31 October 2009

Why buy two if one will do?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Onyinye Okwandu says:

Why do people purchase goods in bundles [i.e. - 2 for $3.00 instead of 1 for $1.79] if they initially only needed one?

I propose this question for a few reasons. Firstly, it was extremely difficult for me to figure out what to question on an economic standpoint so when I finally did think of something I didn’t bother to think of anything else. Secondly, [and lastly for that matter] I find myself doing this often. The idea of obtaining two seems to be an appealing idea for me and many consumers despite the obvious increase in price. So with that said, I am going to attempt to find a “bottom line” to my question using the concepts discussed in Zetland’s lectures along with my own personal opinion-since I am a representative of consumers.

For a consumer standpoint, when we purchase items in bundles we really don’t save a significant amount of money. For example, 2 packs of paper plates cost $3.00 and a single pack cost $1.79. Yes, there is a $0.58 difference but the producer receives an extra $1.50 [or so] more from your second purchase on top of the $1.79 you initially were prepared to pay. Nonetheless, this brings up a critical point. The consumer has no monetary constraint with the second purchase. Instead, the consumer has the financial resource to make a second purchase, so he/she will do so. We see an increase in utility with the second purchase rather than diminishing marginal returns. There is something about the price that makes us believe we are getting a deal. Because $1.79 is nearly $2.00, a dollar more does not seem to be that big of a deal. However, will the consumer purchase another bundle? No, probably not. At this point, diminishing marginal utility will start to take effect unless the consumer reaps a benefit from the third + purchase.

With the producer, he probably receives more of the benefit from the consumer’s second purchase. For one, from observation alone we can assume the production of paper plates is not very costly. There are many companies that produce paper plates, including ‘no name’ companies too. Hence, this plate market seems flexible in that a company can probably move in and out this market without tremendous consequence. Thus, the producer is making a significant profit from creating bundles and likely to drive its competition to do the same or out of the industry. Take note, the producer will not set the price significantly away from the original. For instance, the consumer is less likely to purchase the bundle if the price was $5.00 for two and still $1.79 for one. Therefore, with this in mind, the producer will only increase the price enough to make a little more.

Bottom line: We will purchase a good in pairs if the price is not significantly more than just purchasing one. Because 2 is greater than 1, consumers feel they are benefiting from this purchase even when at the end of the day it will cost us more.

1 comment:

  1. The question posed by the student is a good one, but lacks definitive follow through on the inermediary resons for buying the second part of the item in question. This has to go with Storage at the Home and the Convenience of having sufficient quantity on hand at the time of use. Prime example is the purchase of the most commonly needed products and the space to warehouse them until the intended time of usage. Case in point: I recently went to my dry grocer store and saw a package of Toilet Paper for $0.99 for 4 rolls. I thought it was a great deal, until i checked the main section where there were several brands , and several configurations. Brands A, B and C], Packaging selections of 8, 12, 24 rolls per pack, and 8, 12 Double Rolls. Now the Double Rolls, were not exactly twice the number in the singles, Singles = 140 sheets, Doubles = 240 in Brand A, but Brand B were only 176. So again the consumer is further fractioned to find the best value.

    In the end (pardon the pun), I settled to buy none, as I did not have the space (At that moment ) for the more economical 12 rolls double size (<16 cents per roll equivalent) vs $0.25 for the "4 pack", advertised on sale at the end aisle.

    ReplyDelete

Spammers, don't bother. I delete spam.