Consumer Surplus

From an email from Amazon.com:

Greetings from Amazon.com.

You saved $7.00 with Amazon.com's Pre-order Price Guarantee!

The price of the item(s) decreased after you ordered them, and we gave you the lowest price.

The following title(s) decreased in price:

Inception (Blu-ray/DVD Combo + Digital Copy)
Price on order date: $24.99
Price charged at shipping: $17.99
Lowest price before release date: $17.99
Quantity: 1
Total Savings: $7.00

I was willing to pay the $24.99 but I will certainly take the extra $7.

  • Mark

    I think the often thrown away economic concept of "consumer surplus" is something that needs to be understood and highlighted in any discussion about free markets and government intervention.

    Most of the time free market commentators, including Warren on his blog and Forbes articles, attack government intervention from the standpoint of information. That is, there is no way a central government can have the knowledge and all of the information to know what price to charge or buy products.

    I state that this argument is weak because governments, in almost all cases, do not intervene in the "market" for economic reasons. They intervene because of politics. Even if the government entity in charge of planning production had perfect information, in almost every case it still cannot create the benefits of a free market because it cannot maximize "consumer surplus".

    If the government, as it does in most cases, sets the price too low it will create a shortage. In that case, the government will ration off the commodity. There is no guarantee that the individuals that would pay a higher price and therefore value the commodity higher will actually receive the commodity over individuals who enter the market because of the low price.

    Even if the central planners can determine the true "market clearing" price, government will not allocate and distribute the commodity based on a true price mechanism. Politics will determine allocation. Political cronies will have the first allocations. Goals determined by the state planners will get the next.

    Only by the price mechanism can a commodity be allocated in a manner that the individuals that value it the most will also be the ones who will acquire the commodity. And in this way only can "consumer" surplus be maximized.

  • Rand

    Oh no! The Ben Bernank was right, deflation. What a terrible thing. It's a good thing that the dollar will be devalued soon.

  • DrTorch

    Mark,

    Good point.

    I'm not so sure the argument is "weak" for the reasons you state, I think there is some validity to it, but a bigger problem, IMO, is that every new age of planners claims "it's different this time" b/c they have all the information. Bar code scanners, computers, JIT supply chains... all allow the central planner to claim how he's superior to the market.

    In the mean time, you're absolutely right about politics being the driver. This is a strong argument b/c it's empirically verified throughout history, and people don't change. (It also fits well w/ Christian theology, and is a bulletproof counterpoint to Marxist hijacking of said, whether it be Social Gospel, Liberation Theology, etc.)

  • jj

    I was just reading about price discrimination at online merchants, including Amazon. Two customers buying the same DVD at the same time might be charged different prices based on their browsing or shopping history.

    I wonder if this is price discrimination in your favor: they give discounts to people who might talk about it on their blog.

  • Don

    Damned greedy Amazon! Trying to immorally lure you to come back and spend more money by "priming the pump" with a cash discount!

    A pox on their capitalistic house!