Show Summary Details

Page of

PRINTED FROM OXFORD HANDBOOKS ONLINE ( © Oxford University Press, 2018. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a title in Oxford Handbooks Online for personal use (for details see Privacy Policy and Legal Notice).

date: 22 September 2019

Why Are Prices Set the Way They Are?

Abstract and Keywords

Different approaches to pricing are used in different industries. This article explores the question of why this disparity in pricing mechanisms exists and persists – even among markets that often appear superficially very similar. It defines the concept of a pricing modality, the way that buyers, sellers, and intermediaries interact in a market to determine the price for a particular transaction. The article is organized as follows. Section 2.2 discusses three different approaches to explaining and understanding the reasons why particular modalities hold in particular markets. Sections 2.3 and 2.4 discuss two markets – pricing for television advertising and pricing of movie tickets in the United States – in which arguments from economic equilibrium are seemingly unable to explain the predominant pricing modalities. Section 2.5 discusses the rise of fixed pricing as the dominant modality for retail transactions. This history is interesting because of the extent to which fixed pricing has become the standard for ‘fairness’ in retail pricing. The final section summarizes the main points.

Keywords: price setting, pricing modality, television advertising, movie tickets, fixed pricing, retail pricing

2.1 Introduction

One of the themes of this book is the wide variety of pricing approaches that are used in different industries and, correspondingly, the wide variety of methodologies that are needed to support pricing. Different approaches to pricing used in different industries include:

  • On-line advertisements are typically sold in a sort of auction based on the number of impressions that they garner (Vudali and Atherton, Chapter 7).

  • In Western economies, most retail transactions typically use a fixed price modality. That is, the seller posts a price and prospective buyers either pay that price or do not purchase.

  • Less-than-truckload trucking services are typically sold to large purchasers as annual contracts based on a discount from a standard tariff (see Kintz, Chapter 13).

  • Airline tickets are sold individually using highly dynamic and differentiated prices (see Barnes, Chapter 3).

This chapter explores the question of why this disparity in pricing mechanisms exists and persists—even among markets that often appear superficially very similar.

To address this question, we define the concept of a pricing modality. The pricing modality is the way that buyers, sellers, and intermediaries interact in a market to determine the price for a particular transaction. In the terms of Mark Granovetter (1992), prices themselves are an “outcome” while a pricing modality is an “institution”. Depending upon the situation, a pricing modality can either be a particular instance of an economic (p. 14) institution or part of a larger economic institution (e.g., a “market structure”). Some examples of pricing modalities include:

  • Fixed pricing. A seller chooses a price. That price is posted in a market. The item for sale (product or service) is available at that price to all buyers in the market.

  • Bargaining. A price is negotiated between an individual buyer and a seller. The “price” is the final point of agreement—assuming that agreement is reached.

  • Dictatorship. A government or state agency chooses and enforces prices.

  • Seller auction. A seller accepts bids from two or more potential buyers. Buyers may or may not be allowed to update their offers. The ultimate price is determined by the seller’s choice of buyer but may also depend on the other bids as well.

  • Customized pricing. A potential buyer solicits offers or bids from potential suppliers, often through a “request for proposal” or “request for quote” process. The price results from the buyer’s choice of which bid to accept.

  • Contingent pricing. The buyer and seller agree on a table of prices or pricing formula that determines the final price based on uncertain future outcomes.

A pricing modality describes the “rules of the game” in a given market. These rules are understood by all buyers, sellers, and intermediaries as well as by outside observers such as reporters, regulators, and stock analysts. In some cases, the predominant modality may be mandated by regulation, but more often it is simply a matter of common understanding among all parties.

We note that pricing in most industries is a messy business, with great variation among industries and even among different companies within the same industry. In many cases, only insiders fully appreciate the subtleties of how prices are set, communicated, evaluated, and updated within their industry. In many cases, industries that seem superficially very similar operate under very different pricing modalities. This raises the questions: Why do certain pricing modalities prevail in certain markets and industries? Why are prices set using different modalities in markets that appear to be very similar? How do prevailing market modalities influence how people think about prices? How do they influence what people consider “fair” or “unfair” in economic transactions?

Definitively answering these questions is beyond the scope of this chapter. However, this chapter does seek to establish some specific points. The first is that the pricing modality in use in a particular market generally cannot be predicted purely by reference to principles of economic optimality. Pricing modalities are neither ahistoric nor asocial—understanding history and the broader social setting is often necessary to understand why a particular pricing modality is in place in a particular market at a particular time. Second, over time, pricing modalities tend to become normative for all participants—buyers, sellers, and intermediaries. An attempt by any player to unilaterally deviate from the norm may not succeed even if it would lead to an improved situation for all participants. Finally, the fact that pricing modalities have a past means that they can also have a future. That is, the pricing modality in use in a particular market can shift due to changes in technology, regulatory environment, or social and demographic characteristics. When this happens, incumbents who are heavily invested in the previous modality may find themselves at a relative disadvantage.

(p. 15) The next section discusses three different approaches to explaining and understanding the reasons why particular modalities hold in particular markets. The subsequent two sections discuss two markets—pricing for television advertising and pricing of movie tickets in the United States—in which arguments from economic equilibrium are seemingly unable to explain the predominant pricing modalities. The next section discusses the rise of fixed pricing as the dominant modality for retail transactions. This history is interesting because of the extent to which fixed pricing has become the standard for “fairness” in retail pricing. The final section summarizes the main points.

2.2 Approaches to Pricing Modalities

Broadly speaking, there are three pure approaches used to explain the use of a particular pricing modality within a particular market:

  • The market equilibrium approach analyzes economic institutions strictly in terms of the incentives and information of the players (buyers, sellers, and intermediaries); the nature of the goods and services being sold; and the regulatory and technological environment in place. Given this, it seeks to show that a particular pricing modality is the (ideally unique) Nash equilibrium of the underlying game.

  • Institutional history views economic institutions as the outcome of historical develop-ment involving the interplay among changing technologies, regulations, players, and industry structures. The institutional history viewpoint emphasizes the role of the past in determining the pricing modality currently used in a particular market.

