27 September 2009

Not the Same Going Down as Up

Vernon Smith recommended this 1992 article [PDF] to me:
This analysis indicates that reference price formation does have significant effects on consumer behavior. Furthermore, these effects are asymmetric with consumers two and a half times more responsive to egg price increases that are in excess of the reference price than they are to comparable egg price decreases.
If you do not think that the response to egg price increases is important (demand falls more quickly when prices rise than it rises when prices fall), then you may want to apply this result to other market goods (share prices, houses, etc.) in your thinking of how we are going to respond to a change in current economic conditions -- especially if (5%+) inflation returns to the US.

In relation to water prices, this result gives us reason to suspect that higher prices will lead to strong contractions in demand (not quite as strong as 2.5 times, since there are fewer substitutes for water than for eggs...)

Bottom Line: We respond more strongly to (real/nominal) price increases than decreases. Plan accordingly.

3 comments:

  1. WaterSource/WaterBank27 September, 2009 05:45

    The price won't go up until all sources have been exhausted ... the price of eggs in communist countries didn't go up until all the bird eggs disappeared ... that is why there are virtually no birds other than migratory gulls & scavenger crows in the Czech Republic, Russia and China ... notice the lack thereof if you visit...

    Water in my lifetime worked the same way ... groundwater in particular had to be exhaused legally and illegally followed by the legalization of the illegal ie domestic wells before water was worth the hastle of bringing the product to market through engineering analysis and the Court procedures let alone the environmental hurtles. Turn-key water for developments that didn't want to wait for years brought a premium in the market place. Where available, subsidized water from Bureau projects set this natural occurance back 25 years.

    Case in point: A spring on Aspen Mountain sold for many millions of dollars and yet a mile away the same amount of water from the Roaring Fork could be exchanged with Bureau water for a $1000.

    CA in particular will now follow the same path for cheap water ...

    straight to the groundwater supplies which will be mined/depleted in about 30 years as was the Arkansas, South Platte and Rio Grande Rivers in my lifetime.

    Happy Trails ...WaterSource waterrdw@yahoo.com

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  2. @ML -- Yeah, I thought of that reading this this morning. The article should be called "prospect empirics."

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