
Alchian–Allen effect - henryaj
https://en.wikipedia.org/wiki/Alchian%E2%80%93Allen_effect
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tlb
The reverse effect works too. When an overhead cost drops, people consume
crappier versions. Free online news is a striking example. If you walked down
to the news stand and paid $0.75 for a physical newspaper and the content was
all Clickhole listicles you'd never buy it again. But people consume plenty
for free.

~~~
mikeash
There was and still is plenty of Clickhole-level crap on newsstands next to
the newspapers. People buy it.

~~~
stonecraftwolf
In fact IIRC people buy printbait considerably more than they buy actual
newspapers.

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anonytrary
I thought this was just common sense. Suppose you're buying necklaces.

Today: Gold $10; Silver $0.10

Tomorrow: Gold $1010; Silver $1000.10

By adding a constant to both prices, the price ratio no longer remains aligned
with the underlying value ratio. Assuming you have to get one necklace each
day, there is less of a decision tomorrow than there is today, because silver
is overpriced relative to gold. The correct prices for tomorrow should have
been "Gold: $1010, Silver: $10.10", so you're effectively getting _more_
scammed by going with silver.

~~~
jetrink
I'd agree that once presented with as stark an example as yours, it is common
sense, but it takes some insight to create such a thought experiment in the
first place.

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dfee
> when the prices of two substitute goods, such as high and low grades of the
> same product, are both increased by a fixed per-unit amount such as a
> transportation cost or a lump-sum tax, consumption will shift toward the
> higher-grade product. This is true because the added per-unit amount
> decreases the relative price of the higher-grade product.

> Another example is that Australians drink higher-quality Californian wine
> than Californians, and vice versa, because it is only worth the
> transportation costs for the most expensive wine.

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ashrk
My unscientific observation has been that the opposite holds for French wine.
They seem to ship the US their worst, but it hits our shelves marked up 4x
what it'd be in France.

Maybe it's a branding thing, and French wine's got enough power in that
department that they don't need to send us good stuff to move product, at
least at the lower end. Maybe with some French writing on the label low-price-
shopping consumers are equally likely to buy it whether or not it tastes good,
so there's no reason to send anything but the worst they have. Other European
countries seem to have no trouble shipping us nice wine in the lower price
tiers, but then they're not France.

~~~
zwaps
In reality there's a lot more in a product than just good and bad.

Especially with wine, where it is not actually so clear that a true quality
ordering exists, all sorts of other effects are at play. For example, we know
how the signaling value of price overrides some true quality variables.

In economics, its important to know these simple models and their outcomes,
but it is equally important to know when other effects are at play, or when
assumptions do not hold

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lurquer
So that's why I go broke on vacations... I want to eat somewhere cheap and the
wife says, "No, let's go to the expensive joint... we've already spent $x
getting here, so an extra $50 won't make a difference!" Now I have a name for
the phenomena.

~~~
peterkshultz
I would call what you're experiencing the sunk cost fallacy [1].

[1]:
[https://en.wikipedia.org/wiki/Sunk_cost#Loss_aversion_and_th...](https://en.wikipedia.org/wiki/Sunk_cost#Loss_aversion_and_the_sunk_cost_fallacy)

~~~
lurquer
No. The sunk cost comes into play in explaining why we've gone to Disney World
three time too many simply because we bought some multi-day package years ago.
I hate Disney. She hates Dianey. But, we gotta use up the stinking tickets.

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gnulinux
> the Alchian–Allen theorem

Uhm, I'm not an economist but how is this a "theorem"? What is the theory,
what are the axioms, where is the proof? This seems like an empirically
observed trend.

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shitgoose
there is some basic arithmetic in the article. imagine the cost was raised by
$100, then prices of beans would be $101.5 and $103, i.e. pretty much everyone
would go for higher quality. gradually decrease the premium, and you will
gradually decrease the number of people who prefer the higher grade product in
favor of lower price. this is pretty much it. quite simple and neat
observation, actually.

"the harder the punishment, the harder the drug" is another very important
non-trivial observation, missed by most people.

~~~
gnulinux
> quite simple and neat observation, actually.

Did you read my comment? That's exactly what I wrote. This is not a "theorem".
Theorems live inside theories, they're logically implied by axioms of the
theories. That basic arithmetic proves nothing of the sort.

~~~
zwaps
Then it is a theorem, as it is tautologically implied by certain axioms
imposed on preference relations or choice correspondences, such as
completeness, transitivity and a notion of continuity.

Since the whole theory won't fit in one wikipedia article, I suggest you read
the first chapters or either a) Mas-Collel, Whinston and Green or b) Kreps,
Microeconomic Foundations I (not the old undergrad book from him)

This would provide you with the theory to understand this result in a more
mathematical correct way.

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robrenaud
> Another example is that Australians drink higher-quality Californian wine
> than Californians, and vice versa, because it is only worth the
> transportation costs for the most expensive wine.

