Are products sold in supermarkets more expensive?

   Several students from economics classes and general-education classes would like to discuss supermarket pricing in their research projects. A general finding is that goods are more expensive in supermarkets than the same products sold in traditional grocery shops. The low-price impression created by supermarket advertising is found to be wrong. Some goods are cheaper but there are lots more higher-priced goods. Usually my students do not think that monopoly power can explain the higher-price phenomenon. Rather, they suggest that customers are willing to pay a higher price for a better “quality”: Shopping is not a straightforward buy-and-pay behaviour. Rather, the better shopping environment, cleaner shop and more varieties matter.
   I agree that shopping experience in supermarkets is better than in most grocery shops or wet markets. (Some people will disagree. But let us set aside this dispute, if any. If shopping experience in supermarkets is not better, then the higher-price phenomenon is even harder to explain.) Nonetheless, an explanation attributing to better quality is not too ideal. Consider the following artificial dialogue:

   “Why your goods are sold for higher prices?”

   “I offer better service.”

   “How can you prove your service is better?”

   “I can sell my goods for higher prices.”

   Just kidding. The explanation attributing to quality is not that bad. But it is fair to say that the explanation by quality is not enough, at least not very interesting, because it is too easy to make such an explanation. Every time when a higher price is found for the same product, we can always say the service accompanied with the good is better. The point is: what is this service?

   Cleaner environment? Yes, compared to wet market. But some grocery shops are also clean. Variety may be a more persuasive attribute of supermarket superiority. Although grocery shops also offer a variety of goods, supermarkets still provide a much greater variety. It is more convenient to shop in supermarkets and convenience is something that you are willing to pay to have it.

   The story may stop here, then, until recently I was inspired by other students, also from general-education class, who presented an explanation offered by the best-seller Undercover Economist by Tim Hartford. The argument goes like this. Supermarkets often change the prices for goods. Sometimes prices are cut. Sometimes prices are raised. Doing so enables supermarkets to distinguish customers. Uninformed or impatient customers will buy goods anyway. Well informed or patient customers will buy only when goods are cheaper. If prices are always high, patient buyers won’t buy. If prices are always low, sale revenue may be lower. Anyway, a steady pricing cannot distinguish the patient customers from impatient customers. Then, supermarket owners cannot charge different customers differently (the terminology adopted in microeconomics is "price discrimination"). In contrast, pricing products differently at different time increases the sellers’ profit.

   Well, my student told me this interesting explanation. Without reading the original book at that time, this story is immediately reminiscent of Hal Varian’s famous paper on television set pricing. Varian is the chief economist of Google. Before this employment, he has worked for UC Berkely for a long time and has written a famous textbook on economics of information technology. He is considered to be an expert in the economics of marketing strategies.
   What Varian observed in the paper is this. TV set sellers on and off will offer substantial price cuts. He wondered why prices are not steady. The explanation that he gave is basically the same as the supermarket pricing story told above.

   The story again may end here. But I suddenly realize that this story should be somehow related to the abundant product variety in supermarkets. As mentioned above, customers are divided into price-sensitive and price-insensitive ones depending on their knowledge and patience. But a buyer who is sensitive to the price changes in fish balls may be insensitive to the price changes in chewing gum. Your mum may be an expert in cooking food and is thus sensitive to the price of food like fish balls. However, she rarely buys chewing gum, and does not know what the cheapest quote for a gum is. Nonetheless, a price expert in some goods will not just purchase goods in which one has expertise. She or he may occasionally buy some other goods. For these goods, she or he is no longer a price expert. Putting different goods together, each buyer, as an expert in some aspects, will have the opportunity to encounter some goods that one has no expertise in prices. So, when they buy the discounted goods from supermarkets, they may also buy some goods that may be over-priced. Compared to a shop selling only one kind of products, over-priced goods are more likely to get purchased in a variety shop. When price-cuts in one good attract price experts (in one good) to visit their stores, they also attract non-experts (in another good), who are the same people, to visit and occasionally buy the over-priced goods. This is perhaps another magic to increase supermarket profits. 

