Posted by: donmihaihai | April 16, 2008

Four instances where increase in price lead to increase in volume.

I was reading the article ” Exactly How Talented are Hedge Fund managers” (http://www.forbes.com/2008/04/04/hedge-fund-alpha-ent-fin-cx_kw_0404whartonhedge.html?feed=rss_news) from Forbes where light bulb lighted up. Because that is the answer for the last instances of Charlie Munger question on demand and supply, where I have no clue on why and how it happen except that the possibility of that happening is very high. Reading back again, I found that I had not make the mental jump back then even with the answer being provided.

Question and Answer:

The basic of demand and supply tells us that increase in price lead to decrease in volume in most cases. And Charlie Munger pointed out 4 instances in his speech : Academic Economics : Strengths and Faults after considering Interdisciplinary Needs.” that “If you want the physical volume to go up, the correct answer is to increase the price?”

1) Luxury goods: Raising the price can improve the product’s ability as a “show-off” item, i.e., by raising the price the utility of the goods is improved to someone engaging in conspicuous consumption. Further, people will frequently assume that the high price equates to a better product, and this can sometimes lead to increased sales.

2) Non luxury goods: Same as second factor cited above, i.e., the higher price conveys information assumed to be correct by the consumer, that the higher price connotes higher value. “This can especially apply to industrial goods where high reliability is an important factor.

3) Raise the price and use the extra revenue in legal ways to make the product work better or to make the sales system work better.

4) Raise the price and use the extra revenue in illegal or unethical ways to drive sales by the functional equivalent of bribing purchasing agents or in other ways detrimental to the end consumer, i.e. mutual fund commission practices. [This is the answer I like the most, but never get.]”

After thoughts

Thinking about it, I have been trying to apply 1) and 2) into investing because it is the easiest one. But from available information, most companies choose to do the opp. to drive sales. One might assume that investor may dump them but it is the opposite because each increase in sale is cheer by speculator by driving the share price higher. Short term at least until the reality of profitability (might) bite. I might as well say because of this speculating short term thinking, frequently, companies with better pricing strategy forgoing growth in sale for profitability are being ignored, especially in last 2 years or so.

For 3) my understanding is pretty much in the incentive driven bias where the greater incentive is given to sale personnel, the greater they are pushing for the sales and it is basically link to 1), 2) and 4). Try multi level marketing(MLM).

I must knock myself for not making the mental jump because I have been seeing and watching it with my eyes for 4) in the last 5 years or so. Not just that, I have been rejecting calls and refuse to walk into any bank without any good reason. There is a huge army of “finance salesgirl” in Singapore. Next all the craps about commission vs. fee base ( ethic count not fee or commission, if everyone perceived fee base is better, they just make a jump and use fee base as a tool to make that sale. ). Not just these, the structure of fund(hedge fund included) are not new to me.

Looking forward to re-read the ten speeches again.

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Responses

  1. […] An outstanding example on Supply and Demand. One of the four instances or the best example on this : https://illdoitmyself.wordpress.com/2008/04/16/four-instances-where-increase-in-price-lead-to-increas… […]


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