I’m headed to a good old-fashioned swap meet today — hundreds of vendors, thousands of shoppers, and hopefully, at least one great deal to be found! I have to admit, I love the prospect of discovering a good bargain.
The best part of swap meets, flea markets, and garage sales is that the prices are negotiable. Experienced shoppers know to never pay the advertised price. They hone their bargaining skills, trying to get the best possible deal. In fact, a vendor may end up selling very similar items at different prices to various buyers.
That means some people are going to be relatively better off than others when all is said and done, right? True, but who is better off may not be as obvious as it first seems.
Who got the better bobblehead bargain?
Imagine both Jerry and I buy an Adam Smith bobblehead, and I pay $5 while Jerry pays $3. To determine who is better off (relative to the other) requires knowing a little more about the individual buyers — in particular, what the highest price they were willing to pay was. I paid $5, but suppose I would have been willing to pay $10. Jerry, on the other hand, was only willing to pay $4.
Economists call the difference between what someone is willing to pay for an item and what they actually paid consumer surplus. In our example, my consumer surplus is $5 and Jerry’s is $1. When consumer surplus is considered, we can see how I might be happier about my purchase than Jerry is.
We can also look at our example from the seller’s point of view. At what price are they willing to sell their merchandise? If they wouldn’t have sold the figurine for anything less than $2, their producer surplus is $1 for the sale to Jerry and $3 for mine. They are also happy with the trades!
What happens when vendors aren’t flexible on price?
The variable pricing seen at swap meets not only allows us to witness firsthand how consumer and producer surplus differ depending on individual preferences, but it also gives us insight into another economic puzzle. If some people’s willingness to pay for something differs from others’, charging different prices can result in greater overall producer and consumer surplus. More people can be a part of the deal.
Going back to our example, imagine that the vendor decides to sell bobbleheads for no less than $5 that day. The vendor’s decision still results in a $5 surplus for me (remember, I would have bought one for $10), but now, Jerry doesn’t get his bobblehead, because he wasn’t willing to pay more than $4. Additionally, if the vendor can’t find another buyer to replace Jerry, then the vendor loses out on the surplus from an additional sale.
Successful shoppers and vendors in marketplaces with negotiable prices are skilled at determining their potential trading partners’ willingness to buy or sell. By doing so, they maximize the number of trades as well as consumer and producer surplus. Everyone goes home with a deal!