  • Economic sociology emphasizes the roles of social structures, norms, expectations, and the extent and nature of social ties in determining the form of economic institutions.

We will briefly discuss each of these three pure approaches as they apply to pricing.

2.2.1 Market equilibrium

The market equilibrium approach assumes that the pricing modality currently in place in a market can be determined entirely from consideration of the players (buyers, sellers, and intermediaries) in that market and their preferences, the information available to each player and how it is revealed over time, the distribution technology, the characteristics of the product or service for sale, and the regulatory environment. Four examples of this approach as applied to pricing include:

  • In a pioneering example of game-theoretic reasoning, Bertrand (1883) argued that competitive pressures would force sellers of identical goods to set their margins to zero. Prices would then equal marginal costs.

  • Riley and Zeckhauser (1983) used a mathematical model to show that a seller encoun-tering risk-neutral buyers should quote a fixed price rather than bargain or use a (p. 16) randomized pricing strategy. They showed that this holds whether or not the seller knows the distribution of willingness-to-pay within the buyer population.

  • Lazear (1986) considered the case of a seller holding a fixed stock of a good whose value to customers is highly uncertain—for example, a dress at the start of the spring season. He shows that the optimal policy for such a seller is to start initially with a high price which he should then sequentially lower until the entire stock is sold. This corresponds to the “markdown policy” commonly used by sellers of fashion goods (Ramakrishnan, Chapter 25).

  • Dana (1998) showed how the advance purchase discount policy adopted by airlines, rental cars, and other related industries can be derived from a model in which customers have uncertain demand for the service. This result holds even in the absence of market power on the part of the seller.

These are just four examples among many—the argument from equilibrium is, to a large extent, the defining characteristic of modern economic theory. Economists employ a range of analytic tools to establish market equilibria—and, thereby, pricing modalities. As one example, the “no arbitrage” principle provides a limit to the extent to which a market can support price discrimination. As another, the assumption of profit-maximizing sellers interacting with utility-maximizing buyers often enables a set of possible equilibria to be determined as the set of joint solutions to mathematical optimization problems.

It is unquestionable that the argument from equilibrium has been extremely successful in providing insights into the structure of markets. To name just one example, it was long believed—by many retailers among others—that the need to mark down unsold inventory was solely the result of mistakes in buying, merchandising, or pricing. For example, a pamphlet issued to managers at a leading San Francisco department store entitled “How to Avoid Wasteful Markdowns” warned:

High markdowns benefit no one. Not the store. Not the manufacturer. Not the customer. The store loses in value of assets or inventory. The manufacturer loses in future sales and by loss of prestige of his product. The customer is getting merchandise that is not up to standard, at a low price it is true, but, remember—she would rather have fresh, new merchandise that she can be proud of and with real value at regular price than pay less for questionable merchandise. (Emporium 1952)

Economic analysis such as that by Lazear (1986) has helped retailers understand that, far from being evidence of mismanagement, markdowns can be an effective and profitable way to manage sales of seasonal merchandise.

Game theory has proven to be a particularly important tool for analyzing markets. The demonstration that a pricing modality is a unique pure-strategy Nash equilibrium is a powerful result. It means that, under the current modality, no player (buyer, seller, or intermediary) could unilaterally do better by changing his actions. This can be a strong explanation for the persistence of a particular modality over time. Furthermore, in many cases, it can be shown that a sequence of “best response” moves will lead to an equilibrium—see, for example, Gallego et al. (2006). While this type of result cannot be used to explain the origin of a modality (why buyers and sellers interact on the basis of fixed prices) it can provide some justification for the persistence of the modality over time.

(p. 17) However, game theory explanations for market structure have a number of well-known drawbacks. First of all, a one-shot game may have multiple pure Nash equilibria. In this case, some refinement or restriction of the Nash criterion needs to be used to predict which equilibrium would prevail. Worse still is the case of games that admit only mixed-strategy Nash equilibria. For large games (those with many players and/or many possible actions), the computation of all Nash equilibria is a computationally difficult problem (Papadimitrou 2007). It is not clear how sellers would have access to the computational power needed to calculate the mixed-strategy solution that can arise, for example, in the case of a finite number of capacity-constrained Bertrand-Edgeworth oligopolists (Allen and Hellwig 1986). And, even if players had access to sufficient computational power, there is no accepted way to predict what would happen in a one-shot game that admits only mixed-strategy equilibria.

A further challenge to the use of game theory has come from the field of experimental economics—in particular, the finding that, in many experimental situations, the strategies adopted by the players do not correspond to a Nash equilibrium. The classic example is the “ultimatum game” in which one player (the “Proposer”) is given a sum of money and proposes a split of the money to a second player (the “Responder”) who decides whether or not to accept the proposed split. If the Responder accepts, than each player receives the proposed split. If the Responder rejects the proposed split than both players receive nothing. The unique Nash equilibrium for this game is for the Proposer to propose the smallest possible amount to the Responder and for the Responder to accept. However, Fehr and Schmidt (1999) found that in more than 70 percent of games, the Proposer offered between 40 and 50 percent to the Responder. Furthermore, Responders routinely rejected offers of 10–20 percent of the money. In almost all ultimatum game experiments, either the Proposer or the Responder (and sometimes both) play a strategy that is strongly dominated in the game theoretic sense—the Proposer by proposing to give away more than the minimum, the Responder by rejecting positive offers. These results have been replicated in a wide variety of settings (Henrich et al. 2001; Camerer 2003: 48–59; Henrich et al. 2004). While there are substantial variations between cultures, deviation from Nash equilibrium is the rule rather than the exception. Experimental economists have found deviations from “optimal play” in many other types of game (Camerer 2003). The implications and interpretations of these deviations from optimality can be controversial1 but it is increasingly apparent that arguments from game theory need to be used with great care. Experi-mental economics has shown that a Nash equilibrium may be neither descriptive nor reliably normative for a particular market (Özer and Zheng, Chapter 20).

2.2.2 Institutional history

In his book, Institutions, Institutional Change and Economic Performance (1990), Douglass North asserts that neoclassical economics cannot explain the origin and persistence of many economic institutions.

