injuryupdate
18-07-2007, 06:08 PM
This article below doesn't mention surgeons but made me think about them. It surprises me that surgeons that seem to be pretty ordinary in outcomes (from the viewpoint of someone in the sports medicine industry) still charge $1500 per knee arthroscopy, say, and obviously have plenty of people willing to pay it. Perhaps this is why there aren't cheap prices for the mediocre surgeons around, as the surgeons who are relatively less busy can still create an impression of quality by charging high prices:
The uninformed pay the price
Ross Gittins | July 12, 2007 - 1:35AM (SMH)
http://smallbusiness.smh.com.au/managing/management/the-uninformed-pay-the-price-906106083.html?page=fullpage#contentSwap1
If you want to be a successful small business person, you need to think more carefully about the role of the prices you charge than your customers do.
What is the role of an item's price? To tell people how much they're required to pay? Sure - but there's a lot more to it.
In simple economic theory, the role of price is to bring supply and demand into balance. The market price is the meeting point between the seller's cost of supply (including a reasonable profit margin) and the buyer's willingness to pay.
But prices also convey information to buyers - and this is the bit canny sellers need to understand.
Simple economic theory assumes both buyers and sellers have "perfect knowledge" -of the nature of the goods being sold and of the prices being set by other sellers in the market.
In reality, although sellers are usually well informed about these matters - it's their bread and butter, after all - buyers are often not nearly as well informed. That's often because they don't buy such items often enough - or the items don't account for a big enough part of their budgets - to make it worth the time and effort it would take to be well-informed.
So there's the point: it's quite common for buyers to use the price of an item as an indicator of the quality of that item.
Consider the case of the experimenters who set up a stall selling boxes of Belgian chocolates at the annual Brussels food fair. On the first day, they set the price at 9 ($14) a box. Sales went well.
The next day they raised the price to 15 a box. An economist would expect this to lead to greatly reduced sales but, in fact, they doubled.
On the third day they slashed the price to 2. An economist would expect a total sell-out at that giveaway price but, in fact, sales collapsed.
So what on earth was going on? It's simple when you think about it. Without buying a box and tasting the chocolates, you couldn't tell how good they were.
So, in the absence of any other information to guide them, customers used the price being charged as an indicator of the quality of the chocolates.
They took the higher price to mean high quality and so they bought up. They took the lower price to mean inferior quality and so they avoided buying.
An anomalous and isolated example? Not really. Let's say you're off to a dinner party and stop off at the local bottle shop for some wine to give to your hosts. How do you pick the bottle you want?
Maybe you pick a wine you've had before and know is good. Maybe you can't find one of those but you can find a big-name brand you know you can rely on.
If so, rest assured you'll be paying a higher price for the big-name brand wine than you would for wine of a similar quality from a little-known maker.
Why? Because lots of people pick wine that way and the big-name maker knows he can charge extra for his reputation for reliably high quality.
That's the point of brand names. Firms work hard to establish a reputation for quality, which brings them customer loyalty and allows them to charge higher prices.
Should such a firm find itself with goods of inferior quality, it will seek to preserve its reputation by selling them without its brand name attached.
But let's say you scan the shelves of the bottle shop and all you see are unfamiliar bottles from unknown vineyards. How do you pick?
Since you've no idea whether any of them are any good, do you pick anything that's moderately priced? No. Because you want to make a good impression on your hosts, you buy a more expensive bottle, hoping that will ensure it's a good drop.
In other words you've used price as an indicator of quality. We do this all the time in circumstances where we're uncertain about quality.
In other circumstances, of course, where the high reputation and price of a particular brand is well known to us and our friends, we deliberately buy expensive items to demonstrate our economic success and superior status.
Then there's the case of cosmetics, where price is so entrenched as an indicator of quality that a maker who didn't bump up his prices would be asking to be spurned by consumers.
For sellers the message is that prices perform different functions in different circumstances - particularly when buyers aren't well informed about intrinsic quality or about the prices your rivals are charging.
You should be aware of the possibility of price changes leading to unexpected consequences. Where prices are used as a proxy for quality, adjust them accordingly.
For buyers the message is that price is often an unreliable guide to quality.
When you use price as a guide to quality you are assuming other buyers are much better informed than you are and that sellers aren't taking advantage of everybody's ignorance.
