I’m reading “Modern Principles of Economics” by Alex Tabarrok and Tyler Cowen. I’m really enjoying it—it’s engagingly written and even though I’ve learned most of the material before, I keep learning fun little things.
Here’s my favorite tidbit so far. Printer companies usually sell printers relatively cheaply and set high prices on toner. Similarly, game consoles are usually sold cheaply, with the cost recouped by sales of games. Why is this? (Note that in both cases, the goods are “tied”: there’s competition between Xbox and Playstation on both console prices and game prices, but Xbox games can only be played on Xbox—-Microsoft and Sony aren’t competing on price for games on the other’s console.)
There are a bunch of reasons which are probably true to some extent but aren’t as interesting, so I’ll quickly mention them. Maybe customers are fooled by the low printer price and then get suckered into paying more for the toner. (But often companies buy printers and you’d expect them to take both prices into consideration. And there’s competition between printer companies, so maybe customers should be able to learn to buy the printers with cheaper toner after enough trips to the printer shop where they see cheaper options on the different toner brand.) Or maybe consumers have higher time discounting than companies, so this is effectively a small loan from the company to the consumer.
I’m interested in an explanation which isn’t about that kind of factor. You should think about this yourself, because I think it’s really fun!
Here’s a hint:
It’s about price discrimination. Printer companies would love to charge higher prices to people who want their services more, and charge lower prices to people who want their services less.
And here’s the answer:
People vary in how much they want printers. One way of guessing how much value someone derives from a a printer is seeing how many pages they print. So people who print more probably derive much more value from a printer than people who don’t print very much. Setting a high price on toner and a low price on printers lets you effectively price discriminate so that people who get more value from your product pay you more for it.
Isn’t that neat! It’s obvious once you think about it but I’d never thought about it before.