Preston McAfee: Why Are Prices So Bizarre?

This event was digitally recorded and is available for viewing on the Caltech Theater site.

American Airlines changes fares 500,000 times per day. Gasoline varies as much as 15¢ per gallon over a two mile drive. How do companies determine prices? The main theory involves price discrimination, or value-based pricing, which involves charging each consumer what the market will bear. Sophisticated sellers create goods designed for specific groups of customers, selling intentionally damaged products to price-sensitive groups. The theory is illustrated with striking examples from IBM, airlines and more.

Grocery stores advertise sale prices on milk, paper towels, cola and other items, even though the demand and cost of production didn't change. Why? Why are turkeys cheapest just before Thanksgiving, a time when demand is highest? These paradoxes have a common resolution.

R. Preston McAfee is the J. Stanley Johnson Professor of Business Economics and Management, and Executive Officer for the Social Sciences at Caltech.

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