Supply and Demand: Behind the Scenes of Retail Pricing

How consumer input affects the price of everything you buy.

By: Seth Macy
October 7, 2011

Let’s take a trip back in time. Not too far; just 2006. America’s economy was zipping along at a frenetic pace. The price of real estate rose exponentially, and if you tried to tell someone that the market wasn’t sustainable, they would laugh in your face. Sony began gearing up for the release of the PlayStation 3, and if you spent any time on the Internet, you probably witnessed an argument or two concerning the $599 price tag for the more feature-rich of the system’s two models. The two sides of the argument generally boiled down to “it cost too much” versus “it’s a great value.” And you know what? Both sides were correct.

The fact that the PS3 cost more than the sum of its parts could be proven by gathering together the prices of similar, individual pieces (most Blu-Ray players at the time were still more expensive than the PS3, with none of the extra features). This much was undeniable. However, value is a wholly subjective notion and decided by consumers. If a consumer sees value in a product such as the PS3, then they decide that the price is just. If not, they simply don’t buy it, buy a substitute product, or wait until the price comes down to a level they feel is acceptable. This is known in economics as the subjective theory of value.