2 - Pricing

Summary

Both the atemporal Marshallian analysis and the explicittime entry–exit model discussed in chapter 1 had the same interaction between demand and supply within a period. With the time structure implicit in this modeling, any attempt to charge more than the “market price” fails completely, while the entire market can be taken by a price below the market price. Thus an instant response by demanders to any variation in pricing behavior is implicitly assumed. This is a common strategy for model simplification: one action happens infinitely more rapidly than another. Once we start paying attention to how long it takes to learn things and to do things, this assumption becomes implausible for many markets.

Marshall identified both space and time as issues in the analysis of a market. In his analysis of sticky prices, Robert Gordon (1981) has argued that some commodity allocations have an important tradeoff between space and time. In markets with a single location for transactions (or a small number), prices seem to react very quickly to imbalances in desired trades. But the use of a single location makes examination and collection of physical commodities prohibitively expensive. In contrast with stock markets, grocery stores have their products available for both examination and collection at a widely dispersed set of locations. Moreover, prices within a grocery store do not behave like prices on a stock exchange. Some prices (e.g., produce) are changed frequently, but not continuously; other prices are changed infrequently. Some items are “on sale.” The strategic intent of stores, along with the costs of different items are important in understanding pricing.