What does "What the market will bear" mean?

Great Debates
1

I dislike this term. It’s equivalent to “I’ll charge whatever I feel like and if you’re stupid enough to pay it I’ll laugh all the way to the bank”.

What’s unsaid is that there’s an implicit understanding that a person has a right to make a profit and a living but that the profit margin should be fair and reasonable (I can already hear some of you saying “fair to whom”).

People today have a little more savvy about things. Like we know soda costs pennies per serving at fast-food restaurants; that plastic toys cost next to nothing to be pressed out in China.

Knowing this, when we pay $1 for a soda at McDonalds we don’t flinch. Considering labor costs/overhead/etc this seems “reasonable”.

But what happens when the market learns that the wholesale cost of something drops dramatically?

Is it reasonable to expect the retailers to drop their prices; that is to share the savings?

I believe that when someone doesn’t do this that they are breaking the implicit contract stated above.

Recently we saw a major music conglomerate drop its wholesale CD prices by a good percentage. This is “supposed” to lead to the dropping of retail prices and boost sales and fight piracy.

But would it be wrong if all music retailers decided not to pass this savings on, thus boosting their own bottom lines?

I say yes it would be wrong.

What do you all think?

2

All it would take wouldbe for one retailer to pass on the savings, then he would steal some customers, getting more business, more turnover and more profit, in spite of a smaller margin - the other retailers (who had decided not to pass on the savings) would have to rough out a quiet period or drop their own prices to compensate.

For competing retailers to agree not to drop their prices would be a cartel, wouldn’t it?

3

Aside from your pejorative phraseology, what is fundamentally wrong with the concept?

Yes it is reasonable, but not for the purpose of “sharing the savings”. Retail markets want to capture greater market share. If wholesale prices fall, retail prices fall so that this can happen.

Imagine that hamburger prices fall today. Don’t you think that Burger King is going to lower it’s retail costs tomorrow in order to lure some MacDonalds customers?

4

I think my point is that we have a built it perception of what’s a fair profit. If something changes that equation, I expect change in price.

As to your example: if beef prices were to plummet to 1/10 of their current levels, I damn well expect McDonalds and Burger King and everyone else to drop their burger prices, significantly.

If not, I will choose not buy, as I will feel that I am being gouged.
I am “comfortable” with a $2 price for a Big Mac, knowing what I know about the price of beef. If beef drops big-time, I will expect to see that drop in fastfoods stores. I will no longer perceive $2 for a Big Mac as “fair”.

5

Exactly- you will CHOOSE not to pay more than a certain amount that you consider reasonable. And if enough people act as you do, suppliers will have no choice but to drop their prices.

“What the market will bear” cuts both ways. If you think it’s “unfair” that there are suppliers out their who’ll charge a lot more for a product than you think is warranted, tell me- do you ALSO think it’s unfair that suppliers sometimes have to slash prices to ridiculous levels just to get rid of merchandise? Do you think it’s “unfair” that suppliers sometimes have to sell merchandise at a loss?

After all, using your standard, doesn’t the consumer have a moral obligation to give a “reasonable” amount of money to suppliers?

6

Competition should make any lower costs get to the final costumer. If there is no competition thou… they will only lower prices if they think that will attract more costumers.

It works both ways... if you dont buy something expensive and most people follow suit... then prices remain steady or drop. When you consume you are "voting" in a sense on what is considered appropiately priced.
7

I happen to own a few rental properties, and I set my prices strictly on what the market bears. The price can vary considerably depending on a million variables, but sometimes it’s a renters market and sometimes it’s an owner’s market.

If the teeming masses of renters out there would all agree to pay me a premium during the rental downturns, I would be happy to give them discounts when the rates go back up. That’s not going to happen so the owners base their prices on what the market bears, and the renters decide what’s fair based on the same thing.

All things considered, it works out pretty well.

I suspect that the price of beef has a rather small contribution to the overall price of getting a hamburger to a customer.

8

Hey, capitalism! That’s what makes our country great!

I disagree with your suggestion that we have a built in perception of what’s a fair profit.
How is profit calculated and by whom?
Do you consider profit to be some kind of function of incremental value added?
Is it fair that some types of intellectual input result in more profit than physical labor?
Is it fair that persons/entities can profit from the provision of capital, rather than their physical or intellectual exertions?

