“Why do they make the prices so high for toys?”
“Who is they, sweetheart?”
It was an interesting conversation on our way out of the Walmart parking lot. My six-year-old had decided to eschew a toy purchase so that she could save for an eventual trip to the Bahamas.
She was expressing a common fallacy: there is some they out there responsible for high prices. Perhaps it’s a cabal of villains rubbing their hands at the thought of over-charging us, whatever that means, for food, clothing, shelter, toys, and so on.
Her frustration is misplaced. “They” don’t set prices. “They” respond to market conditions in which “they” have to compete with other firms and we have to compete with other consumers.
Toys are expensive, in other words, because there are a lot of other people who might want to buy the same toys, or even taking it back a step they might want to use the stuff that goes into the toys to make something else–different toys, perhaps, or something that isn’t a “toy” at all.
Fundamentally, a lot of us adhere to what are essentially conspiracy theories of prices specifically and social phenomena more generally. “They” aren’t setting high prices out of contempt for you or because they don’t like you. Prices are high or low depending on the forces of supply and demand—and if the price of something is high, it’s because there isn’t a lot to go around relative to the demand.
Paradoxically, conspiracy theories of price formation place the blame on the wrong shoulders. As a consumer, you’re not in any kind of adversarial or competitive relationship with the suppliers. You’re competing with other demanders. That thing you want so badly costs $10 rather than $5 because the firm is reasonably certain that if you won’t pay $10, someone will.
Here’s a specific example. In 2009, I went on a Mexican Riviera cruise with my family. At one stop, I visited a kiosk that was selling luchador (Mexican wrestling) masks. I wanted one. The vendor wanted $10. I tried over time to bargain him down to $5. He wouldn’t budge. I ended up paying $10 for the mask.
Why? Was it because the vendor was callous? Mean? Greedy? Perhaps I’d like to think so—after all, I would have loved to pay $5 rather than $10. But the opportunity cost to the vendor of selling me the mask for $5 would be the $10 he probably could have gotten for the mask from another customer. The prospect of the $10 from that other customer—with whom I was competing—made him understandably reluctant to sell the mask to me for a price I would have found more agreeable.
When markets are competitive, prices don’t change because firms are conspiring against you. Prices change because other demanders are competing with you.