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Alchian–Allen effect

en.wikipedia.org

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Re: Alchian–Allen effect

#11

Post by andyjohnson0 »

dyeje wrote: post #4
andyjohnson0 wrote: post #3

I don't see anything in the article about the extent to which this effect has been observed in the real world. Is it another example of economists assuming that people are idealised rational actors (who would prefer a 1.6x coffee bean premium to a 2x, to take the example in the article), or is there some hard evidence that it explains the real behaviour of real people?

They give 3 examples at the end: "The effect has been studied as it applies to illegal drugs and it has been shown that the potency of marijuana increased in response to higher enforcement budgets,[2] and there was a similar effect for alcohol in the U.S. during Prohibition.[3] This effect is called Iron law of prohibition or Cardinal rule of prohibition. Another example is that Australians drink higher-quality Calif…

Thanks. I did read the article and noticed the examples that you referred to.

To clarify: I just don't see where the evidence for any of these claims is accessible. Four of the six references don't appear to be available on-line. Of the two that are, one is a brief summary that leads to a paywalled FT article that I can't read, and the other is a ~200 pdf economics textbook.

I'm happy to accept that a price differential changes when a constant is added to both prices. But I do question whether people in the real world will switch to a different type of coffee bean because the differential goes from x2 to x1.6. And I wanted to know more about the real-world circumstances in which it had been observed.

I might be pursuaded that the market for illegal drugs/alcohol could exhibit this effect, but it would be interesting to know how how, given that illegal products are probably going to be subject to other effects not shared by legal products, biases and selectivities were compensated for.

Edit: Made first paragraph clearer.

Re: Alchian–Allen effect

#12

Post by ashrk »

dfee wrote: post #2

> when the prices of two substitute goods, such as high and low grades of the same product, are both increased by a fixed per-unit amount such as a transportation cost or a lump-sum tax, consumption will shift toward the higher-grade product. This is true because the added per-unit amount decreases the relative price of the higher-grade product. > Another example is that Australians drink higher-quality Californian w…

My unscientific observation has been that the opposite holds for French wine. They seem to ship the US their worst, but it hits our shelves marked up 4x what it'd be in France.

Maybe it's a branding thing, and French wine's got enough power in that department that they don't need to send us good stuff to move product, at least at the lower end. Maybe with some French writing on the label low-price-shopping consumers are equally likely to buy it whether or not it tastes good, so there's no reason to send anything but the worst they have. Other European countries seem to have no trouble shipping us nice wine in the lower price tiers, but then they're not France.

Re: Alchian–Allen effect

#13

Post by TezlaOil »

jldugger wrote: post #9
cbsmith wrote: post #6

I didn't realize they had a name for it... it seems so obvious.

> it seems so obvious. I'm not sure the effect is logically sound -- before the price hikes you weren't willing to pay a dollar more for name brand (or premium drugs etc), but after the price hike you are? I'm not sure if the authors have a mathematical model supporting the decision, or are just observing illegal drug markets and generalizing.

> before the price hikes you weren't willing to pay a dollar more for name brand (or premium drugs etc), but after the price hike you are?

Imagine that 10 normal people and Bill Gates want to buy bottles of wine. Bill goes for a bottle of $6000 Richebourg Grand Cru, and the 10 normal people always go for Shitscreek Red, sold for $4. So about 9% of the buyers are willing to pay extra for the name brand.

After the Great Wine Tax Bill of 2021, the prices are both increased by a fixed per-bottle amount of $6000. So now the Richebourg costs $12000, and the Shitscreek costs $6004. The 10 normal people migrate to beer, and Bill Gates still buys Richebourg. So about 100% of the buyers are willing to pay extra for the name brand.

Re: Alchian–Allen effect

#14

Post by tlb »

The reverse effect works too. When an overhead cost drops, people consume crappier versions. Free online news is a striking example. If you walked down to the news stand and paid $0.75 for a physical newspaper and the content was all Clickhole listicles you'd never buy it again. But people consume plenty for free.

Re: Alchian–Allen effect

#15

Post by aqme28 »

jldugger wrote: post #9
cbsmith wrote: post #6

I didn't realize they had a name for it... it seems so obvious.

