Comment by mhuffman | Hacker News Reader

Comment by mhuffman | Hacker News Reader

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> I work in the lumber business. We always, every day, at all times, sell our lumber to the highest bidder.

This is auction-style pricing. Good for lumber and some other commodities, but not great if you want to buy eggs, bread, medicine, or gas on the way to work.

>We always sell to the highest bidder. I have no idea how we'd even do it otherwise -- a lumber lottery? All of this reporting about corporate greed is truly dumb.

Well, the other way to sell it is to put a price on it and sell it to the first person willing to pay that price!

You mentioned that you have a lot of competition. That along with auction-style pricing will normally get very close the the WTP ("ideal") price of a product. This is not always possible. It is usually difficult to dial in the "right" price of a consumer product. They can just not buy your chips or cheese! It is no big issue for them and the psychological effect of raising prices for no reason will cause just that reaction. That is why shrinkflation has been a thing.

Imagine having to outbid someone at the grocery store for milk. Or having to outbid someone at the pharmacy for your child's insulin. You can see why certain products cannot be sold to people that way.

Another way of looking at this whole situation is that every company is greedy to some extent. Pricing is hard. And they took advantage of certain events and situations to try new pricing. Many lied about why (claiming supply issues, because saying "we just want more of your money" doesn't sit well with people), which is not cool. If the new pricing sticks then it is probably closer to the "real" price. If it is too high, people will not buy the products and the price may go back down. I say "may" because there is always the possibility that selling fewer items at a higher price might produce more end profit than selling more items at a lower price.

And what price would we choose? Yesterday's price? Last year's price? And if we sold out immediately, what then? Would we just have a race every morning for buyers to secure the prior day's production? Why wouldn't we increase price and see if we sold out again? And do the same the next day? You'd quickly wind up at the same place -- that is, charging what the market will bear. And while I was doddling along, my many competitors would be selling to the highest bidder, then using that money to bid up the logs I have to buy, thereby putting me out of business.

Now you are getting it! Pricing is hard. You work in an industry where it isn't a problem, but it is if you sell potato chips. The point being that nearly nothing in a normal person's life is priced and sold the way you do it, so comparing them is silly.

btw, auction-pricing is the wet-dream of every MBA that runs a company. It is the closest thing that people have to find out a person's WTP, for exactly the reason's you outlined in our comment. But you can't do that with loaves of bread, or bacon, or laundry detergent, or nearly anything else.

But certainly the manufacturers can. And the grocers compete with one another. I honestly don't see the differences you do. Lowe's competes with Home Depot in much the same way Safeway competes with Roth's. And the manufacturer selling to those grocery stores is going to sell to the one that pays them the most. We don't sell on auction boards like you're implying. Our sales floor takes calls from buyers, and they makes calls to buyers, and every day our traders close sales on the basis of who's willing to pay the most. It's not that complicated.

>But certainly the manufacturers can. And the grocers compete with one another. I honestly don't see the differences you do. Lowe's competes with Home Depot in much the same way Safeway competes with Roth's. And the manufacturer selling to those grocery stores is going to sell to the one that pays them the most.

No. In fact the manufacturer might sell through the distributor that pays the least, if they have high enough sales/coverage (think Walmart) and the total profit is acceptable. Think about selling your product through a mom and pop store that pays you more per item and you clear $1 but they sell 10, or selling 100,000,000 million of your items but you are only clearing $0.05 each. It is much more complicated and larger grocer chains do not have to pay as much wholesale, because they have access to a lot of loyal customers. So they don't compete they way you think and they sure as hell don't have to "bid" on items if they are a large chain. If anything, sometimes it is the reverse, where manufacturers have to pay for self-space and placement. All the ones of a similar size likely sell the product for about the same (in the same demographic area), but may pay different wholesale prices. Or they may not. It is much more complicated. The main point is that it is not like your business. Yours is special and highly-sought after in business, but almost never available.

>We don't sell on auction boards like you're implying. Our sales floor takes calls from buyers, and they makes calls to buyers, and every day our traders close sales on the basis of who's willing to pay the most. It's not that complicated.

