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Alchian–Allen effect

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Re: Alchian–Allen effect

#21

Post by srtjstjsj »

TezlaOil wrote: post #13
jldugger wrote: post #9

Earlier quoted context omitted.

> 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 Grea…

That's not what the effect is about. The effect is about normal people becoming more likely to choose the expensive one because it appears to be "less 'more expensive'", because they judge ratios instead of absolute values.

A similar irrationality is when people will do an extra hour's work to save $50 off a $100 purchase, but not to save $50 off a $10000 purchase.

Re: Alchian–Allen effect

#22

Post by srtjstjsj »

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…

Those don't seem to be the same effect as buying fancier coffee because it seems like a comparatively better deal per pound. Prohibition makes a product hard to get in desired volumes, beyond just price, so you want as much as you can get when a window opens; you can dilute it yourself at home later. It may be the case that demand an't be satisfied by buying weak lots in low quantities.

Re: Alchian–Allen effect

#23

Post by amelius »

silvester23 wrote: post #16
amelius wrote: post #10

Earlier quoted context omitted.

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?

I wasn't clear. I suspect that under certain conditions (price, relative quality etc), and at a certain increase of price, people will switch to the cheaper product because the quality difference isn't that much.

Re: Alchian–Allen effect

#24

Post by pc86 »

srtjstjsj wrote: post #20
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.

It is literally the opposite of the effect described in the article.

Re: Alchian–Allen effect

#25

Post by pc86 »

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…

The fact that the sources are not easily accessible to you for free does not negate the fact that there are cited sources explicitly disproving your assumption (that this is just economists making things up).

> Thanks, I also read the article.

I'm not sure the extent to which you considered this, but in this context it's hard to read that sentence without making you sound like a jerk.

Re: Alchian–Allen effect

#27

Post by cbsmith »

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?

The point is that even when there is a fixed price gap between higher quality and lower quality goods, the rationale to buy the higher quality gets stronger as that gap becomes smaller proportional to the price of the products.

It's not that people always buy the more expensive product.

Re: Alchian–Allen effect

#28

Post by andyjohnson0 »

pc86 wrote: post #25
andyjohnson0 wrote: post #11

Earlier quoted context omitted.

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…

The fact that the sources are not easily accessible to you for free does not negate the fact that there are cited sources explicitly disproving your assumption (that this is just economists making things up). > Thanks, I also read the article. I'm not sure the extent to which you considered this, but in this context it's hard to read that sentence without making you sound like a jerk.

> > Thanks, I also read the article.

> I'm not sure the extent to which you considered this, but in this context it's hard to read that sentence without making you sound like a jerk.

Did you consider the possibility that I was simply thanking dyeje for their reply, and confirming that I had noticed the examples that they referred to? Assumption of good faith, etc? Nevertheless I've edited my reply to hopefully make my intended meaning clear.

Re: Alchian–Allen effect

#29

Post by gnulinux »

> the Alchian–Allen theorem

Uhm, I'm not an economist but how is this a "theorem"? What is the theory, what are the axioms, where is the proof? This seems like an empirically observed trend.

Re: Alchian–Allen effect

#30

Post by shitgoose »

gnulinux wrote: post #29

> the Alchian–Allen theorem Uhm, I'm not an economist but how is this a "theorem"? What is the theory, what are the axioms, where is the proof? This seems like an empirically observed trend.

there is some basic arithmetic in the article. imagine the cost was raised by $100, then prices of beans would be $101.5 and $103, i.e. pretty much everyone would go for higher quality. gradually decrease the premium, and you will gradually decrease the number of people who prefer the higher grade product in favor of lower price. this is pretty much it. quite simple and neat observation, actually.

"the harder the punishment, the harder the drug" is another very important non-trivial observation, missed by most people.

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