Simple Pricing versus Price Discrimination

On a shopping trip yesterday, I had a chance to see JC Penney's new pricing scheme. Here's a picture of one of their displays:

As a big marketing push, JC Penney is doing away with the standard complicated pricing schemes of department stores. The store had no XX% off signs and no hidden promotions, just prices that you would pay at the register. Even stranger, all prices were in whole dollar amounts, making it easy to compute the pre-tax bill before approaching the register. Is this a good idea? It certainly has its appeal, but there are reasons that complicated pricing is the norm.

Coupons, special programs and the varying percentage discount at department stores attract a particularly price-sensitive demographic of consumers. At the same time, consumers who do not respond to price will just grab whatever they want to purchase (no searching for discount racks, hence, less likely to get the deals). From this standpoint, the typical smoke-and-mirrors pricing strategy can be used for price discrimination, a classically profitable strategy that involves charging different groups of consumers different prices.

On the other hand, pricing with smoke and mirrors has costs. Just think of all of the paper and ink wasted on coupons, the resources devoted to devising the next discounting scheme and the administrative costs of implementing the markdowns (repricing racks, making sure everything scans at the register, etc.). Even if you can generate more revenue, maybe the costs of price discrimination are too great. Perhaps this is why JC Penney is going toward simpler pricing.

This discussion of price discrimination costs and benefits neglects to mention hat consumers do not necessarily like to be swindled -- and that may be how smoke and mirrors pricing feels. Alternatively, arithmetic-oriented consumers might love the numerical puzzlers that 30-20-10 pricing affords, or possibly, consumers like the excitement of not knowing the price before paying (who doesn't love a surprise discount?).

In the end, it's possible that JC Penney is just betting that more people want to shop at a store with straightforward pricing, but it is interesting to think about the economic conditions that set the table for such complicated pricing at department stores.

Bleg an Assignment Bleg

Greg Mankiw posted a bleg (a blog post designed to elicit feedback/advice) that started with this fantastic line:

I need some help from the growth empiricists out there. If you aren't one of them, stop reading. Continuing will be a waste of your time.

As someone who has read some of the empirical growth literature to which he refers, but has not contributed, I still found the post to be really interesting.

More to the point of the post, as someone who is currently teaching a course for undergraduates entitled Honors Econometrics (technically: Introduction to Econometrics: Honors), wouldn't a guided replication of one (or parts of all) of the papers Mankiw links in his update (one, two, three) be a cool assignment?

Romney's Taxes

From my Google reader, here are two interesting perspectives on Mitt Romney's 15 percent tax rate.

First, from Steve Landsburg:

To understand Mitt Romney’s tax burden, you have to compare him to his doppelganger Timm Romney, who lives on a planet with no taxes. In the year (say) 2000, Mitt and Timm both earned (say) a million dollars. Timm invested his million dollars, saw it double over the past decade or so, and cashed out his investment this year, leaving him with two million dollars. Mitt, by contrast, paid 35% tax in 2000, leaving him with $650,000. He invested it, saw it double, and cashed out last year, paying 15% tax on the $650,000 capital gain. That leaves him $1,202,500, which is about 60% of what Timm’s got. In other words, the tax system costs Mitt almost 40% of his income.

Second, from John Cochrane:

If you made money in dollars, paid taxes, then went to Canada and got $1.20 Canadian, it would make no sense to say "you made 20 cents of income, we'll tax it." It makes no more sense to pay taxes again on money that is moved over time. We decry that Americans don't save enough, the Chinese, the trade deficit and so on. Well, if you want people to save more, stop taxing it.

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UPDATE:

Make it three. Here is Mankiw:

All of these calculations are static. They ignore the general-equilibrium effects that arise as the true burden of taxation is shifted by behavioral responses. In essence, these calculations are made under the implicit assumption that factors of production are supplied inelastically, so the tax stays where legislators put it. Of course, that assumption is implausible, especially in the long run. True general-equilibrium tax incidence is very hard, and as far as I know, reliable estimates on it are not readily available.

An attractive research question?

Robin Hanson has an entertaining suggestion for dissertation research:

This suggests that studying how physical attractiveness varies with industry, occupation, and position could give us a window into agency failures at work. That is, it could show us where some employees are especially free to choose for their personal benefit, rather than for a larger benefit. Even when they leave clear evidence of this self-dealing. Seems like a project for an enterprising data-gathering grad student.

Of course, a confounding factor is when attractiveness contributes directly to an employee's marginal product: modeling, fundraising and pharmaceutical sales come to mind as possible industries that confound the explanation. In this respect, a job where attractiveness serves little or no useful role -- such as Hanson's government contractor example -- is an ideal setting to unveil possible agency problems.

Economics and Clairvoyance

John Cochrane has an interesting post in which he concludes:

This story is embarrassing, yes. But it's most embarrassing for the Times and other believers in the idea of clairvoyant, all-powerful discretionary regulators. It's not at all embarrassing if you think Fed officials are as human as the rest of us -- and that safety comes from better rules of the game, not finding just the right soothsayer to run the show.

The rest of the post is worth reading too.