Price waffle

I caught a programme last night on the beeb about property. Nothing new there - you can be guaranteed to find a property programme of some description 50% of the time the telly goes on: if the schedulers are to be believed, we're obsessed. (Indeed, there was another property prog on Channel 4 at the same time.)

But this one was a little more thoughtful. The last person to be interviewed was an estate agent based in Sandbanks, Poole - not too far away from where I used to live in Bournemouth. A few years back, one place sold for a particularly large amount of money, and worked out at something like £900 per square foot. This particular estate agent did a quick calculation and discovered this made it the fourth most expensive place to live in the world. The next step is brilliant: he then trumpeted the whole area as such. 'Sandbanks: the fourth most expensive place to live in the world!' Thus began Sandbank's insane rocketing into the property stratosphere, accompanied (as he notes) by developing new offices and a whole selling style suitable to people wanting to buy into the Sandbanks glow.

It could be - as Cialdini notes - that this 'expensive = good' strategy is a reliable heuristic: price generally correlates to quality. You get what you pay for - or at least, mostly its a safe bet to use this rule.

But someone buying a Sandbanks property is paying for the prestige; if the sellers sold from a portacabin and wore string vests, they wouldn't buy - despite it apparently being the same product. It isn't.* The nice lady on the programme even argued that, partly, anyone buying property in the UK is paying for an extra mythical something: the status of home-owner, possibly?

Sticking with the more clearly prestige-based Sandbanks, economic-theorilly there's no issue. You get more utility from it, you pay more; it doesn't matter if part of that utility is 'prestige'. I actually think, mostly, utility is a great idea: it's a leveller that makes no moral judgement about the difference between people's preferences. If you get utility from rubbing jam into your hair, so be it: we're all utility-maximising liberals here. Anyone who's against the idea, I suspect, just doesn't like the mechanical-sounding nature of the word: reducing the infinitely complex tangle of human desire to a mere function! Well, yes and no: it's actually impossible to directly measure anyone's desire for anything (notwithstanding attempts to use utils). How much one is willing to pay / exchange is an indication, but that's the best we can do.

But while utility is dead useful - mostly - it swallows everything whole. It subsumes any explanation of how a Poole estate agent can get rich by creating an aura of unique desirability. Somehow he's taken people's heads apart, fiddled with their utility-dials and made them want the Sandbanks dream. Prices have gone wampy as a result (and thus, perversely, becoming self-reinforcing: this here's for the rich and powerful, and the more it costs, the more true that is! Eek, a price-positive-feedback loop / Giffen good.)

Soda Crystals is another example worth mulling over: it's extremely effective at cleaning everything (better, it seems, than anything else available) and - as the review says - is cheap as chips. It's also entirely environmentally friendly and, as long as you wear gloves, safe. Yet its rarely in the cleaning product section in the supermarket. If you're lucky it'll be hanging out with the washing powder.

Without invoking capitalist conspiracy, it's easy to imagine what happened. Several companies competing in the cleaning market look for an edge, and old n cheap doesn't cut it. What's a little more puzzling is how the price has been driven up. Perhaps 'Modern' cleaning stuff isn't in the same category as 'things Grandma used to use': firms pour millions into R n D on making better nozzles, newer delivery methods - and CGI ads illustrate these wondrous scientific advances in gaudy, hyper-real detail.

In comparison to housing, though, there's no over-demand. Unlike Sandbanks' (and the UK's) properties, there's no shortage of either soda crystals or Unilever's latest spangly kitchen spray. So what can account for the huge sales of the latter, and Soda Crystals' economic obscurity? Well, I only have two theories, one of which I've already mentioned:

1. They're not the same product: when you buy spangly cleaner, you're buying 'modern'. The two are not substitutes. The problem with this is that they clearly are substitutable on strictly, um, utilitarian grounds. So there must be something else adding to the utility - and as the price is so different, whatever this x factor is, it must be adding a lot to it.

2. Information is key: people simply don't know about it. Who tells us how to clean stuff? I only know about Soda Crystals because my girlfriend bought it to clean my mum's bathroom. I think I learned what to buy through supermarket-shelf trial and error. It's probably safe to assume this process was informed by whatever impressions I picked up seeing ads on telly or billboards. Soda crystals were effectively invisible to anyone without social networks that recommended it. (And now there's the internet to spread the message too!)

In the New York Times this week, Krugman talks about the price of oil. There's a story going about (one I actually heard from someone at the weekend) that there's plenty of oil in the world - the price is due to market manipulation, and it's a bubble that's going to pop. Krugman thinks otherwise, and reckons the fundamentals are pretty sound. He blames wishful thinking: 'there's plenty of oil la la la'.

Now that's interesting because the oil market is spectacularly complex - but if Krugman's right, yer bog standard supply and demand curve gives us most of the information we need about the oil market.

So anyway, price: a tricksy thing. The question is, if you're modelling it, how much of this detail needs to go in? The ideal is to do sensitivity analysis across as many factors as possible - but in a world where cleaning products don't appear to even be substitutable, what is a modeller to do?

[* I guess that's what No Logo was all about, huh?]