Price parity, evolution and dandruff.

For anyone on here to read anything but economic theory so dry it makes dandruff look squelchy, please be on your way. You won’t thank me.

For everyone else I’ll make plain my starting point. I consider myself an evolutionary economist. To put that in perspective, I have a ‘c’ grade at economics A-level. It was a double lesson before lunch and I spent my time drawing my lunch rather than listening to Dr. Wigley and the specifics of micro-economic theory. I remember a couple of useful things such as the latin term ‘ceteris paribus’ – all other things being equal.

After I left school and distanced myself from the stultifying boredom of the classroom, I taught myself evolution and almost everything else I’ve understood subsequently fits into that. The free market, for example. Make everything possible and see how it develops. Any restrictions you impose will constrain growth.

And that’s my principle argument against price parity. It’s an artificial construct. We don’t have anywhere in nature where all things are equal by diktat.

Some proponents of price parity argue that it’s a natural evolution. They never quite spell it out but I infer from that they mean under perfect competition there will be a tendency towards equal pricing. If Asda sees that Tesco is selling Sunpat Crunchy Peanut Butter for for £1.49 and they know Stan from Peckam Rye is aware of that then, ceteris paribus, Asda will price at £1.48. I like nice simple arguments and that’s nice and simple.

My arguments against that idea are 3-fold, namely:

1. Perfect competition doesn’t exist

I fully accept that 20 years ago it was merely a textbook construct and that the internet has changed that. It is theoretically possible, now or in the near future, for companies to know their competitors prices and to price accordingly.

But that’s a very long way from perfect competition. The competitor’s cost structure is also a component. Even that might be public knowledge at some point in the distant future (I’m all for that) but then there’s personal choice. Consumer behavior. Stan cares more about the natural affinity he has with Tesco by virtue of the fact that his surname is Tasco than the 1 pence he’d save as Asda. It turns out that factor alone is worth up to 7% on every purchase. Who’d have thought it?!

2. We’ve tried it.

We used to have perfect competition in a sense. Back in the 80s it didn’t matter which bookshop you went to in the U.K. because they all sold the same books at the same price. In the 90s the competition authorities thought that was a rather daft idea and abolished it. Now you can even buy 3 books for the price of 2. It’s gone crazy.

We also tried it in Soviet Russia. Big Time. We simplified everything to just one store. None of this looney price comparison nonsense. The consumer bought what they could at a price they could afford and the seller sold at a price it could afford. It was grey but perfect.

3. Let it be.

If there really is a natural tendency towards price parity then let it happen. You don’t need to contract it and enforce it.

I can well believe it will happen but I have no idea what it will look like except that it’s very unlikely to be a static because nature doesn’t do static. Maybe there will involve two very closely contested companies. Maybe twenty or two hundred. Or maybe there will be a dynamic equilibrium, like the tides and the seashore, with gentle price swings one way or another or massive price swings like our own economies.

The point is, I don’t know. It’s entirely possible that I slept through that lesson in which case I do apologise, Mr. Wigley, it’s just when I’m hungry my mind goes to jelly. If anyone else was listening that day or, indeed, you’ve heard anything to the contrary since then, please speak now.

That just leaves me to thank God for Evolution. I want you to know that I’m with You every step of the way. Ceteris Paribus.

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