[neoclassical economics] does not provide much insight into such organizations as the medieval manor, the Champagne fairs, or the suq (the bazaar market that characterizes (p. 18) much of the Middle East and North Africa). Not only does it not characterize these organizations’ exchange processes very well, it does not explain the persistence for millenia of what appear to be very inefficient forms of exchange. (North 1990: 11)

North, and other institutional historians, seek to explain the origin, development, and persistence of economic institutions over time in terms of social change. They view arguments from pure economic equilibrium as having insufficient explanatory power because they take for granted much of what needs to be explained. “Asserting that a particular game is an equilibrium outcome in a larger meta-game whose rules reflect only the attributes of the available technology and the physical world is useful yet unsatisfactory, because it simply pushes the question of institutional origin back one step. What is the origin of the meta-game?” (Greif 2006: 11). Institutional historians seek to supplement (rather than replace) economic analysis with the understanding of an economic institution as the outcome of an evolutionary process.

If understanding history is necessary, then the rationale for an existing pricing modality cannot be entirely explained from current conditions. The implication is that if history were different, then the present would be different. This is the definition of historical contingency—an existing economic institution has the form it does, at least in part, because of past events and cannot be fully explained without reference to history. If history needs to be evoked to explain the present, then the final form of the institution cannot be “optimal” with respect to current conditions. This idea is very similar to the concept of path-dependence introduced by Paul David. Specifically, David was interested in how an apparently sub-optimal standard could become dominant over a very large market even in the presence of a superior alternative. The particular example that he evoked was the QWERTY keyboard layout.

QWERTY—named for the sequence of the first six keys on the upper left side of the keyboard—is the name given to the most common keyboard layout. It was by far the prevalent layout for typewriters and is still the dominant layout for computer keyboards, PDAs, cell-phones, Blackberries, and so on. The QWERTY layout was originally designed by the American Christopher Sholes and adopted in its current form by the Remington Corporation in 1874. QWERTY is evidently inefficient since three of the four most common English letters (E, T, and A) are allocated to the weaker left hand. According to David (1985), this was a conscious decision on the part of early typewriter designers to slow typists down in order to keep the keys from jamming.

The Remington was the first commercial typewriter available in America and the fact that it had a QWERTY layout set the course for the future:

QWERTY’s early dominance meant that typewriter users became committed to the layout. From 1874 to 1881, the only typewriters commercially available were Remington machines with QWERTY keyboards, and typists learned to use them. Some of those typists set up typing schools, where they taught the QWERTY keyboard familiar to them. Their pupils took jobs at offices with the keyboards they knew. Many businesses newly equipping themselves with typewriters ordered QWERTY machines, because it was easy to find typists trained to operate them. (Diamond 1997: 5)

Over time, the design of typewriters evolved so that key jamming was no longer a limiting factor on typing speed—yet QWERTY remained dominant. In 1932, William Dealey and August Dvorak introduced a new layout—the so-called Dvorak keyboard—which had been (p. 19) designed to make typing both faster and less fatiguing. Navy tests showed that retraining QWERTY typists to Dvorak increased their accuracy by 68 percent and their speed by 74 percent (Diamond 1997).

Nonetheless, despite its superiority, the Dvorak typewriter did not displace QWERTY. Interested parties including manufacturers, typists, and typing schools simply had too much invested in the status quo to change. Put another way, the “switching costs” in terms of both variable and fixed costs for participants to convert from QWERTY to Dvorak were too high to justify the change. As a result, David argued that a “sub-optimal” technology continued to dominate the market, even though a superior technology had been available for many years.2

While the specific details of the QWERTY example are somewhat controversial, there is no question that there are many examples of customs and standards in which path-dependence clearly plays a role. Examples include left-hand driving in the UK versus right-hand driving in the USA; the varying width or “gauge” of railroad tracks in different countries; 110 volt electric power in the USA versus 220 volt power most other places; etc. Institutional history is both necessary and sufficient to explain, for example, the use of different power plug configurations in different countries. There is no “argument from optimality” that explains the use of a different power plug in the UK than in Italy. Thus, at some level, any controversy is not about the existence of “path-dependent” institutions, but rather the extent to which a sub-optimal institution can long persist in the face of superior alternatives.3

2.2.3 Economic sociology

The market equilibrium approach is asocial in the sense that it makes no reference to any sphere of social interaction or normative behavior among the parties except as manifest in their preferences and externally imposed regulations. Economic sociologists claim that the core models of economics are overly simplistic and reductive in that they are built around the assumption of economic individualism. This ignores the fact that the set of activities defined and labeled as “economic” is, in fact, part of a larger social structure. The sociologist Mark Granovetter noted that economic actions are “embedded in concrete, ongoing systems of social relations” (Granovetter 1985: 487). Economic sociology emphasizes the “social embeddedness” of the economy. Granovetter and other economic sociologists emphasize that economic transactions are merely a particular type of social interaction (p. 20) and the modes of economic interaction within a society, the institutions that are built around economic activities, and the allowable sets of outcomes are strongly mediated by broader social factors. To the extent that this is true, an economic institution cannot fully be understood without reference to the surrounding social context.

An example of the economic sociology approach is the study by Yakubovich et al. (2005) of electric power pricing. During the formative years of the electric power industry in the United States, there was a spirited debate about how electricity should be priced. Electricity was unique in the sense that the cost of providing electric service was driven not only by the demand for electric power at any particular moment, but also by the need to build capacity to accommodate the highest anticipated demand during the year—the so-called “peak demand”.4 Two different approaches to pricing were proposed; the Wright system and the Barstow system. Ultimately, the Wright system prevailed. The authors argue that economic theory “does not lead to any strong prediction as to which pricing system we should expect to have been adopted” (Yakubovich et al. 2005: 580). The Wright system prevailed not due to its intrinsic superiority nor from persuasive argument, “but from complex manipula-tions and exercises of power by leading industry actors, who mobilized support through their personal networks and domination of industry trade associations” (ibid.: 581–2). This emphasis on the importance of personal networks in determining economic outcomes is a particular hallmark of the work of economic sociologists.

