<story><title>Pricing niche products</title><url>https://kevinlynagh.com/notes/pricing-niche-products/</url></story><parent_chain><item><author>whack</author><text>When eBay first started, I loved the idea of auctions as a way to set market prices. From an economic and game-theory perspective, it is so optimal!&lt;p&gt;Clearly as later examples like Amazon have shown, auctions don&amp;#x27;t make sense for most product categories. I believe this is mainly due to psychological reasons.&lt;p&gt;Decision-fatigue is a real thing. People dislike having to think hard. In a fixed-price sale, the buyer just has to ask themselves one yes&amp;#x2F;no question: &lt;i&gt;&amp;quot;Would I be happy buying this item for $X?&amp;quot;&lt;/i&gt; This is a very simple question to answer. In a sealed-bid auction, people have to ask themselves &lt;i&gt;&amp;quot;What $X am I willing to pay for this item&amp;quot;&lt;/i&gt;, which is a tremendously more complex question to answer. In fact, from a game theory perspective, you should never put in a bid that you&amp;#x27;re &amp;quot;happy with&amp;quot;. You should put in a bid where you&amp;#x27;re exactly neutral between buying-vs-not-buying. Otherwise, you&amp;#x27;re leaving money on the table. This is asking people to make purchasing decisions whose outcomes will leave them explicitly &lt;i&gt;not happy&lt;/i&gt; - a state of mind that every person hates putting themselves in.&lt;p&gt;Couple this together with the fact that the buyer doesn&amp;#x27;t even know whether they won the auction, until X hours&amp;#x2F;days later. And during this period of time, they are under a state of uncertainty, which is another mental state that people generally hate.&lt;p&gt;I think that for very expensive, non-time-critical and hobbyist items, an auction may work great. People may actually enjoy pouring effort into it because it is their hobby. But for any item that people just want to buy-and-move-on, auctions are a horrible mechanism. Perhaps one day when AI assistants make all our purchasing decisions for us, auctions will become the norm, but certainly not today.</text></item></parent_chain><comment><author>SamBam</author><text>&amp;gt; You should put in a bid where you&amp;#x27;re exactly neutral between buying-vs-not-buying. Otherwise, you&amp;#x27;re leaving money on the table. This is asking people to make purchasing decisions whose outcomes will leave them explicitly not happy - a state of mind that every person hates putting themselves in.&lt;p&gt;It seems that this is a problem the Vickrey auction solves. By charging the price offered by the 11th highest bidder, they are ensuring that everyone pays less than or equal to their bid, and most likely less than.&lt;p&gt;This works out perfectly if everyone actually bids their neutral point: the winners are all either neutral or happy (most likely happy), the 11th is neutral, and the losers are all neutral or happy (most likely happy).&lt;p&gt;In practice, people bid at a price that they&amp;#x27;d be &lt;i&gt;happy&lt;/i&gt; to get it, so actually the 11th will feel slightly miffed that they weren&amp;#x27;t able to purchase at that price. And of course all the losers will be annoyed that it cost so much. But the former problem can&amp;#x27;t really be helped, and the latter is baked into basic supply-demand.</text></comment>
<story><title>Pricing niche products</title><url>https://kevinlynagh.com/notes/pricing-niche-products/</url></story><parent_chain><item><author>whack</author><text>When eBay first started, I loved the idea of auctions as a way to set market prices. From an economic and game-theory perspective, it is so optimal!&lt;p&gt;Clearly as later examples like Amazon have shown, auctions don&amp;#x27;t make sense for most product categories. I believe this is mainly due to psychological reasons.&lt;p&gt;Decision-fatigue is a real thing. People dislike having to think hard. In a fixed-price sale, the buyer just has to ask themselves one yes&amp;#x2F;no question: &lt;i&gt;&amp;quot;Would I be happy buying this item for $X?&amp;quot;&lt;/i&gt; This is a very simple question to answer. In a sealed-bid auction, people have to ask themselves &lt;i&gt;&amp;quot;What $X am I willing to pay for this item&amp;quot;&lt;/i&gt;, which is a tremendously more complex question to answer. In fact, from a game theory perspective, you should never put in a bid that you&amp;#x27;re &amp;quot;happy with&amp;quot;. You should put in a bid where you&amp;#x27;re exactly neutral between buying-vs-not-buying. Otherwise, you&amp;#x27;re leaving money on the table. This is asking people to make purchasing decisions whose outcomes will leave them explicitly &lt;i&gt;not happy&lt;/i&gt; - a state of mind that every person hates putting themselves in.&lt;p&gt;Couple this together with the fact that the buyer doesn&amp;#x27;t even know whether they won the auction, until X hours&amp;#x2F;days later. And during this period of time, they are under a state of uncertainty, which is another mental state that people generally hate.&lt;p&gt;I think that for very expensive, non-time-critical and hobbyist items, an auction may work great. People may actually enjoy pouring effort into it because it is their hobby. But for any item that people just want to buy-and-move-on, auctions are a horrible mechanism. Perhaps one day when AI assistants make all our purchasing decisions for us, auctions will become the norm, but certainly not today.</text></item></parent_chain><comment><author>octorian</author><text>&amp;gt; When eBay first started, I loved the idea of auctions as a way to set market prices. From an economic and game-theory perspective, it is so optimal!&lt;p&gt;&amp;gt; Clearly as later examples like Amazon have shown, auctions don&amp;#x27;t make sense for most product categories. I believe this is mainly due to psychological reasons.&lt;p&gt;I&amp;#x27;ve always loved eBay as a way to introduce sanity into the prices of old&amp;#x2F;used items. Especially computer equipment, where &amp;quot;regular vendors&amp;quot; would rather let it sit on the shelf marked at 10x what its worth than actually price it to a level someone would be willing to pay.&lt;p&gt;Of course for new items, it never made any sense. The eBay prices were sometimes even higher than regular vendors, hoping to catch people in the place they happened to be looking.</text></comment>