The July 30, 2017 WSJ has an article by Andy Kessler on "The High Cost of Raising Prices," arguing that too many business kept raising prices on a shrinking consumer market in a desperate effort to maintain revenue.
He may have a point.
But one of the examples that leads the article is way off base, I think.
The article opens:
Most investors love companies with pricing power. Me? Not so much. Consider the life of a wealthy expat who asked a broker to show him the most expensive apartments in Rome. The first, at €20,000 a month, was a dump. So was the second, at €18,000. Yet the third apartment, at €16,000, was well-maintained, with gorgeous views of the Italian capital. Sensing confusion, the broker explained that the first two apartments had sat empty for months—and the owners kept raising prices to make up for the lost rent.
Sound familiar? The U.S. Postal Service has seen first-class mail volume drop from a peak of 103.7 billion letters in 2001 to 61.2 billion last year. It raised rates from 34 cents to 49 cents to make up the difference. Movie tickets sold in the U.S. peaked at nearly 1.6 billion in 2002. Last year only 1.3 billion were sold. Meantime, average ticket prices jumped from $5.81 to $8.65.
Um, excuse me, but 1.3B tickets at $8.65 is $11.2B dollars. And 1.6B tickets at $5.81 is only $9.2B dollars. So you make MORE money at $8.65 tickets. I'm using nominal dollars - but so was Kessler. It's like saying somebody used to sell 10 units at 10 dollars, and now he only sells 8 units at $20, so he's stupid. At the least, the movie ticket example (comparing prices 15 years apart, which accounts for almost all of the price change) is irrelevant to where he starts, the Italian apartments with quarterly escalating prices until they are unrentable.
Overall, Kessler may have a theme, but the movie ticket example isn't it. Didn't a copy editor have the math skills to realize the movie ticket example is boneheaded?
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Footnotes.
In real dollars, $5.65 in 2002 in $7.68 today. So using nominal dollars to compare prices that are 15 or 20 years apart is inept.
Kessler might have been thinking that the extra 0.3B people in 2002 might have had extra profits on their sodas and popcorn - but there's no clue he expected the reading to be making that leap.
Other factors in the movie example could include a changing marketplace, with huge increases in alternative entertainments, giving up a wedge of the cheapest market to migrate to the upper wedge of higher price market might be the best tactic. Or patrons might respond to bigger nicer theaters, which are more expensive, but without which ticket attrition might have been much worse. (There may have been A/B tests that $8 tickets are more profitable than $6 tickets, for example, which goes against the thesis that price increases are the actions of clueless management, like the italian apartment owners.)