Another example of the sociological approach to pricing is Stephen Gelber’s (2005) study of bargaining for new cars. The fact that bargaining is accepted (and even expected) in new car sales is a clear exception to the fixed pricing modality that otherwise dominates retail sales in the United States. Gelber argues that bargaining has survived in automobile sales because it is one of the last remaining markets in which men make the majority of the purchasing decisions and that men are more comfortable in the conflict-fraught (and hence masculine) process of bargaining while women strongly prefer the more passive role implied by fixed pricing. “If department stores turned male customers into women by offering them a single price in a feminine environment, then car dealers turned women into men by not posting one true price for their new cars…“(Gelber 2005: 138). He sees the current mode of bargaining for automobiles as a direct descendent from the male-dominated horse-trading market of the late eighteenth and early nineteenth centuries.

Gelber’s analysis is purist in the sense that it focuses almost entirely on the historical and sociological dimensions of the automobile market. He mentions but does not explore the fact that bargaining is likely to be more prevalent for “big-ticket” items such as automobiles and houses than it is for “small-ticket” items such as groceries or clothing. He presents no evidence that other retail items with predominately male buyers such as shop tools or hunting equipment are more prone to bargaining than retail items with predominantly female buyers. While his analysis is incomplete, it is not necessarily wrong. Both auto manufacturers and dealers have long been aware that women seem more averse to bargaining than men (Business Week 2007). If a particular manufacturer or dealer thought that abandoning bargaining in order to attract more female customers was to its advantage, there is no reason why it could not do so. And, in fact, there have been sporadic attempts to introduce fixed pricing for automobiles over time, ranging from Sears in 1912 (Emmet and Jeuck 1950: 220–1) to more recent attempts by Saturn and others (Business Week 2007). The (p. 21) fact that bargaining has survived as the dominant modality in the face of these and other attempts to institute fixed pricing still requires explanation.

We note that both “path-dependence” economists and economic sociologists view the structure of economic institutions as not fully explainable from a “closed” examination of the market itself without reference to history or context. The difference between them is one of emphasis. Sociologists tend to explain differences in terms of different societal norms or social structures while the “path-dependence approach” emphasizes the importance of history—particularly the way that market structures can become “locked in” early in the development of a market and then persist through time.

2.2.4 Application to pricing modalities

None of the three approaches described above can, by itself, fully explain the variety of pricing modalities used in various markets around the world. In particular, arguments from market equilibrium usually need to be supplemented by references to history and social factors if a particular market is to be understood. We discuss three specific examples in which the argument from pure equilibrium would appear to fail: the television advertising market in the United States, movie ticket pricing, and fixed pricing in retailing.

2.3 Why is Television Advertising Sold in Anupfront Market in the United States?

In the United States, advertising inventory is sold by television networks such as CBS and NBC and purchased primarily by advertising agencies on behalf of their clients, the advertisers themselves. The market for this inventory has a curious structure. The bulk of television advertising is bought and sold in a short period in May known as the upfront market. The upfront market for prime-time advertising typically commences shortly after the networks have announced their fall (autumn) schedules. During a very intense period lasting from a few days to a few weeks, the television networks such as ABC, CBS, Fox, and NBC, sell the majority of their inventory for the next television season, where the “season” lasts from September to the following August. While the details of the upfront market are quite complicated, the typical transaction consists of an agreement to air an advertiser’s commercials in certain shows for the next year along with a guarantee to provide a minimum number of impressions (viewers) in certain demographics such as “Adult Males, 18–42”. If the network does not deliver the promised impressions it is obliged to compensate by providing additional slots to the advertiser or other consideration. If the network over-delivers it is simply a benefit to the advertiser. Typically the networks sell 70–80 percent of their anticipated capacity during the upfront market with the remaining capacity sold during the season on a spot basis in the so-called scatter market.

This is a simplified description of a market of great complexity. More details on how the US television advertising market works can be found in Lotz (2007) and in Phillips and (p. 22) Young (Chapter 11). For our purposes, it is sufficient to note that the market has several features that do not have an obvious benefit to any of the participants:

  1. 1. During the upfront period, billions of dollars in complex commitments are negotiatedamong multiple parties in a short hectic period of a few days or weeks. Mistakes arenot uncommon and, given the number of deals being negotiated and the short timeperiod, none of the parties has the ability to “optimize” its responses to proposalsmade by other parties (Phillips and Young, Chapter 11).

  2. 2. The timing of the market—sales commitments in May for delivery from Septemberthrough the following August—does not correspond to either the calendar year nor tothe fiscal year of any participant. Nor does it correspond to the typical “mediaplanning” calendar used by advertisers and agencies (Lotz 2007).

  3. 3. Both buyers and sellers are making commitments with substantial financial implica- tions in the face of considerable uncertainty—neither the networks nor the advertisersknow how shows are likely to perform in the coming season. If a network overestimatesthe impressions that will be generated by a new show, it runs the risk of needingto compensate advertisers with additional inventory. The opportunity cost of these “make-ups” can be substantial.

Given that it does not appear to be a particularly efficient market mechanism, how did the upfront market come to be and why does it persist? There are many other more obvious and convenient ways in which television advertising could be bought and sold. In other industries with fixed, perishable capacity, buyers can purchase future units in bulk at almost any time during the year. Thus, even very large groups such as conferences can enter negotiations at any time with airlines and hotels to purchase future capacity: there is no “upfront market” for airline seats or hotel rooms. Furthermore, other countries lack the upfront/scatter market structure. In addition, at various times over the years, advertisers and agencies have suggested that the industry should eliminate the upfront market in favor of a “continuous market” in which impressions and/or advertising slots could be purchased as needed (Ephron 2003). More recently, a group of advertisers led by Chevrolet pushed for an “e-Bay style” market for television advertising (McClellan 2010). But these efforts have come to naught and the upfront market has remained largely unchanged for almost fifty years. This suggests that we must look to the history of the upfront market to provide an explanation.

2.3.1 The history of the upfront market

Commercial television appeared in a serious form in the United States in the years following World War II. The “big three” television networks—ABC, CBS, and NBC— were originally radio networks and the structure of the new industry closely followed the established structure of radio. Despite some initial moves at government subsidy, the new medium of television, like its predecessor, radio, soon became 100 percent advertiser funded. Early television, like radio, was dominated by a small number of networks, each with a national organization of affiliated stations.

