You are dealing in a hypothetical where there aren't market forces at work.

My point being that sure, ideally it wouldn't be like that, but any implementation I can possibly think of is not viable at all. Jobs are fairly unique things.

Entrepreneurs probably employ such pricing methods more often than BigCo as well, simply because they sell less uniform products to less anonymous customers.

Your point?

He says one has to "set a maximum price below what prevails in the market" to create shortages. Guess what? This law doesn't do that. You are always allowed to charge up to 10% more than the average price.

If it was the case that peaches can't be produced at prices a customer is willing to pay, then the market splits to high-end and low-end with two types of customers with different paying ability like in high end cars (think mercs and rolls royces).

A customer might have information asymmetry but isn't stupid (is this overtly harsh?).

To quote my own comment in a parallel thread here: "wouldn't a middle man who tests cars try and separate the lot and charge for his services?". The market for lemons seems model a static market which is not realistic IMHO

Doesn't that encourage collusion to generate artificial scarcity - all participants benefit from it?

A true market could be created by enabling people to buy and sell the service, or perhaps by bidding. This doesn't work unless the supply of the service is artificially restricted (otherwise the price goes to near zero immediately). Of course, some argue that the "true price" of intellectual property is very close to zero, but the app in the article can be thought of as a service.

$4 to make the thing, get it to you, and pay all taxes inherent to all the jurisdictions involved in producing and selling the thing to you. Let's even assume I'm the most amazing business man, and I've trimmed the process down to the absolute minimum possible cost per unit by nailing every optimization under the sun.

and $1 profit to come out ahead.

Now. That $1 profit is totally open to get undercut by a competitor.

We've pinned that $4 as the minimum possible cost to make that widget based on the laws of physics and business. Even if my competitors are all as amazing as me, they too hit $4 spend to produce 1 widget.

The next day, a tax is imposed. Not on the consumer, but on the businesses; this increases the floor cost per widget produced from $4 to $4.50 cents.

I priced things at $5 a widget. I'm still in the black with no adjustment. I have two choices: increase cost to keep making the same relative profit (if the market will bear it) in terms of cash, or convert some of that cash profit to "Goodwill" by basically taking a haircut and eating the tax. This could get me brand recognition or attract a certain type of investor.

My competitor, Sudden But Inevitable Undercut Inc. Priced their widget at $4.50 previously only pocketing 50 cents.

Unfortunately, they have no wiggle room any further. They drop out of the market, as to them the thought of increasing the price is unthinkable.

Any other competitors are left with the same choice as I had:

A) increase price to get same relative profit B) cash in on Goodwill

But as more companies choose B, the value of B plummets. No one cares if you ate the tax if everyone does it, and in fact not doing it when everyone else does attracts an equally large set of particularly minded investors

The consumer still ends up ultimately eating it because supply just shrunk, demand stayed the same, (price goes up) because a supplier was just priced out of the market in a poof of non-profitability.

BUT! The ones who dropped out liquidated their stuff! Who'll buy it? Probably suppliers still making widgets. Who has the most to throw around? Me, of course. I could grab all those assets to prevent my competitors from being able to utilize them to scale, or to bolster my own production to be able to service more demand! I can do this, because growth can only be bought with money now. I have money now! Yay, greed!

So now, you're left resolving that Goodwill spread across your supplier population. In my experience, there is a far smaller set of Stakeholder value centric companies than Shareholder centric value companies.

Let's say it's 50/50 though, lets assume the market bears my elevated cost for buying the widget without much complaint. What does next quarter look like?

The ones who readjust up for the same relative profit may be able to capture fulfillment for a higher fraction of the finite demand. At first, this may seem advantageous to those who took a haircut, because that essentially turns into a bump in supply, pushing prices down; but as long as the higher priced widget sellers keep improving faster than the competitors that took the haircut, over time they (the less altruistic bunch) may be able to drive more benevolent competitors out of profitability, recapturing their (the more altruistic, but slower growing suppliers) now unprofitably serviced chunk of demand.

Boo! I say as the highest price supplier, I didn't make as much as I wanted in end consumer sales, but hey, wholesale is better than no sale, right? And I can still play the ole M&A card to acquire other suppliers to increase the shadow I cast in terms of effect on price.

If the market doesn't bear the higher cost, it can go the other way of course, and if one makes the dangerous assumption of rational homo economicus, the more benevolent actors may hold out, but they still won't won't grow as fast as their less altruistic competitor, (growth requires cash now, not goodwill).

So say our more altruistic company charges less most of the time, they're still going to have to price in the difference in response to the proportion of increased demand by consumers drawn by their normally lower prices, the max demand they can in house satisfy with their own production, and the elevated cost of sourcing more expensive supply from a less popular supplier due to their higher price to keep customers happy. Their prices are still pegged high, and they are vulnerable vulnerable to shakedowns by their upstream supplier if they want to keep that goodwill flowing.

A final equilibrium is reached only when there is no more room allowed by regulators for M&A until there is a breakthrough or change in the laws and physics of business, to bump that floor price down.

In reality, all businesses make these types of decisions all the time. The hard truth remains though: if you tack on higher costs to produce, there is nothing to stop businesses from passing that cost along. Not passing it along can net some goodwill, but rapidly hits diminishing returns as more companies do it, and hamstrings your growth potential if the population of the type of investor your goodwill piques the interest of ever shifts substantially, and in particular, shrinks. I've met far more pragmatic, profitability driven investors than ideal driven, so I'd wager your idealists are way less common than your "lets make lotsa money" investors.

Cash buys you more throughput. Goodwill may get you more demand, but inability to keep up and fulfill that demand means you're delegating business, and customers to a more costly supplier eventually anyway. Which raises the question, if you can't give everyone the lower price now, why not pass on the cost of that tax, reclaim your profit, possibly innovate, and give it to them later? Or why not have it be your hand on the till? I mean you had good intentions. You're just reacting to the market! You'll make it up to the consumer! Just... Later.

Several years later, you get faced with the same decision again and wonder if now is the time... Rinse, repeat.

Greed, in this sense, subverts the "virtuous" cycle.

But lets get back to iteration 1.

The end consumer though... after the tax is imposed is still paying at least $4.51-$5.50 where yesterday, they were paying $4-$5.

So, no... While I think you can cross your fingers and hope a bunch of people famous for being cutthroatly pragmatic will out of the goodness of their heart eat a tax for you...

I've gotten to the point I've thrown in the towel on that, and assume the traders are right

It's priced in.

And this is why we can't have nice things.

[x] only exists because it is underpriced relative to market demand.

A great question to ask after this is "would i be okay subjecting my child/mother/father to this experience?"

For example, there are 2 tennis courts available on a first come, first serve basis at a park in SF. Because they are free to reserve, and there's more demand than supply, people will bot all the courts at all given times during the day and scalp players for the free reservations.

Or, a car is available for [x] msrp price, plus a 25% "market adjustment" fee. Is this ethical for every dealer in the country to do the same?

The solution to just set a higher price might not work, as people might not be willing to pay that much, or even have that much money.

What? You don't think the two measures would converge? In either case, the one with more market power would use that to improve their side of the bargain? Who'd've thunk...