Where is students' pressure from?

   My students from a general-education class studied why the present generation of young people appeared not as strong as the older generation in coping with pressures. They said the examination pressures were higher than before. Meanwhile, today’s teenagers grew up in an environment where parents took too much care of their children. As a consequence, today’s youngsters often failed to foster the ability to properly cope with the examination pressures themselves, some even resorted to suicide as a means to avoid facing the pressures.

   I am not immediately convinced that examination pressure is higher nowadays than in the past. Opportunities to study in universities have doubled over the past few decades. It should only be easier to get into universities for the present generation of teenagers than in the past.

   My students also suggested that examination became more important for today’s students and so the pressure was higher. However, I actually witness how universities make allowance for various types of non-academic performance such as sports and some special extra-curricular activities. In comparison with the past, examination is less important for university admissions.

   I also want to say examinations are much easier today than in the past.

   My students replied by saying that securing a higher degree (such as a bachelor degree from university) was much more important now than a few decades ago. (This means that even if exam is less important for you to get into university, getting into university is more important in life than in the past.) I agree. Also, I agree that academic result is still the most important (though slightly less important) assessment criteria of admissions.

   Nevertheless, it is then the social rewarding system that matters, not the examination pressure that matters. If there are more examinations and examinations are harder, then we can say examination pressure is higher. But this is not true. Examinations are fewer (for a normal high-school student not intending to study overseas) and easier than a few decades ago. So, what matters is that the consequence of getting an unsatisfactory result in examination is worse than before. What are the changes in the consequences? There might be two changes.

   Firstly, as mentioned by students, it could be that higher-education degrees are much more important today than in the past. Although universities degrees have doubled, non-university jobs may also decrease substantially. Today if one cannot get a university degree, it is more difficult to find a decent job than in the past. What we need today is skilled labour instead of unskilled labour as in the past.

   Secondly, the payoff structure may also matter. Even if it is easier to find jobs without a university degree, the payoff may be substantially lower when you do not have a degree. Suppose the rewarding structure in our society has become increasingly skew. This means securing the first place will get a high pay. But the first runner-up may get substantially lower pay. The second runner-up gets even much lower pay, and so on, and so on. In the past, perhaps being the first may not be better than the second very much but now this difference is very large. With such a change in payoff structure, people should feel a very high pressure from any contests because becoming the winner or not makes a very big difference. Modern economy is turning towards skill-oriented. Unskilled labour can be easily substituted by outsourcing the jobs overseas (or perhaps, one day, by robots). Our current payoff structure seems to become skewed to the top. In a “winner-take-all” society like this, people will really be stressed. (Cornell economist Robert H. Frank has written a book The Winner-Take-All Society, demonstrating this phenomenon and trying to explain.)

   Nonetheless, this is a consequence from a society change. An educational reform (such as emphasizing less on examination result and more on creativity) cannot help. People will still feel stressed when they are judged based on other (non-exam-based) criteria. Anyway, the society will find some ways to pick the winners and the income gaps between the winners and the losers are still big. Unfortunately, if the above observation is true, youngsters will still be facing pressures even if the education or examination system is reformed. Even if the system is changed by de-emphasizing exams (e.g. everyone will get the same exam grades),  they still have to face the non-exam-based competition in society.

   Well, if you believe in this analysis, we have to conclude that things cannot be easily solved by changing educational requirements when elsewhere bosses or the society do not change their requirements or rewarding schedule. People often tend to blame the education system when they discover that students face high pressure, saying that the education system should be reformed into a more creativity-oriented and less exam-oriented. The above analysis does not support this response. It reveals that solutions to students' pressure are even harder than reforming an education system: we are not able to persuade bosses or other institutions not to reward winners by a skewed payoff structure. 
   Yes, perhaps things cannot be so easily solved. But, at least, identifying the problem correctly is the first step to solve any problems, especially for economists (or economics students) whose primary task is to explain phenomenon.