> it seems so obvious. I'm not sure the effect is logically sound -- before the price hikes you weren't willing to pay a dollar more for name brand (or premium drugs etc), but after the price hike you are? I'm not sure if the authors have a mathematical model supporting the decision, or are just observing illegal drug markets and generalizing.

That's not what is being claimed. The _ratio_ of high quality to low quality products shifts in favor of higher quality as the prices of the two equalize due to fixed costs.

Re: Alchian–Allen effect

#16

Post by silvester23 »

amelius wrote: post #10
cbsmith wrote: post #6

I didn't realize they had a name for it... it seems so obvious.

It doesn't sound obvious or universally true to me. For example: what if the expensive product is of only 1% better quality than the cheap product? Will people who use the expensive product not think that they are paying too much for too little gain, and switch to the cheaper product?

That's completely independent from an increase in price though, isn't it?

Re: Alchian–Allen effect

#17

Post by zwaps »

ashrk wrote: post #12
dfee wrote: post #2

> when the prices of two substitute goods, such as high and low grades of the same product, are both increased by a fixed per-unit amount such as a transportation cost or a lump-sum tax, consumption will shift toward the higher-grade product. This is true because the added per-unit amount decreases the relative price of the higher-grade product. > Another example is that Australians drink higher-quality Californian w…

My unscientific observation has been that the opposite holds for French wine. They seem to ship the US their worst, but it hits our shelves marked up 4x what it'd be in France. Maybe it's a branding thing, and French wine's got enough power in that department that they don't need to send us good stuff to move product, at least at the lower end. Maybe with some French writing on the label low-price-shopping consumers…

In reality there's a lot more in a product than just good and bad.

Especially with wine, where it is not actually so clear that a true quality ordering exists, all sorts of other effects are at play. For example, we know how the signaling value of price overrides some true quality variables.

In economics, its important to know these simple models and their outcomes, but it is equally important to know when other effects are at play, or when assumptions do not hold

Re: Alchian–Allen effect

#18

Post by Matticus_Rex »

andyjohnson0 wrote: post #3

I don't see anything in the article about the extent to which this effect has been observed in the real world. Is it another example of economists assuming that people are idealised rational actors (who would prefer a 1.6x coffee bean premium to a 2x, to take the example in the article), or is there some hard evidence that it explains the real behaviour of real people?

Most of the reaction against modern economists for assuming rationality is just meme repetition. Yes, this is an accurate criticism of a tiny portion of modern economists, and of many economists of prior eras. One of my favorite books, Kahneman's Thinking, Fast and Slow, is a prime example of how pervasive this meme is -- he seems completely unaware that the critique has largely been integrated into the field well before the time of publication. The assumption of rationality has been replaced by assumptions around bounded rationality and cognitive bias.

Modern economic theory is not some abstraction that doesn't resemble the real world, even in cases where the empirical evidence is as-yet weak (which it's not in this case, as is apparent to anyone who reads the whole entry).

Re: Alchian–Allen effect

#19

Post by zwaps »

andyjohnson0 wrote: post #11
dyeje wrote: post #4

Earlier quoted context omitted.

They give 3 examples at the end: "The effect has been studied as it applies to illegal drugs and it has been shown that the potency of marijuana increased in response to higher enforcement budgets,[2] and there was a similar effect for alcohol in the U.S. during Prohibition.[3] This effect is called Iron law of prohibition or Cardinal rule of prohibition. Another example is that Australians drink higher-quality Calif…

Thanks. I did read the article and noticed the examples that you referred to. To clarify: I just don't see where the evidence for any of these claims is accessible. Four of the six references don't appear to be available on-line. Of the two that are, one is a brief summary that leads to a paywalled FT article that I can't read, and the other is a ~200 pdf economics textbook. I'm happy to accept that a price different…

Here is a study in trade on this phenomenon https://krannert.purdue.edu/faculty/hummelsd/research/apples...

Re: Alchian–Allen effect

#20

Post by srtjstjsj »

tlb wrote: post #14

The reverse effect works too. When an overhead cost drops, people consume crappier versions. Free online news is a striking example. If you walked down to the news stand and paid $0.75 for a physical newspaper and the content was all Clickhole listicles you'd never buy it again. But people consume plenty for free.

That's not the reverse effect, that's supply and demand, and people forgetting opportunity cost of time. Newsstands sell plenty of junk like US Weekly.
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