Auctions don't have to be complicated. Whenever anyone "bids" on something and the winner gets it, it is auction-style pricing. There are many kinds. The ebay style is one. The one at estate sales or Christie's is another (called open-cry), etc. But it is the holy-grail in business of determining price. The only thing better would be to somehow scan the brain of a person and know the maximum that would pay and charge that.

>In fact the manufacturer might sell through the distributor that pays the least, if they have high enough sales/coverage (think Walmart) and the total profit is acceptable.

There's where you lose the thread. They sell to Walmart not because "total profit is acceptable." They do it because they believe it will make them the most money in the long run. Maybe potato chip manufacturers are different than lumber manufacturers, but I doubt it.

>There's where you lose the thread. They sell to Walmart not because "total profit is acceptable." They do it because they believe it will make them the most money in the long run.

I mean that the exact same way you do. If the word "acceptable" is tripping you up, we can substitute "maximize" and it means the same to me.

>Maybe potato chip manufacturers are different than lumber manufacturers, but I doubt it.

I mean, the fact that people call every day to bid on your product and (presumably) the prices changes daily and they don't on theirs, objectively means that it isn't, right?

Yes, that much is likely true. Yet, I maintain that the market dynamics we saw in lumber very likely played out in other sectors. There's been so much discussion of price gouging, when at least in my industry, I know for a fact the pricing was a product of radically increased demand. It seems very likely to me the same is true for potato chips.

>Yes, that much is likely true. Yet, I maintain that the market dynamics we saw in lumber very likely played out in other sectors.

I agree. The exogenous shocks from Covid (and the shutdowns/working from home) and the money that the govt. lavished on people and businesses caused a lot changes in market dynamics. Some temporary, some seemingly permanent, and some still in flux. As an example, I own rental property on the side. In the town I live in, there hasn't been a decrease in housing and there hasn't been an increase in population. However rents doubled in the span of 3 years. As for why, it seems, they just did it because others where doing it. Taxes didn't go up. Insurance didn't go up. Repairs cost the same. It appears that you can just charge more and people will pay it and so that is what happened.

>There's been so much discussion of price gouging,

When I think of price gouging, I think of someone buying up all of the bottled water after a hurricane and then selling it for 10 times as much when there is no other option available to people. What these companies are doing is testing new price points. In fact, if they are publicly traded and didn't try to maximize shareholder profits they could be facing being ousted or even legal threats.

On a side note, HN has a funny relationship with "price gouging" because many love dynamic pricing (like Uber uses) which is literally price gouging, but if someone tries a new price point on bacon or a dozen eggs they flip the fuck out.

>I know for a fact the pricing was a product of radically increased demand. It seems very likely to me the same is true for potato chips.

I mean, you know your business. I believe you. But there really are companies out there testing new price points just because it is convenient and they won't face the typical backlash from customers because "inflation", or "supply chain issues", or whatever, but really they are just seeing if they can get more profits. This shouldn't be shocking to anyone but it rubs consumers the wrong way when it happens and when everyone does it, it contributes to CPI inflation which people feel at home.

I don't know about lumber, but for groceries, I know the goods can be sold up to a year before delivery. So while you might have some of the dynamics you mention, that changes the responsiveness a fair bit.

Many industries don't have many manufacturers or operate on different regions. You get an illusion of choice at the grocery store, but many times the a single factory produces product under a dozen different brands.

This is a good point. I think canned vegetables, in particular, are processed in just a few factories and just have different labeling.

Well, even in a highly competitive industry like lumber, with many manufacturers competing daily for the sale of identical products, we saw significant price increases. This due almost entirely to a dramatic increase in demand relative to supply. So much has been said about supply constraints and greedy corporate shenanigans, but lumber is an excellent example of neither being true. I think the inflation we're experiencing is a product of people spending more money, and having more money to spend, likely as a direct result of historic and unprecedented federal stimulus. And I attribute fault to both parties. Trump juicing the economy at the top of the business cycle, Biden blowing the lid off, and "it's-only-transitory" Powell keeping rates too low for much too long.

An option to prevent running out is quotas. They are pretty common. For example, during the pandemic some groceries restricted toilet paper to a certain number of packs per customer. Similar things happen with discounts ("50 percent off, limit one per customer") or products vulnerable to scalping like new game consoles.

Somehow the demand-siders always work their way around to quotas.

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