Friday, September 21, 2012

Economic logic, part II

The examples I gave in the last entry were clear-cut:  I'm pretty sure that, from the point of view of maximizing your personal pleasure (which is what economics is about), you should not consider the cost to the vendor in your calculations (unless for some reason hurting the vendor was part of your calculations -- but in that case, you would almost certainly be better off not buying from him at all).  The examples in this entry still puzzle me; I'm not sure where the correct logic lies.

The first is from The Armchair Economist by Steven Landsburg, which I thoroughly recommend to everyone.  I found myself agreeing with almost everything in it, but one case still leaves me puzzled.  Suppose you are going to a show of some sort and have bought 2 tickets at $50 apiece for you and your guest.  When you get to the show, you can't find the tickets.  Should you buy more, or should you be unwilling to buy them because you don't want to pay for the same thing twice?  What about if you had not bought the tickets, but found that you had lost $100 on the way to the show?  Landsburg says (to the best of my recollection) that most people would not buy the tickets again because they had already budgeted that money for entertainment, and would not want to exceed their budget.  On the other hand, most people would be willing to go ahead and buy the tickets with, say, a credit card, even if they had lost the $100 earmarked for buying tickets.

Landsburg pokes fun at this "mental accounting," but somehow, I find myself agreeing in principle that I would not re-buy the tickets even though I would spend the money if I had lost cash.  I'm probably just being stubborn here, but I wish I could grasp the logic strongly enough to appreciate it more viscerally.

Here's another case which may or may not be related, but it puzzles me in a similar fashion.  Suppose you go to the grocery store to buy a can of green beans.  On the shelf are two types of cans, a store brand for $0.75 and a name brand for $1.  You know there is very little difference in quality between the two; which would you buy?  Now suppose you go to another store to buy a large television.  There are two sets of the same size and resolution that you want, one off-brand for $999.74, and one name brand for $999.99.  Which do you buy?  My gut is to buy the cheaper green beans but the more expensive television, on the grounds that $0.25 out of $1000 is negligible, whereas $0.25 out of $1 is a large fraction of the total price.  But I can't get over the fact that it's the same $0.25 either way.

Now, there are many other factors that one could bring into this, such as the fact that the television is supposed to last longer and therefore the name brand might be worth more even if you can't see any difference in picture quality.  I want to ignore those factors as much as possible and treat the two commodities as sharing all the same basic properties except for price.  I suppose you could imagine that you are buying a truckload of green beans for $999.74 or $999.99.  My sense is that, even in that case, no one would care about the extra quarter in one case, but virtually everyone would prefer the more inexpensive single can (assuming, as we have, that they two cans are the same quality).

Even though the total price difference is a quarter in either case, one could say that, in buying the more expensive green beans, one is creating the potential for spending a lot more money in the long run, since presumably you buy more green beans than televisions in your life.  That makes sense to me, but only with the caveat that it is a mental shortcut:  in general, you should buy the less expensive item of the same quality, even if the price difference in absolute terms is negligible.  For an individual can of green beans, I can't see why the $0.25 you save on the cheaper brand should count for any less than the $0.25 you save when buying a whole truckload of the cheaper brand.




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