I was a psychology major with no interest in being a shrink. I liked business, but hated accounting. I was either open-minded or confused.
One place that my conflicted interests have always come together is around pricing. That pricing decisions – for any product or service – contain a mix of economics, psychology, marketing and raw chutzpah has always intrigued me.
I am drawn to, and collect, pricing stories. One of my favorites involves the owner of a small boutique getting ready to go on vacation. Fall inventory arrived and she needed to clear out some stuff to make room. A shelf of knick-knacks had not been selling, so she left a note for the assistant to cut the price in half and put them on sale. The note got misinterpreted and the price was instead doubled. When the owner returned, she was delighted to see that her 50% off sale worked as every one of the items had sold. She was more delighted, though curiously puzzled, when she found out what actually happened.
That kind of stuff is fascinating.
Pricing plays a lot of roles, but one of its most important is as the signaling device between producers and consumers. How does our complex market economy work without gnomes in the back room orchestrating everything? Pricing signals.
Pricing helps everyone know how to behave. If there is a shortage, prices go up. Consumers get the message to think about curtailing consumption; producers get the signal to make more. It is a beautifully elegant mechanism that makes this big old machine work. Sure, we lurch here and there, making or buying too much, not making or buying enough. But amazingly, it all seems to find its way back toward the steady middle without anyone having to call a meeting.
I am thinking about pricing signals as we watch the legislative processes around surprise medical bills and prescription drug prices. I am thinking about the value of price signals as we listen to presidential candidates pitch various versions of universal healthcare. But what I am really thinking about is mufflers.
That is because all these ideas, in the name of wanting to eliminate some real pain for some real people, are mufflers on the signals sent to the market through the price. And when muffled, the signals don’t do their job.
Put an externally imposed ceiling on the price of anything – rent, concert tickets, meds, physician services – and you blunt the signal to producers to make more of it. So, they don’t. And the very thing we needed to help bring the price down – more supply – doesn’t happen because the signal never got through.
Deep thoughts for a summer Friday, I know. But as we collectively consider options to address some of these issues, just be aware that price controls by any other name are still mufflers and suppressors of the critical signals that make a market work.