Basically, I’ve been playing Eve Online recently, and it got me thinking about real world economics. Obviously, commodities irl fluctuate pretty frequently, even daily, but if I go down to the store to get a pack of razors, the price will be the same it was last month or even a year ago, regardless of the price changes of steel or plastic.
Is it just a cultural reason for why these consumer commodities have stable prices or is there some economic reason behind it? Is it that the prices of materials don’t fluctuate that much?
In: Economics
Answer: Prices do rise pretty much slowly and consistently over time. The Bureau of Labor and Statistics in the US keeps track of the consumer price index which basically tracks the average overall price of various groups of commodities on a monthly basis. If you look, there is generally a trend of increasing prices. Now, why isn’t this price increase obvious to you? A few various reasons.
1. As others have said, companies have long term contracts and financial instruments which shield them from short term price increases or decreases. This means that companies can very slowly raise prices because they have stable prices, even if the underlying commodities are very volatile.
2. Companies are more likely to change quality or amounts rather than prices at certain levels. For instance, during the 08 recession, Hershey bars didn’t get more expensive, but the company actually reduced the size of the candy bar. So even though you look at it and see the same price, you are actually paying more for the same quantity of chocolate. Many companies did this same thing.
3. Not every company raises prices at the same time. Walmart for instance will sometimes sell things below the Manufacturer’s suggested retail price (MSRP). So if the MSRP increases by $1, you may not see the increase where you shop, but other stores may still be increasing prices.
Most companies use contracts (futures etc) to set the price they will need to pay for items at a price they want. This allows them to manage the risk of price fluctuations negatively impacting their cost and then ultimately the end price to the consumer. If the price goes down the company will be out only a small fee for the contract which they can price into their costs.
Just because cost of goods sold increases or decreases doesnt mean the vendor will pass it onto consumers. They always want as good as a profit margin as possible.
The biggest price component of most retail product (razors, food etc) in the US is to compensate for distribution and the retail outlet’s costs. Once you take out the labor cost of manufacturing, the raw material cost is usually a very small portion of the retail price.
(My experience of consumer electronics retail). $20 priced accessory, $5-6 price from manufacturer, $0.50-$1.00 freight (bulk international), $2-$4 final packaging and distribution, $3-4 retail markup. Of the $5-6 price from manufacturer – raw materials probably $2-4 (even then “raw materials” are processed plastic and electronic components)
Labor costs are reasonably stable (and increasing efficiencies of scale offset increases). Transportation and distribution are also relatively stable (fuel costs affect this more than labor). Generally speaking, many of the cost items don’t change much year to year.
Man, the EVE marketplace is really something. You can notice the stark instability of prices in EVE specifically because it lacks a lot of the things being mentioned. CCP has very few restrictions or regulations on how capsuleers do business, and while everything functions fine, you can tell that it’s missing that sort of guidance. Even then, the markets do follow a lot of those real world trends too. The whole thing on profit margins really does make a difference. It wouldn’t matter as much in a smaller scale game, but when you spend as much time playing EVE as most dedicated players do, you can see why companies try and cut costs when possible. Those small differences add up. You can also see why companies want to avoid taxes and shit.
Planetary taxes in Hi-Sec gutted any profit I could have made from PI.
A lot of non-perishable items have pretty constant prices because companies have the luxury of buying raw materials and shipping product when it’s cheapest to do so.
Milk, for example, often varies in price because it can’t sit around. Dairy farmers have to ship it as soon as it’s in the jug, and if gas prices are high that means milk prices will be high. Soda, on the other hand, can sit in the factory warehouse until it’s cheapest to move it to a retail distribution center.
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