Tobold's Blog
Tuesday, November 16, 2021
Price stickiness

My gas and electricity company just informed me that my regular payments for next year have been increased to 250% of what they were this year. The laws of supply and demand, and increasing prices when demand outstrips supply, seem to be alive and well in that domain.

However, if you are currently shopping for Christmas presents, you might have a very different experience. There are a bunch of possible presents, especially consumer electronics, which nominally haven't increased in price, but you simply can't get them. Prime example is the Playstation 5, which was released about a year ago, and for which demand still largely outstrips supply. The prices that scalpers ask for it on platforms like eBay reflect that, but the official MSRP hasn't changed at all. Apple just sold me an iPad from their webstore, but their expected delivery date is dangerously close to Christmas, leaving me at risk of visiting family empty-handed. Some used cars are now more expensive than new ones, because the new version still has an old official price, but simply isn't available.

The economic term for this is price stickiness: Although manufacturers could obviously raise prices to bring demand more into line with supply, they don't, for various reasons. Mostly because they aren't sure the increased demand will last, and don't want to scare off potential future customers. That is somewhere are market failure, with people who would be willing to pay more still unable to receive the goods they want, or scalpers profiting from the situation. You can give your kid the cash and tell him to queue for a PS5 himself, but that is likely to result in a frustrating holiday experience for him, which is probably not what you were going for.

The big question is how much of the current economic situation is temporary. The most probable answer is: Not all of it. And prices can be sticky both ways: Some people who are currently increasing prices due to low supply will not completely reverse those increases when the supply problems are solved. And with everything else becoming more expensive, the supply problems of the PS5 might be solved by parents not able to afford a PS5 for their kid anymore by next Christmas, even at the current price.

It's about to get a lot worse for those living in the UK. Amazon-UK just announced that they will be banning the use of UK issued VISA cards - effective in mid January 2022.

Apparently, there were limits in place that prevented VISA from charging more than .3% in transaction fees. Brexit removed/changed those limits and VISA upped their transaction fee to a whopping 1.5% and Amazon isn't happy about it. It remains to be seen if they can work out a deal before January, but this stands to affect a large percentage of the population in the UK if they don't.
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