During the so-called “golden age” of live television (from the end of World War II into the late 1950s), advertisers typically sponsored an entire season of shows. In many cases, the (p. 23) sponsors’ name would be in the title—The Ford Theatre Hour, The Chrysler Shower of Stars, The Kraft Playhouse. This approach had been adopted directly from radio. During the golden age, “it was standard for all networks to pay a program’s production costs and additional fees for the network’s airtime, based on the time of the day that the show aired and the number of affiliates that carried a program” (Weinstein 2004: 42). Most programs of the period were variety shows or staged plays that lent themselves well to live broadcast. Commercials consisted of celebrity endorsements or live product demonstrations. Since advertisers financed an entire series, all of the advertisements during a show would be from a single sponsor. Negotiations between sponsors and the networks apparently took place during February with final commitments in place by the first of March (Ephron 2003). Negotiations were for the opportunity to sponsor an entire series—there was little or no market for individual slots.5

During the period from the mid-1950s through the early 1960s, the industry moved from a sponsor-centric model to a network-centric model. Under the sponsor-centric model, shows were sponsored by one or two advertisers and produced by advertising agencies such as J. Walter Thompson and McCann-Erickson. By the 1957 fall season, only three shows were still produced by an agency—the remainder were network-produced or purchased by the network from independent producers (Mashon 2007: 149). The responsibility for developing, financing, and producing shows was moving from the sponsors and the agencies to the networks. In this new world:

a program series was contracted to the network, not to the sponsor, as was previously the case. The network would schedule the program and either sell sponsorships or participation to interested advertisers. Since this new responsibility brought with it greater financial risks, the networks began to share the cost of pilots with the show’s producers. If a pilot show was accepted for network scheduling, the network retained its financial interest in the series. (Heighton and Cunningham 1976: 34)

The shift from single-sponsor shows to multiple-sponsor shows was gradual but inexorable: during the 1956–57 season, 75 percent of prime-time programs were single-sponsor, by the 1964–65 season the fraction had dropped to only 13 percent (Boddy 1990).

By the mid-1960s, single sponsorship was almost extinct. Instead, the networks developed their own programs or purchased them from independent producers or Hollywood studios and scheduled them as they saw fit. Instead of sponsoring shows, advertisers— through their intermediaries, the agencies—now purchased slots across many different shows often spread among two or more networks.

The modern upfront market seems to have emerged during the transition of commercial television from a sponsor-centric model to a network-centric model. However, the roots of the upfront market may go back to the days before television, when radio was the dominant (p. 24) entertainment medium. Since at least the 1930s radio programming typically followed a September to May season. A commonly cited rationale was that audiences were lighter during the summer months and performers liked to take a summer vacation (Hettinger and Neff 1938: 159). As a result, network advertising contracts for radio, like their later television counterparts, usually started in October and lasted until the following April or May (Hettinger 1933: 186). Television seems to have inherited the idea of a fall season from radio—probably a direct result of the fact that the big three networks came from radio. Although early television shows could premier any time of the year, a season starting in September and lasting until April or May became standard for all four networks (ABC, CBS, DuMont, and NBC) by the 1951–52 season (Castleman and Podrazik 1982). Completing negotiations by the end of February gave advertisers and their agencies the time necessary to script and prepare the (live) shows for the new season. As the networks moved from selling shows and show times to selling slots, it is easy to see how the annual negotiation cycle moved from (a) selling single-show sponsorships to (b) selling both sponsorships and slots to (c) selling only slots. The upfront system was evidently well in place by 1962, when an advertising executive could complain, “the advertiser must make his decisions in March, knowing that he will have to live with them for the entire year that begins the following October!” (Foreman 1962: 44).

2.3.2 Is the upfront market an example of path-dependence?

A pure economic equilibrium explanation for the upfront market would be that it is the only “logical” market structure given the basic institutional and technological characteristics of the market for television advertising. Allaz and Vila (1993) present a two-period model of oligopolistic suppliers with constrained capacity in which a forward market forms despite the fact that it makes the sellers as a whole worse-off than selling on the spot market alone. They do not apply their approach to television advertising, but their analysis could plausibly serve as a starting point for a model of the upfront market. Such a model would need to reflect the fact that the television network ad market is not only oligopsonistic— with only six major sellers—but also highly concentrated on the buyers’ side with four large advertising agencies accounting for almost 40 percent of total upfront ad spend (Ephron 2003).

Any explanation of the upfront market needs to account for the fact that advertising markets in countries other than the United States are structured quite differently. In Canada, the upfront market is quite small (about 20 percent of the total) and most advertising is sold on the scatter market. In Australia and New Zealand there is no upfront market per se—advertisers contract periodically throughout the year with the networks (Graham Young, personal communication). It seems unlikely that these differences repre-sent unique technological or current regulatory environments within these countries. Rather, it seems likely that, to a large extent, they reflect the different historical pathways of commercial television in the different countries. For example most European television industries have a much longer tradition of both government support and control than the American industry. It is also significant that advertising markets in other media such as newspapers and magazines do not have upfront markets. Neither do group sales for airlines, hotels, or cruise lines.

(p. 25) A key element in the persistence of the upfront market appears to be the institutional and human capital infrastructure that has developed around it. The upfront market is avidly anticipatedand followedby mediajournalists and stock analysts. Thevolume of upfront sales made by a network is considered an indicator of corporate performance and the total volume of upfront sales is seen as an indicator of the financial health of the television industry. Prior to the upfront market, equity analysts prepare detailed forecasts of network performance. As a typical example, one analyst predicted of the 2007 upfront market: “The market will grow 4.7% to just under $9.5 billion with CBS moving up 5.3% to $2.5 billion, ABC climbing 4.3% to $2.04 billion, NBC rising 3.9% to $1.98 billion and Fox going 5% to $1.98 billion” (Friedman 2007). Similar analysis of upfront “winners” and “losers” takes place once the market is complete and the networks have announced the results. In the face of such scrutiny, network executives are understandably reluctant to “opt out” of the upfront market.

