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Comment by orev | Hacker News Reader

Pricing for any item is set by one thing: what people are willing to pay for it.

If a business raised prices because of tariffs, and consumers paid the higher price, that was a successful test that consumers are willing to pay that higher price for the item. Once that’s been established, the business has little incentive to lower prices once the tariffs go away. Prices only go down if competition with other companies pushes them down, but every player in a market has little reason to do so when they’re enjoying the higher profits.

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Pricing for almost every item is set by the lowest price the producer is willing to accept, not by what people are willing to pay.

It's the "one price rule" in economics.

Everybody is willing to pay different prices. If you're starving, you're probably willing to pay "all my money" for food. But you don't, you pay the same price as everybody else who aren't willing to pay that much. The seller can't set the price to "all your money" because somebody else will be willing to sell for less.

> but every player in a market has little reason to do so when they’re enjoying the higher profits.

In that case any producer willing to defect from this implicit pact and lower their prices slightly will be able to make all the profit. Anti-trust should be ensuring there are enough producers that there's always somebody willing to goose their profits at the expense of their competitors by lowering prices.

It should be, but isn't.

You are describing theory, which is fine as a model but it is an imperfect model. There are a host of reasons this falls apart in reality.

Yeah but, that vagary is literally the exact same wording that can be applied to "prices are set according to what consumers no; not it's value" that sparked this thread.

In reality these work very well for many of the important things. Ask any farmer who sells a 60 pound bushel of wheat for $6, producer of $10 blue jeans or maker of those $400 60" TV's. They're not swimming in profit.

The exceptions are far fewer, but far more noticeable. Housing and health care don't follow the one price rule. The exceptions dominate our mindshare because they're so painful, but the non-exceptions outnumber the exceptions.

One price rule for commodities isn't super relevant for consumers though? Commodified markets are well understood so long as there is decent competition.

What we are increasingly seeing on the consumer side of the market - even on grocery items - is price segmentation. Grocery stores (moreso their suppliers) learned that many (most?) consumers are willing to pay much more for staple food items that are not commodities but quite common buys. Like chips or soda or branded packaged foods. They set a regular retail price to 50% more than it was a few years ago over time, and then to capture more of the price sensitive consumers they offer incentives like coupons, in-app deals, random sales, etc. to induce those consumers to purchase.

This is getting to be extremely aggressive and will continue to do so for the foreseeable future. Uber/Instacart for example have plenty of whistle blower insider types who have written about how price segmentation on an individual basis based on personal information and habits happens. Such as the type of credit card on file (Amex holders get charged more), how much gift card credit balance you have, your trends like accepting higher prices once from a given location/destination pair and time, etc.

If you go to the McDonalds drive-thru and simply order at the window you will be likely paying considerably more than the person who has the app installed and orders through that method.

Airline tickets perhaps follow this model as well - browser history and cookies will present a higher price to one consumer vs. another for the same book at exactly the same time. Some court cases are attempting discovery on this recently, so it will be interesting to see if true.

The price of an individual consumer transaction is absolutely set to what the company charging it believes the market will bear. Increasingly that "market" is the size of exactly one consumer.

I listened to a few earnings calls for fast food and consumer staple companies during COVID. Executives were absolutely incredulous that they could continue to increase prices and have it not impact volume of sales much if at all. What was taught in MBA school simply was not reality on the ground, and COVID times exposed this fact. The US consumer at least as a whole has simply lost the ability to price shop and is not as price sensitive as the textbooks say. This may change, but it's the current state.

About the only thing producer prices set is a pricing floor.

Not a single post in this comment thread isn't just describing theory.

double negative, so... every comment does?

Yup.

only true for commodities

I don't see why this matters a single bit. You can easily flip it around and say that the businesses were clearly fine with all this because they kept importing, so why shouldn't the entirety of the tarriff refund go to consumers?

Oversimplification. Businesses can exist when the the cost of a good is less than the price they can get. There are many possible prices that this might be true, and there is some price that maximizes net profit.

When an item's margin becomes large, the risk/reward equation becomes favorable for new competition to come in. That puts downward pressure on prices.

For a given good, let's say that tariffs increased the business's cost for that good. If that cost goes away and the price stays constant, then the margin increases. That triggers more competition.

> Pricing for any item is set by one thing: what people are willing to pay for it.

Pricing is set by two things: supply and demand. Tariffs make supply more expensive, less supply is brought in, therefore the consumer must either pay higher prices or go without. Yes, they can just choose not to buy, and then the importer can choose not to import.

Every player has an incentive to lower the price: it attracts customers away from the other players.

They were able to raise their prices all at once because of tariffs. If they'd done that by simply agreeing to raise prices, it would be collusion.

Once the tariffs go away, prices would be naturally expected to fall back to their previous equilibrium because the same forces apply.

It's even more complicated than that, of course. But if there was competition before tariffs then there is competition after tariffs and you'd expect them to act similarly.

Only for optional goods! Exploitative inelasticity for necessary goods usually leads to investigations, regulations, and occasionally jail time. So it’s important to be sure to lower prices in a timely manner if you’re e.g. an egg wholesaler/retailer, otherwise you start having to declare new material risks to the SEC.

> if… consumers paid the higher price

It’s not binary. Some customers were willing and some weren’t. Even if the company was able to keep selling the item profitably, it may have reduced its total profits at the higher price point (fewer sales) and would gladly revert once the tariff is gone.

This is why when the price of oil goes up, so does the price of gasoline, but when the price of oil comes down, well... When's the last time you remember gas suddenly costing a whole lot less?

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