Sunday, January 07, 2007

Are Cable Prices an example of Price Discrimination?
If you go to a big electronics store, like CompUSA or Best Buy, and look at the prices for cables (USB, HDMI, CAT5, etc.) you'll find that they seem quite expensive. I used to work at a CompUSA years ago, and in fact the cables were priced way above cost--margins were sometimes 200%, 300%, or higher. I saw a post on Shacknews today by someone who had seen the employee discount on a cable, and apparently these high margins persist.

How could this be? Why wouldn't these high margins be competed down? I suspect that it is price discrimination. The classic example of similar price discrimination is popcorn at movie theaters. Movie theaters sacrifice some profit by charging prices for movie tickets that are below marginal cost, but gain large profit by then charging high prices for concessions, such as popcorn. The lower ticket prices attract larger numbers of customers, and those who really like popcorn will be willing to pay high prices, allowing the movie theater to extract more consumer surplus for itself. (Locay and Rodriguez, JEP 1992, has some problems with this story, and I have the same problem--why aren't popcorn prices just competed down?--but let's accept it for the moment).

Are cables similar? Suppose you buy a new TV or printer. You need cables to connect it to other devices. By charging low prices for the primary item--the TV, printer, or whatever--the store can lure in more customers. The store can recover some of that loss by charging high prices for cables. It may gain on net if it can lure in enough people with its low price items.
On the other hand, there are plenty of places where you can buy cables cheaply online. Similarly, there are plenty of grocery stores where you can buy cheap popcorn--but you can't take that popcorn into the movie theater with you. You can just buy cheap cables after (or before) buying the expensive electronic good. So how do these margins persist? Is it ignorance on the part of casual electronics buyers? I find that a little hard to believe; surely they do some research before buying television sets priced in the hundreds or thousands of dollars. Is it the convenience of getting everything at one time? Delivery of goods ordered online is pretty convenient. Perhaps it has to do with delivery and installation services sold by places like Best Buy. Do their installers require you to buy their cables? Or is it just so much more convenient to pay them for everything and have them worry about it that it is not worth saving $40 by getting cables from somewhere else?

I'm open to ideas, but "retailers are greedy and evil" isn't a thoughtful or acceptable answer (since it begs the question of why they can't get away with such margins on everything).