The upfront/scatter market structure is woven deeply into the fabric of the television industry. Both the networks and the advertising agencies have invested many years and dollars in developing the capabilities needed to operate in this environment. The large advertising agencies employ specialists in developing and negotiating upfront deals. The networks have both people and systems focused exclusively on extracting as much revenue as possible in the upfront market. Equity analysts and journalists use upfront market performance as important financial indicators. Deviating from the current modality would require abandoning this familiar world, writing off millions of dollars in investment and sailing into unknown waters. The sociological view of the upfront market might be as an industrial norm that persists due to its ritual importance as described by Lotz (2007).

This does not mean that the upfront/scatter market structure is not a Nash equilibrium of some game. If a large agency, a large advertiser, or a major network saw that it was to their advantage to withdraw unilaterally from the upfront market, they would surely do so. If enough players withdrew, the upfront market would collapse. Thus, it is unquestionably true that all the major players believe it is in their interest to participate—at least as long as others participate. This, by definition, implies that the upfront market is a Nash equilib-rium of some game. The question is, what game? How big does the “television advertising market game” need to be defined before the upfront market falls out as a unique subgame-perfect Nash equilibrium—if it ever does? It could be argued that equity analysts and network shareholders might need to be included as players since their expectations are cited as a reason for continued network. On the other hand, equity analysts only follow the upfront market because it has been important historically. In other words, the motivations and even the identities of the “players” cannot be specified without reference to history.

2.4 Why Do Movie Tickets Cost the Same on Tuesday Nights as Saturday Nights?

When the movie Dreamgirls opened in December, 2006, theaters in Los Angeles, New York, and San Francisco charged $25.00 per ticket—almost twice the usual price—during the first ten days of its run. Despite the high price, enough people flocked to the musical (p. 26) to fill almost all of the available seats. Ticket prices were lowered to their usual levels after the initial two weeks and the movie went on to a successful nationwide run (Hessel 2007).

The unusual thing about the differential pricing of Dreamgirls tickets is precisely how unusual it is. While movie theaters do employ many standard promotional approaches such as student/senior discounts or matinee discounts, they do not vary their pricing according to the popularity or genre of a movie, nor do they change it over time as demand begins to dwindle. In other words, they do not practice revenue management as do many industries such as the passenger airlines with which they share similar characteristics. As with passenger airlines, the seating capacity of movie theaters is fixed and immediately perishable—an empty seat is an irrecoverable source of lost revenue. As in airlines and other revenue management industries, demand for movie seats is uncertain but follows predictable patterns. For example, demand is reliably stronger during the summer and holidays than during other times of the year and is stronger on weekend nights than on week nights or during matinees. Demand tends to decline or “decay” after release in a fairly consistent fashion (Einav 2007). Furthermore, demand predictably varies among genres: during the period from 1985 through 1999, the average revenue per movie for science fiction movies was more than seven times the average for documentaries (Orbach 2004). R-rated movies tend to have lower box-office returns than G or PG rated movies (Sawhney and Eliashberg 1996). Both the cost of a motion picture and the amount of marketing and advertising expenditure have strong positive correlations with total revenue (Eliashberg et al. 2006). On the surface, this would seem to indicate that movies would be a strong candidate for dynamic pricing or revenue management.

Of course, forecasting demand for movie seats is far from an exact science. There will always be high-profile, high-budget flops such as Waterworld and surprise, low-budget hits such as Little Miss Sunshine. Nonetheless, there is no readily apparent reason why the industry could not benefit from more differentiated pricing. It would not be difficult to use some of the factors described above to develop a model of demand by theater that had sufficient predictive power to support profitable revenue management. Broadway theaters, whose demand is arguably less predictable than movies, routinely use various forms of price differentiation ranging from different prices for different seating qualities to half-price tickets sold through the TKTS outlet on the day of the show (Leslie 2004). Even professional sporting events—long known for pricing conservatism—have begun to vary prices accord-ing to the anticipated demand for individual games.6 Why are movie theaters reluctant to follow suit?

Orbach (2004) and Orbach and Einav (2007) have examined the “riddle of motion picture pricing” in some detail. The current near-uniformity of prices within a theater is particularly puzzling because prior to 1970 there was significant pricing differentiation. According to Orbach, “throughout the 1950s and 1960s there was a clear distinction between pricing of regular and event movies. Exhibitors also maintained price variation between weekdays and weekends and among different types of seat” (Orbach 2004: 348). Furthermore, theaters and theater chains still differentiate prices according to geography: “Admission fees in certain cities are as much as three times higher than in other cities” (Orbach 2004: 322). Given that (p. 27) theaters and theater chains are not allergic to price-differentiation among cities and price differentiation worked in the past, why do they universally maintain uniform pricing within the same theater? Orbach and Einav discuss six possible reasons:

  1. 1. Perceived unfairness of differentiated prices on the part of consumers.

  2. 2. Price may be a quality signal. A discount price might lead consumers to believe that aparticular movie is inferior, thus leading to a sharp decrease in demand.

  3. 3. Demand uncertainty.

  4. 4. Menu and monitoring costs. These are particularly relevant at large multiplexes inwhich a single ticket taker provides entry to many different movies.

  5. 5. Agency problems. A distributor does not care about concession revenue, which can bea large component of profitability for an exhibitor.

  6. 6. Double marginalization. An industry structure in which a monopolistic supplier(such as the studio) sells to customers through a monopolistic distributor (such asa theater) has been shown to result in higher-than-optimal pricing to customers aswell as lower-than-optimal profits for both the supplier and the distributor.

Orbach and Einav dismiss all of these reasons as either not applicable or as insufficient to explain uniform pricing. Their arguments seem persuasive. It is very difficult to argue that uniform movie pricing is now optimal when differential pricing was successful in the past and is used successfully in similar settings such as Broadway theaters and sporting events. In the absence of a more persuasive explanation, Orbach and Einav hypothesize that tacit pressure from movie distributors is the reason for uniform pricing. According to Orbach (2004), the shift from differentiated to uniform pricing can be dated to the release of The Godfather in 1970. The Godfather was released with uniform pricing nationwide and became the highest grossing movie to date. As Orbach (2004: 350) notes, “It is implausible that all exhibitors across the country decided individually to charge a regular price for The Godfather.” This suggests (but does not prove) that some central coordination—presumably from the distributors—was involved.

