Why don't scarce goods cost more? Evolution.

The economic mysteries of daily life.
March 29 2008 7:05 AM

The Price Is Right

Does evolution explain why we hate to pay more for scarce goods?

Ticket scalping
Ticket scalping

Friends of mine, a husband and wife, once argued over the price of a packet of cakes bought at a convenience store. She complained that the cakes weren't worth the price she had paid. He pointed out that she had bought them—albeit grudgingly—knowing exactly how they tasted and that, therefore, they had to be worth what she had paid. No prizes for guessing which one of them is an economist.

We economists know a lot about pricing, but we tend to be baffled by the way the human race thinks about it. The package holiday offer "Kids go free to Disneyland" is, to an economist, a profitable attempt to charge more to couples with two incomes and no children, who are likely to have more cash to burn. To everyone else, it is an idea waved through unquestioningly—we all like kids, after all.

Advertisement

The presentation of a pricing policy clearly matters—something disconcerting to economists, who can translate all the pricing into mathematical equations and make the presentation go away. It seems to be acceptable to charge a higher markup for fair-trade coffee, organic bread, or lower-emissions gasoline. It is not acceptable for businesses to say, "We are such fans of exploitative coffee, pesticide-laced loaves, and dirtier gas that we're willing to discount them and accept a lower profit margin." Underneath the gloss, the pricing policies are, nevertheless, identical.

The most common puzzle of all, for an economist, is why prices so rarely rise in the face of a shortage. There was a shortage of Wii games consoles last Christmas, Xbox 360s in 2005, Playstation 2 consoles before that, and so on. To secure tickets for a hot concert, you will usually need to go to a scalper, because the regular concert promoters wouldn't dare charge a ticket price that might bring demand down to the level of supply. And when U.S. oil companies raised gasoline prices after Hurricane Katrina, there were howls of outrage—despite the fact that the refining infrastructure was badly damaged and that it was evidently impossible to supply everyone at the customary low price.

I have previously pondered the very clever explanations economists produce to explain why prices do not rise to equalize supply and demand. Perhaps ticket prices are kept low to encourage a memorabilia-buying younger crowd. Perhaps popular restaurants like to have a waiting list for reservations because it adds to the cachet. Even I am starting to feel that these explanations sound strained. Are these side benefits really enough to outweigh the lost revenue from higher prices?

The intuitive explanation, of course, is that we irrationally object to high prices, even when the alternative is rationing, long lines, and uncertainty over whether we can buy what we really want.

That is discomfiting for economists, but we might at least take solace in the idea that even though there is no immediate logic to a belief in the just price, there is at least an evolutionary logic. David Friedman—son of the late Milton Friedman and a superb communicator of economics—has argued that our ancestors would have evolved in an environment where most transactions were one-on-one bargains. A hard-wired refusal to accept something other than the customary price would, in such a setting, be an advantage. Anyone who reacts to a price rise with irrational rage turns out to be a strong negotiator.

Our stubborn preference for a just price evolved in a setting that is no longer common; but evolution does not respond quickly, which may be why we still shriek with outrage at price hikes. It would also explain why ticket scalpers still prosper.

TODAY IN SLATE

Foreigners

The World’s Politest Protesters

The Occupy Central demonstrators are courteous. That’s actually what makes them so dangerous.

The Religious Right Is Not Happy With Republicans  

The XX Factor
Oct. 1 2014 4:58 PM The Religious Right Is Not Happy With Republicans  

The Feds Have Declared War on Encryption—and the New Privacy Measures From Apple and Google

The One Fact About Ebola That Should Calm You

It spreads slowly.

These “Dark” Lego Masterpieces Are Delightful and Evocative

Crime

Operation Backbone

How White Boy Rick, a legendary Detroit cocaine dealer, helped the FBI uncover brazen police corruption.

Politics

Talking White

Black people’s disdain for “proper English” and academic achievement is a myth.

Activists Are Trying to Save an Iranian Woman Sentenced to Death for Killing Her Alleged Rapist

Piper Kerman on Why She Dressed Like a Hitchcock Heroine for Her Prison Sentencing

  News & Politics
Politics
Oct. 1 2014 7:26 PM Talking White Black people’s disdain for “proper English” and academic achievement is a myth.
  Business
Moneybox
Oct. 1 2014 2:16 PM Wall Street Tackles Chat Services, Shies Away From Diversity Issues 
  Life
Outward
Oct. 1 2014 6:02 PM Facebook Relaxes Its “Real Name” Policy; Drag Queens Celebrate
  Double X
The XX Factor
Oct. 1 2014 5:11 PM Celebrity Feminist Identification Has Reached Peak Meaninglessness
  Slate Plus
Behind the Scenes
Oct. 1 2014 3:24 PM Revelry (and Business) at Mohonk Photos and highlights from Slate’s annual retreat.
  Arts
Brow Beat
Oct. 1 2014 9:39 PM Tom Cruise Dies Over and Over Again in This Edge of Tomorrow Supercut
  Technology
Future Tense
Oct. 1 2014 6:59 PM EU’s Next Digital Commissioner Thinks Keeping Nude Celeb Photos in the Cloud Is “Stupid”
  Health & Science
Science
Oct. 1 2014 4:03 PM Does the Earth Really Have a “Hum”? Yes, but probably not the one you’re thinking.
  Sports
Sports Nut
Oct. 1 2014 5:19 PM Bunt-a-Palooza! How bad was the Kansas City Royals’ bunt-all-the-time strategy in the American League wild-card game?