Buyers would get better value for money if, rather than assuming prices are always set fairly, they put a bit more effort into being better informed.
Ross Gittins is the economics columnist for The Sydney Morning Herald and The Age
The uninformed pay the price
Ross Gittins | July 12, 2007 - 1:35AM (SMH)
http://smallbusiness.smh.com.au/managing/management/the-uninformed-pay-the-price-906106083.html?page=fullpage#contentSwap1
If you want to be a successful small business person, you need to think more carefully about the role of the prices you charge than your customers do.
What is the role of an item's price? To tell people how much they're required to pay? Sure - but there's a lot more to it.
In simple economic theory, the role of price is to bring supply and demand into balance. The market price is the meeting point between the seller's cost of supply (including a reasonable profit margin) and the buyer's willingness to pay.
But prices also convey information to buyers - and this is the bit canny sellers need to understand.
Simple economic theory assumes both buyers and sellers have "perfect knowledge" -of the nature of the goods being sold and of the prices being set by other sellers in the market.
In reality, although sellers are usually well informed about these matters - it's their bread and butter, after all - buyers are often not nearly as well informed. That's often because they don't buy such items often enough - or the items don't account for a big enough part of their budgets - to make it worth the time and effort it would take to be well-informed.
So there's the point: it's quite common for buyers to use the price of an item as an indicator of the quality of that item.
Consider the case of the experimenters who set up a stall selling boxes of Belgian chocolates at the annual Brussels food fair. On the first day, they set the price at 9 ($14) a box. Sales went well.
The next day they raised the price to 15 a box. An economist would expect this to lead to greatly reduced sales but, in fact, they doubled.
On the third day they slashed the price to 2. An economist would expect a total sell-out at that giveaway price but, in fact, sales collapsed.
So what on earth was going on? It's simple when you think about it. Without buying a box and tasting the chocolates, you couldn't tell how good they were.
So, in the absence of any other information to guide them, customers used the price being charged as an indicator of the quality of the chocolates.
They took the higher price to mean high quality and so they bought up. They took the lower price to mean inferior quality and so they avoided buying.
An anomalous and isolated example? Not really. Let's say you're off to a dinner party and stop off at the local bottle shop for some wine to give to your hosts. How do you pick the bottle you want?
Maybe you pick a wine you've had before and know is good. Maybe you can't find one of those but you can find a big-name brand you know you can rely on.
If so, rest assured you'll be paying a higher price for the big-name brand wine than you would for wine of a similar quality from a little-known maker.
Why? Because lots of people pick wine that way and the big-name maker knows he can charge extra for his reputation for reliably high quality.
That's the point of brand names. Firms work hard to establish a reputation for quality, which brings them customer loyalty and allows them to charge higher prices.
Should such a firm find itself with goods of inferior quality, it will seek to preserve its reputation by selling them without its brand name attached.
But let's say you scan the shelves of the bottle shop and all you see are unfamiliar bottles from unknown vineyards. How do you pick?
Since you've no idea whether any of them are any good, do you pick anything that's moderately priced? No. Because you want to make a good impression on your hosts, you buy a more expensive bottle, hoping that will ensure it's a good drop.
In other words you've used price as an indicator of quality. We do this all the time in circumstances where we're uncertain about quality.
In other circumstances, of course, where the high reputation and price of a particular brand is well known to us and our friends, we deliberately buy expensive items to demonstrate our economic success and superior status.
Then there's the case of cosmetics, where price is so entrenched as an indicator of quality that a maker who didn't bump up his prices would be asking to be spurned by consumers.
For sellers the message is that prices perform different functions in different circumstances - particularly when buyers aren't well informed about intrinsic quality or about the prices your rivals are charging.
You should be aware of the possibility of price changes leading to unexpected consequences. Where prices are used as a proxy for quality, adjust them accordingly.
For buyers the message is that price is often an unreliable guide to quality.
When you use price as a guide to quality you are assuming other buyers are much better informed than you are and that sellers aren't taking advantage of everybody's ignorance.
Buyers would get better value for money if, rather than assuming prices are always set fairly, they put a bit more effort into being better informed.
Ross Gittins is the economics columnist for The Sydney Morning Herald and The Age