It is important to note that, in theory, distributors are prohibited from influencing pricing by the terms of the Supreme Court judgment in United States vs. Paramount (1948) and a series of related consent decrees. Prior to Paramount, a cartel of eight distributors controlled the production, distribution, and exhibition of movies in the United States. The outcome of the Paramount case included prohibitions against direct and indirect distributor intervention in box-office pricing. Thus, if distributors are influencing prices, it must be through a tacit channel.

The hypothesis that tacit pressure by distributors influences theater prices is supported by statements from the exhibitors. For example, the executive director of a small Tucson theater commented, with respect to variable pricing, “The whole subject is very intriguing, but we’re not going to do anything to disrupt our relationships with our distributors because they’re our life blood. It might have to be something done by one chain that had 5,000 screens and the sufficient power over distributors to do it.”7 But there is no “smoking (p. 28) gun”—no documented evidence of explicit pressure applied by distributors on exhibitors to adopt uniform pricing. This is not entirely unexpected, since such pressure would almost surely be judged to be in violation of the Paramount agreement.

Orbach (2004) invokes “conservatism” as an explanation for the persistence of uniform pricing: “Conservatism in this context is the adherence of the industry to an established practice without examining its justifications. In the exhibition market, conservatism seems to be fed by unexamined concerns that the transition to variable pricing would be financially disadvantageous” (Orbach 2004: 363–4). Ultimately, appeals to “conservatism” or inertia as rationales are somewhat unsatisfactory. Unlike the upfront market for television advertising, there does not appear to be significant monetary or human capital investment in uniform pricing by theater operators—it would be quite easy for a particular operator to institute differentiated pricing. This strongly implies that theater managers have significant doubts whether differentiated pricing would be successful in generating additional revenue and/or they fear some sort of adverse reaction either from consumers, competitors, or distributors. The upshot is that the question of why movie tickets cost the same on Tuesday night as they do on Saturday night remains open. The lack of pricing differentiation certainly appears to be suboptimal from a market equilibrium point of view, but the factors preventing theater owners from moving to more differentiated pricing have yet to be definitively identified.

2.5 Why Do Retailers Sell at Fixed Prices?

The most important trend in pricing in modern times has been the rise of retail fixed pricing. The fixed pricing modality incorporates four elements:

  1. 1. The seller unilaterally chooses a price.

  2. 2. The seller posts the price in a market for potential buyers to see.

  3. 3. Potential customers observe the price and choose whether or not to purchase.

  4. 4. Transactions take place exclusively at posted or advertised prices.

It should be made clear that fixed-pricing is in no way inconsistent with price-differentiation, customer segmentation, volume discounts, dynamic pricing, or other common pricing tactics. A movie theater selling tickets at $12.50 to the general public but offering senior citizens a $2.00 discount is still practicing fixed pricing. So is a retailer running a “buy one get one free” promotion in its stores, as is a grocery store offering a “25 cents off a gallon of milk” coupon to some of its customers. In all of these cases, the seller has unilaterally set prices and communicated them to customers (albeit with potentially different prices to different customers)—the only decision that a customer faces is whether or not to buy at the price available to her.

About 50 percent of consumer expenditure in the United States is spent on goods and services that are sold in markets that (almost) exclusively use fixed prices. These include food, beverages, household supplies, gasoline, public transportation, and entertainment. Categories of expenditure that are typically transacted using modalities other than fixed (p. 29) pricing include housing, vehicle purchases, and insurance.8 While about 50 percent of household expenditure dollars are spent on a fixed price basis, the percentage of household transactions that take place on a fixed price basis is unquestionably much higher. The non-fixed price transactions are “big ticket” items such as housing and vehicle purchases which are typically purchased less than once a year. Almost all common purchases such as buying a meal at a restaurant, groceries at a grocery store, books at a bookstore, personal items at a drugstore, or clothing from a department store, are fixed price transactions. Given its ubiquity, many might find it surprising that retail fixed pricing is less than 150 years old.

2.5.1 The prehistory of fixed pricing

Bargaining or haggling was the dominant pricing modality for buying and selling almost everything in the West from Classical times well into the nineteenth century. Buyers and sellers haggled over the price of produce in a market, over the price of shoes, of tailored clothing, of skilled handiwork, of land, of horses, of almost anything. In the classical world, auctions were also common—many unique and expensive items such as slaves, land, or furniture were commonly sold at auction.9 Fixed pricing was, at best, a distant third— indeed, with the possible exception of inns and taverns (Casson 1974), it is difficult to find evidence of anything at all being sold at a fixed price during Classical times.

The situation continued past the fall of Rome, through the Medieval world, through the Renaissance and into the modern age. Individual purchases were typically based on bargaining or negotiation. Transactions among merchants, traders, and their agents (the “B-to-B” economy of the time) were based on various types of contracts and agreements that were undoubtedly intensely negotiated.

Fixed and posted pricing began to appear in various urban institutions starting in the eighteenth century. The first coffee houses in London opened in the mid-seventeenth century and apparently charged fixed and relatively stable prices (Ackroyd 2000: 319–24). Restaurants appeared in Paris sometime before the French Revolution. They differed from inns and taverns in that they catered to locals, not travelers. According to a 1773 description of a restaurant, “the price of each item is specific and fixed”, while the 1835 edition of the Dictionnaire de L’Académie Française noted that the prices at a restaurant are “indicated on a sort of placard”. Later, the placards would be replaced (or supplemented) with printed menus with prices—a practice adapted from the menus de hote provided to guests at dinner parties (Spang 2000). Computations for large parties needed to be kept simple in the days before the cash register so a common practice was to charge a fixed price for the meal with prices for beverages listed separately. Hotels, which arose in the United States in the years following the American Revolution, also advertised and posted prices as early as the 1820s (Sandoval-Strausz 2007).

