Bryan is correct: we who live in modern society have far more to be grateful for than we typically realize. Each of us should indeed strive to be more appreciative of our good fortune.

john hare writes:

I am grateful for the ability to eat any type food I want an time I want. I'm a chow hound and grew up on one course meals. Supper was often beans or potatoes or rice, and not fancy either.

Not to the extent of Bryan, but I am grateful to live in an affluent society.

Seth writes:

I agree with all of what you wrote, but I'm even more grateful for competition. The price the competition charges is also a helpful benchmark in addition to considering the toil you saved by not making it yourself.

Matthias Goergens writes:

Your heuristic tends to overvalue manufactured products compared to services.

Ie I can make a decent meal, and a bit of training would make that even better. Doesn't mean I'm less grateful for food than for tweezers.

Matt C writes:

I agree; gratitude is not the right word. Neither Wegmans nor the manufacturer produced the tweezers for any reason than their own self-interest.

We do owe gratitude towards our circumstances. And we should never forget about the tremendous value gained through exchange.

Thaomas writes:

Bryan, by your standard, the folks in North Korea should also be pretty darned grateful. Even the most benighted complex modern society produces things that are impossible for a band of hunter gatherers, much less a solitary hunter-gatherer.

Rich Berger writes:

I don't think I would pay $15 for tweezers, but I am thankful for the marvelous products the market offers.

But I feel grateful in a more fundamental sense. Psalm 118 - This is the day the Lord has made; let us rejoice and be glad.

IGYT writes:

Joel's observation that you can buy $1 tweezers at Walmart indicates you probably underestimate the marginal cost. You most likely bought those tweezers at something like an airport kiosk. Much of the cost in that case is the value of the scarce shelf space, placed where people in a rush and with real money at stake suddenly realize they need something. That pair of tweezers could sit there a year before it happens be what is needed. I can easily see how that value could close in on $15.

Rich Berger writes:

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Duncan Frissell writes:

Or you could buy cheaper on Amazon. Get closer to marginal cost.

Jesse C writes:

Joel, don't be naive! Walmart's cost is probably $2, but they're going to squeeze (pun intended) the competition out until it's just them selling tweezers, and then they'll jack up the price to, say, $5100 or something, and we'll all be forced to pay it.

That's their business model. I know it's true, because we've been hearing these warnings for decades - it's just a matter of time before they start jacking up all their prices.

No joke, a colleague actually made this argument the other day about Walmart. He's a commodities trader. It was hard not to facepalm.

Rob writes:

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Average Radical writes:

Search YouTube for "TED Thomas Thwaites - How I built a toaster -- from scratch" - Somebody tried!

Sheldon Richman writes:

This is how Bastiat looked at things. He said all exchange is an exchange of services, with the test being "toil avoided."

Justin writes:

Unfortunately good tweezers cost aren't cheap. They typically require a lot of manual input and cannot be run lights off like the iconic $2 drugstore tweezers.

I find this post a bit obtuse because it ignores the market. Why would I need to learn mining and most of the metallurgy required when I can easily buy sheet stainless steel on the market and take advantage of the knowledge and services of others? Furthermore the tools required to make them and the skills required are relatively easy to learn and inexpensive, all the equipment required could be purchased for under $20k new.

I feel this misses the prime lesson of the iconic piece "I, Pencil" where we are shown that ultimately complete knowledge of how to produce a product is not required because it can be done through cooperative action and the market.

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