9

Several things wrong here. First, a person does not have a right to make a profit. He has a right to try to make a profit. Second, people hardly ever agree on what is “fair and reasonable”, so this criterion is meaningless.

Really, this is basic economics. If demand for a good is inelastic, then a lower price won’t correlate to a large enough increase in quantity demanded - the seller makes less revenue. The cost of the good supplied does not matter here.

“What the market will bear” simply relects that at a given price, there will be some quantity (maybe zero) demanded for a good.

10

I think there should be a government agency that determines what is and is not “fair” profit.

But like one poster said, it cuts both ways. So if a retailer makes an unpopular car or clothes or something, then the retailer should be guaranteed a “fair” profit, instead of being forced to sell it at a loss. Maybe there could be a gov’t warehouse full of junk that no one else wanted.

Actually the concept of “implicit contract” that the supplier will only charge a “fair and reasonable profit” is one that I have never come across before and is ridiculous.

The idea is that high profits attract competitors. So no you don’t have a “right” to expect that suppliers will only demand a “fair” profit. You should “expect” that competition will exist in any market, I suppose. I’m not sure if that’s a “right”. Given that health care is a “right” to some, I wouldn’t doubt that you’d think it is.

What’s the “fair” profit for Madonna or some other “star” to charge for her crappy (IMO) music? Given that it costs her almost nothing it should be almost free, no? The fact that she’s worth probably hundreds of millions of dollars suggests that she and other musicians, athletes, et. al, are charging “unfair” profits, don’t you think? Quick, bust her.

11

So I gather from your responses that some of you are business people. Good, you are the ones I really wanted to hear from, and I am interested in your responses.

But I hear another phrase “supply and demand” being used that I feel also has lost its meaning.

I (and I expect) many to take the phrase as meaning
big supply - low demand == low price
low supply - big demand == big price

Fine. So explain why this seems to have been corrupted into
any demand (even one) == price increase.

Example: I go to a antique store and I see a thing that I like to collect. It’s obviously been laying there for a while (coated in dust) and it has a price of $10 on it. I’m not sure I want it so I leave. The next day I decide I do want it, but not wanting to make the trip for nothing, I call to see if the thing is still in the store. (It probably wasn’t sold since it sat there for so long,but I really don’t want to get there and be surprised that its gone).
I’m told it’s there. I go to the store and now find a $20 price tag on it.

This has happened to me more than once, and I’ve wanted to kill the merchant for IMO their unbelievable greed.

You have me willing to take this albatross (old inventory) off their hands and they raise the price now that one person has expressed interest in it.

Don’t you dare try to tell me that the demand of 1 == true demand. That’s BS.

Well business people, what gives here; did I just have the misfortune in dealing with a couple of pricks (whom I told to go fuck themselves for their shitty business practices, and shared my experiences with colleagues so that they do not patronize they assholes either), or do you feel they’re justified?

12

I think they should charge whatever the market will bear, give the supply/demand situation. Believe it or not, I’m not kidding.

13

There’s no implicit notion of “fairness” in market pricing. The idea is that basically prices will settle out to some kind of equilibrium based on what the demand is for it. What the “Market will bear” is the highest price that can be charged without losing sales.

Basically, the reason that say, some kind of hamburger is $2.00 is that’s as much as people are willing to pay for that sort of hamburger. If the price goes higher, people will find a substitute- other types of hamburgers, tacos, fish & chips, tv dinners, etc… because more expensive hamburgers aren’t worth it. The key to the whole thing is to make your hamburgers for significantly less than that $2.00 and sell them for as close to that without getting over that amount, because above that amount your sales will drop.

14

There’s no implicit notion of “fairness” in market pricing. The idea is that basically prices will settle out to some kind of equilibrium based on what the demand is for it. What the “Market will bear” is the highest price that can be charged without losing sales.

Basically, the reason that say, some kind of hamburger is $2.00 is that’s as much as people are willing to pay for that sort of hamburger. If the price goes higher, people will find a substitute- other types of hamburgers, tacos, fish & chips, tv dinners, etc… because more expensive hamburgers aren’t worth it. The key to the whole thing is to make your hamburgers for significantly less than that $2.00 and sell them for as close to that without getting over that amount, because above that amount your sales will drop.