As a person who loves Belgian beer, I came to this realization when I was on a
bit of a beercation there. For the most part, the good Belgian beer makes it
here. When I'd try beer from breweries I hadn't heard of while I was there, it
was mostly worse than the Belgian beer I had tried at home.

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andyjohnson0
I don't see anything in the article about the extent to which this effect has
been observed in the real world. Is it another example of economists assuming
that people are idealised rational actors (who would prefer a 1.6x coffee bean
premium to a 2x, to take the example in the article), or is there some hard
evidence that it explains the real behaviour of real people?

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dyeje
They give 3 examples at the end:

"The effect has been studied as it applies to illegal drugs and it has been
shown that the potency of marijuana increased in response to higher
enforcement budgets,[2] and there was a similar effect for alcohol in the U.S.
during Prohibition.[3] This effect is called Iron law of prohibition or
Cardinal rule of prohibition.

Another example is that Australians drink higher-quality Californian wine than
Californians, and vice versa, because it is only worth the transportation
costs for the most expensive wine.[4]"

~~~
andyjohnson0
Thanks. I did read the article and noticed the examples that you referred to.

To clarify: I just don't see where the _evidence_ for any of these claims is
accessible. Four of the six references don't appear to be available on-line.
Of the two that are, one is a brief summary that leads to a paywalled FT
article that I can't read, and the other is a ~200 pdf economics textbook.

I'm happy to accept that a price differential changes when a constant is added
to both prices. But I do question whether people in the real world will switch
to a different type of coffee bean because the differential goes from x2 to
x1.6. And I wanted to know more about the _real-world_ circumstances in which
it had been observed.

I might be pursuaded that the market for illegal drugs/alcohol could exhibit
this effect, but it would be interesting to know how how, given that illegal
products are probably going to be subject to other effects not shared by legal
products, biases and selectivities were compensated for.

Edit: Made first paragraph clearer.

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pc86
The fact that the sources are not easily accessible to you for free does not
negate the fact that there are cited sources explicitly disproving your
assumption (that this is just economists making things up).

> _Thanks, I also read the article._

I'm not sure the extent to which you considered this, but in this context it's
hard to read that sentence without making you sound like a jerk.

~~~
andyjohnson0
> > Thanks, I also read the article.

> I'm not sure the extent to which you considered this, but in this context
> it's hard to read that sentence without making you sound like a jerk.

Did you consider the possibility that I was simply thanking dyeje for their
reply, and confirming that I had noticed the examples that they referred to?
Assumption of good faith, etc? Nevertheless I've edited my reply to hopefully
make my intended meaning clear.

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pwaivers
> _The effect has been studied as it applies to illegal drugs and it has been
> shown that the potency of marijuana increased in response to higher
> enforcement budgets..._

If the price of all marijuana goes up, then I bet overall usage of it goes
down even if the individual potency goes up.

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cbsmith
Depends... if quality goes up, sometimes that grows the demand for a product.
Kraft Parmesan convinced me I didn't like Parmesan for the longest time...

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tr352
Similar to an even exchange in chess. If you’re behind it’s a good deal, if
you’re ahead it’s bad. Of course evaluating value taking into account
positions (and thus determining whether an exchange is really “even”) is not
straightforward.

~~~
murftown
I don't consider myself a good chess player at all, but I always thought the
opposite way: When I'm ahead, I'm willing to whittle down both sides with even
trades until they are left with no options and can be checkmated. When I'm
behind, an even trade feels scary - I'm looking for a way to catch up.

Am I missing some reason why it would be the opposite?

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tr352
Yes you're right, I meant the exact opposite.

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cbsmith
I didn't realize they had a name for it... it seems so obvious.

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jldugger
> it seems so obvious.

I'm not sure the effect is logically sound -- before the price hikes you
weren't willing to pay a dollar more for name brand (or premium drugs etc),
but after the price hike you are? I'm not sure if the authors have a
mathematical model supporting the decision, or are just observing illegal drug
markets and generalizing.

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TezlaOil
> before the price hikes you weren't willing to pay a dollar more for name
> brand (or premium drugs etc), but after the price hike you are?

Imagine that 10 normal people and Bill Gates want to buy bottles of wine. Bill
goes for a bottle of $6000 Richebourg Grand Cru, and the 10 normal people
always go for Shitscreek Red, sold for $4. So about 9% of the buyers are
willing to pay extra for the name brand.

After the Great Wine Tax Bill of 2021, the prices are both increased by a
fixed per-bottle amount of $6000. So now the Richebourg costs $12000, and the
Shitscreek costs $6004. The 10 normal people migrate to beer, and Bill Gates
still buys Richebourg. So about 100% of the buyers are willing to pay extra
for the name brand.

~~~
srtjstjsj
That's not what the effect is about. The effect is about normal people
becoming more likely to choose the expensive one because it appears to be
"less 'more expensive'", because they judge ratios instead of absolute values.

A similar irrationality is when people will do an extra hour's work to save
$50 off a $100 purchase, but not to save $50 off a $10000 purchase.

