Friday, February 28, 2014

Small Niche?

Why pay 249% more than the real thing? What advantage do fake pennies have over real ones?
Perhaps it is a sorting mechanism to find gullible shoppers?

5 comments:

  1. It's for teaching. Less likely to be stolen.

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  2. I took this picture

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  3. True it could be used for anything. But John, even if they were stolen, you would save money. At $3.49 for 100 pieces or $.0349 each, you are losing money vs. if someone steals one cent you are only losing $.01. Every post on this humor link was actually funny while proving an economic theory. This product seems like the very definition of adverse selection (Adverse selection occurs because of information asymmetries and difficulties in selecting customers.) (Froeb, 2014) Why not go to the bank and grab a role for 50 cents! Price-driven adverse selection in consumer lending can be explained in terms of differential price-sensitivity between lenders who will default (“bads”) and those who will not (“goods”). Empirically, many lenders have noticed that offering a less-desirable (e.g. higher price) product to the same group of prospective borrowers (a segment) leads to higher default rates. (Phillips & Raffard, 2011)
    Works Cited
    Froeb, e. (2014). Managerial Economics; A problem solving approach (3rd edition). Mason, OH: South-Western Cengage Learning.
    Phillips, R., & Raffard, R. (2011). Price-Driven Adverse Selection in Consumer Lending. Columbia University Center for Pricing and Revenue Management, 25.

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    2. Actually I think that this does not illustrate adverse selection as much as it illustrates the indifference principle. After all, as John B. Chilton points out, if plastic pennies are less likely to be stolen, one should be willing to pay more for plastic pennies than real pennies. The question is "how much more?" I would be indifferent between paying for the plastic pennies or using real money so long as real pennies were 3.49 times more likely to be stolen than plastic pennies. Anything above that amount would make plastic pennies more attractive and anything less than that amount would make plastic pennies less attractive.

      For example, if real pennies were four times as likely to be stolen than plastic pennies and one found that 100 plastic pennies were stolen once every four weeks that would imply that 100 real pennies would be stolen once a week. This would lead to a need to replace the plastic pennies 13 times a year, which would cost the school district 13 x $3.49 = $41.88/year. On the other hand the real pennies would have to be replaced every single week at a cost of $1.00 x 52 = $52.00/year.

      The point is that plastic pennies probably are stolen quite a bit less than real pennies and that is why this product exists (or at least school districts believe that they are stolen quite a bit less than real pennies are).

      Still, they are likely not all that popular an item or I would suspect that economies of scale and competition would have driven the price down to a much lower price point.

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