There’s no implicit notion of fairness here- I’d guess that McDonalds’ cost in making a Big Mac is probably on the order of a dollar at most, giving them a gross margin of 50%. Cokes are even worse- $1.25 for a drink that costs them about 10 cents. What is important is that you won’t pay more than $2 for a Big Mac because you don’t feel it’s worth it. That’s the price that the market will bear. Any consumer notions of fairness, etc… are rolled into the market price because they affect the perceived value of the product and consequently the demand for that product. If you think the company’s making an unfair profit at some price, you won’t buy, and if enough people think like you, they’ll drop their price so that you will buy it.

15

Your example does not diminish the laws of supply and demand. Suppose at price P, there is one buyer (you), but at price 2*P there are no buyers. Why is this a problem?

In some places it is illegal to advertise one price, then later to demand a higher price. This is not a good way to run an ongoing business.

My counterexample is that I have expressed interest in an item, and the seller offered a lower price to persuade me to buy it.

16

Of course they’re justified.

Did you pay the $20? If you did, then I guess that’s what the market will bear and that’s what the thing was worth, at least to you. If you didn’t, then they charged more than the market will bear and they lost a sale. What’s the difficulty?

Why didn’t you try negotiating the price down?

17

Yep, the antique dealer is free to ask any price he thinks he can get and you’re free to say, “Screw that!”

In most cases businesses will honor any previous price or price quote just for the asking. Did you bother to tell the antique dealer that you understood the price to be $10 when you came in? Chances are if there was a legitimate reason that you expected the price to be $10 instead of $20 he probably would have honered it. Otherwise he is at risk of losing (1) this sale, (2)subsequent business from you and (3) his reputation. Actually in rereading your last paragraph that was exactly what happened in your case.

Let me also mention that having recently been involved in a retail business I can say that for every unscrupulous business person there are 100 unscrupulous customers.

18

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Essentially. Of course the buyer generally has the option to buy, to shop around, or to wait for prices to drop. I wait for the prices of computer games to drop all the time.

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“Fair to whom” is indeed an important question. When I buy something I am not at all concerned about whether or not the vendor is making a decent profit. My only concern is that I’m getting a good product for the amount of money that I’m spending.

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Sure, it happens all the time.

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An implicit contract that really doesn’t exist.

It would only be wrong if they colluded with one another to keep the prices high.

Marc

19

Again, I ask Bwana Bob- is it ONLY the seller who has moral obligations?

Let’s look at, say, the airline industry. At times, airfares can seem ridiculously high. If I check around, and I find that the best round trip fare to New York is $575 (that happens, occasionally), I may find myself screaming “those dang airlines are a bunch of rip-off artists,” and millions of other consumers will say the same. Consumers seem to feel that, in THOSE circumstances, airlines have an obligation to charge us less and take a smaller profit.

But when the travel business is in a slump, airlines sometimes start slashing prices. And when they do, they sometimes find that the public is very slow to react. COnsumers sometimes say to themselves, “Oh, I can go to Hawaii for $450? Not bad, but let’s see if the prices drop even LOWER.”

If that happens, does Bwana Bob get angry at consumers for not being willing to pay a “fair” price to the airlines? Are consumers morally wrong for wanting to pay the lowest possible price, even if that means business make low (or no) profits?

Suppose I paid $100 for a pair of front row seats to the Bruce SPringsteen show. I then try to sell them for $500. Bob probably thinks that’s outrageous- that I’m only entitled to a small, “fair” profit, NOT to a 400% profit.

Okay then, Bob- what do you consider a “fair” profit? 10%, maybe? Okay, let’s say that, under Bob’s rules of fairness, I’m entitled to a 10% profit on my tickets.
But wait- it turns out that attendance at the concert is FAR lower than anticipated, and there are actually a lot of tickets available right at show time. The Boss is about to take the stage, and I’m desperate to sell my tickets. At that moment, some guy approaches me and says “I’ll give you face value for both your tickets.”

Does Bob feel outraged at this would-be buyer? Probably not. But since he’s already concluded that I’m morally entitled to a 10% profit, this buyer is OBVIOUSLY ripping me off by trying to buy them at face value!

Or… maybe I’m NOT entitled to any particular level of profit, and the buyer isn’t ENTITLED to any particular price. Maybe the right price is whatever we can agree upon, however “unfair” it may seem to an outsider.

20

To sum it up Simple Basic Macro-economics 101 Dude!