A comment or two will be greeted with warm hands.

29 September 2008

[Challenge] Why does Demand Increase as Price Increase?

Customer: "What? 8% increase in price?"

Salesman: "I apologize for the increased price. you have to understand, companies are falling, people are going broke, and we are going through a tough time here. So weee..."


Salesman: "I'm sorry, but I've repeated myself a lot of times. Its a tough period we are going through now. The price increase is perfectly justified if we were to continue to stay in business."

Customer: "Sigh....alrite, I'll take 444 of those today. I'll come back for more next week"

Salesman: "444? Woah, and I thought I busted this sales. I believe that you aware that our goods are perhaps one of the most inferior type compared to all our competitors. 444? Geez, you usually buy 380 from us every week. But you are buying a 444 for this week? What happened?"

Customer: "yea, we want to stay in business too. We can't help it but to buy more despite you bastards trying to slash us here."

Salesman: "Don't mind me asking. Our competitors lowered their price. Shouldn't you be interested in dealing business with them instead?"

Customer: "Nupe. If I explain the whole situation, and if your boss is smart enough to understand the whole concept, you guys might jack up the price even more. And we can't afford that happening to us. Just to let you know, we reduced our business dealings with your competitors."

Salesman: "funny, competitors lowered their price, we raised out price and yet you are buying heaps from us. I'm not gonna ask more since I'm happy about this sales. Still....WOW, i guess you guys are doing pretty well. I mean, 380 to 444, thats like 16% increased in sales. Thanks"

Customer: "Ironic eh?"

You read the conversation, but can you figure what just happened?
Despite a 8% rise in price, There is a 16% increase in demand. Plus, this scenario happened in times of bad economy. Not to mention, the customer could do business with a competitor who lowered their prices.

Woah, what just happen? The customer could ditch the salesman and do business with the competitor instead which obviously has a higher quality product. But he did not do that, instead he chose to reduce business dealing with the competitor (who lowered his price) and increase business dealing with salesman (who increased his price).

Logically speaking for most cases, demand decreases as price increases. But this case is an exact opposite whereby demand increases as price increases.

If you are observant enough, you could see the logic behind it being applied to real world situations. This is a very rare situation, but it does happen sometimes.

There is a perfect sound logical explanation behind this. My challenge to you is:
"Can you figure out what is the logic behind this case whereby demand increased as price increased?"

I'll make it easy for you by putting the above scenario in point form:
1) Salesman price - up by 8%
2) Competitor price - down by ??%
3) Demand from customer - up by 16%
4) Scenario happened in times of bad economy.

Logic behind this will be presented in my next post. Best commenter will have an honorary mention in my next post.


742 said...

Does that have anything to do with "higher price is associated with superior quality"? This is the answer i got from google.

3POINT8 said...

nupe. The customer is buying an inferior good. (even if the quality of superior goods has been improved, its still inferior compared to competitors product) So, the higher price does not justify that reason.

Alpha Whale said...

If the price of a product increased by 8%, and there was a purchase of 444 when there was a 16% increase in demand, we can assume that the situation remains profitable for the customer. Whether he sells the product for more or whether the product was initially cheap enough that the increase did not greatly affect the revenue of the customer, we do not know.

The increase in price does not mean that the product is nessecarily better than the others, though we can assume that the latter part of the statement is true due to the reaction of the competitor price. During a poor economical time, there is justification in raising prices in order to maintain business; a decrease in price is cause for suspision less there be enough of a customer base that the decrease in price attracts enough to maintain the same profits.

While there are many other variables thus, my assumption is that the competitors are selling subpar product in order to be able to decrease the price during an economic falling which causes the customer to purchase from the seller who has increased the price*. The assumption is that the demand outweighs the price increase and that a profit is still possible.

*The flip side is that the competitor could have a large enough customer base to decrease the price slightly but carefully: attracting more customers and maintaining a positive revenue. The other seller may be a smaller business and harder hit by the economic situation. The customer may choose the smaller business not only to be nice, but because it increases his companies profile in the public eye.

I don't know, I'm just kind of guessing at all this. Never was much for economics or anything like this, just guesswork. Oh and of course, nice blog (came through a facebook group believe it or not),

Traceur PicPac aka Alpha Whale aka EpicPants

JessieTan said...

demand will keep increasin no matter what. needs will keep coming and coming. =)

JessieTan said...

demand will keep increasin no matter what. needs will keep coming and coming. =)

Alpha Whale said...

I neglected the fact that the quality was inferior.

This doesn't change too many of my previous statements but implies that perhaps the customer is selling the purchased products for a profit, or his company is using them to create a product whose market price is far above the expenses for the material purchased. This would make sense as an inferior material could still be viable in such a situation.

As far as the relation between the company and the salesperson's business, it could be that the company is trying to maintain a good public profile by supporting smaller places. Other options include the possibility that the cheaper and better quality options have more of a competition for purchasing: the prices may go up unexpectedly if the sellers see that there is a requirement for their goods and a competition between companies for it. The smaller business may recognize the quality of the link with the single company who returns constantly and offer discounts or other such deals.

Or the company owners could be siblings ;)

aw said...

The current supplier's 8% increase still make it less than the competitors' prices after they lowered their prices.

That's what's happening with China. European/US lower their prices, but still can't compete with China who increase their prices due to increased raw material and other production costs.

There is also shipping, delivery schedule and other considerations that will affect the final cost to the end user.

The end user just wants the cheapest price possible in bad times, they don't bother about better quality from Europe/US.

Thank you.

shag said...

The product is a Giffen good, where the income effect is greater than the substitution effect.

whats my prize?

aw said...

Oh I forgot. Since you mentioned it is a rare occurence, there is another possibility.

Historically, luxury goods have sometimes done even better in times of bad economy - in bad times, the rich get even richer due to certain economic conditions (hedging, shorting, control of certain basic resources).

So if the product you are referring to is a product bought by the wealthy, then demand will increase.

Johnny Ong said...

commenters here are really good

Cybermate said...

Confusingly intelligently written!

cbenc12 said...

tat really makes sense when u put it that way. bravo!

cbenc12 said...

tat really makes sense when u put it that way. bravo!

kenwooi said...

This is interesting.