(p. 30) Carriage lines in England and America in the late eighteenth century advertised fixed prices. For example, the New York Times of March 13, 1789 carried an advertisement for “New York & Baltimore Stages” that offered “Fare for each passenger 4 dollars, way passengers 4d per mile.”10 One of the most important early fixed pricers were the railroads. Railroad travel was an easily standardized product that lent itself naturally to fixed pricing. Indeed, railroads were not only early fixed pricers, they were also pioneers in price discrimination as recognized by the French economist Dupuit in 1849:

It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriages or to upholster the third-class seats that some company or other has open carriages with wooden benches….What the company is trying to do is to prevent the passengers who can pay the second class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich. And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second-class ones, become lavish in dealing with first-class passengers. Having refused the poor what is necessary, they give the rich what is superfluous.11

Thus, “fixed pricing” was hardly unknown by the mid-nineteenth century. Yet bargaining was unquestionably the dominant modality for the vast majority of purchases. After all, restaurants were primarily for the urban middle and upper classes at a time when the vast majority of the population was rural. A railroad trip would be a rarity for most people and only about 20 percent of the population in 1840 could afford to stay in a hotel (Sandoval-Strausz 2007). Most people, most of the time, did their buying in stores—and in stores, before the 1860s, bargaining was almost universal.12 In smaller stores, the proprietor knew the cost of every good and negotiated every deal personally. Larger stores with numbers of clerks often utilized the “pricecode” system in which information on price-tags was listed in a code that the customer could not read:

Every merchant selected a Price Symbol as soon as he went into business, and it was made a password to his sales methods. It had to contain ten letters, preferably not two were alike and it could not be too easy to decipher. Some of these were “Baltimore,” “Comb basket,” “Black Snake,” “Prudential,” “Cumberland,” the first ten letters of the Greek alphabet, and special symbols such as those used by the J. D. McGraw house in Louisville, Mississippi…

 Why Are Prices Set the Way They Are?

Thus markings on goods became “∧ Z ××” or $14.00. Always it was the practice to mark goods with both the purchase and selling prices..One of the favorite pastimes for the few customers who understood the use of code words was that of trying to guess what they meant. (Clark 1944: 317–18)

This system favored buyers who were most willing and able to haggle. As John Wanamaker described retail trade prior to 1865, “There was no selling price for goods—there was an asking price, and the most persistent haggler bought the goods far below the unwary” (Wanamaker 1911: 27). It was not just customers who haggled with merchants—haggling was standard throughout the retail supply chain. “Manufacturers and importers bargained for the highest amounts they could get from wholesalers and jobbers. Wholesalers and (p. 31) jobbers put the squeeze on retailers for the last possible dime, and retailers in turn charged their customers as much as they feel the traffic would bear” (Scull 1967: 79). Haggling (or “higgling” as it was also called) had the benefit of enabling the savvy retailer to practice price discrimination. “A prosperous customer was quoted one price—subject, of course, to considerable negotiation—while a less affluent customer was quoted a lower price, also subject to adjustment if the customer had the time and stamina to negotiate” (Scull 1967: 79).

A glimpse of this world can be seen in Emile Zola’s novel The Belly of Paris, which is set in the Les Halles market in Paris in the 1850s. Haggling is the basis of every transaction and caveat emptor is the rule. A naive servant who overpays for a fish is jeered and hectored by the other stall owners when she tries to return it (Zola 1873/2007). Other glimpses can be seen from contemporary marketplaces in traditional economies. In rural Mexico, “[for maize] one dealer observed asked $4.50 a pesada, sold fairly readily at $4.40 and would go to $4.20. If the client were very persistent, he might even sell at $4.00. If so, however, he managed to short weight the client of about half a kilogram of grain by clever manipulation.… Yet for regular customers who have agreed on a ‘good’ price, most dealers add a little maize after the weighing is complete” (Beals 1975: 167).

The system of bargaining for goods was the standard in Western society for millennia. However, as the 1860s dawned, this was about to change.

2.5.2 The fixed pricing revolution

It is impossible to determine which retailer was the first to use fixed pricing. Quaker merchants, who had a reputation for probity13 are often credited with being the first to set fixed—although not necessarily posted—prices. In a 1658 tract entitled A Warning to the Merchants of London, the most influential early Quaker, George Fox, enjoined merchants to desist from the “cozening and cheating and defrauding” practice of haggling and adopt a fixed price policy (Kent 1990: 142). According to Daniel Defoe in The Complete English Tradesman (1726), Quakers “resolved to ask no more than they would take upon any occasion whatsoever and chose rather to lose the sale of their goods,…, rather than abate a farthing from the price they had asked.”14 A dry-goods store founded by A. T. Stewart in 1826 is often credited with being the first to employ fixed prices in the United States (Scull 1967: 81). Some Parisian stores, such as the Petit Dunkerque, were advertising fixed and marked prices in the late 1830s and the Ville de Paris, the largest magasin de nouveautés in Paris, also featured fixed and marked prices by 1845 (Miller 1981).

The idea of fixed retail pricing was clearly in the air by the 1860s. But it was the arrival of those “grand emporiums of commerce”, the first large department stores, that established the fixed price policy as the standard. Retail stores selling many different lines of goods with an emphasis on customer service and variety began to appear in the 1850s and 1860s (p. 32) more-or-less simultaneously in the United States and France and a little later in England. Which of these establishments qualifies as the first “department store” is a matter of lively (if inconclusive) debate among business historians15 What is certain is that four of the most important early department stores were A. T. Stewart’s Cast Iron Palace in New York (1862), Rowland Hussey Macy’s eponymous New York store (1865), Aristide Boucicaut’s Bon Marché in Paris (1850s), and John Wanamaker’s Grand Depot (later known as “Wanamaker’s”) in Philadelphia (1876). Each of these pioneering entrepreneurs brought great energy and marketing savvy to their respective enterprises. All were experienced retailers and all—with the exception of Boucicaut—had experimented with a fixed price policy at previous establishments.16

Stewart, Macy, Boucicaut, and Wanamaker all became known for their fixed price policies and money-back guarantees at their stores. Stewart put price tags on all of his goods and advertised his “one-price” policy in the newspapers (Scull 1967: 81). Wanamaker boasted of his Grand Depot that “The prices of goods were put down at the beginning to the lowest point that they could be sold for and there was no underground way to get them. All were on the ground floor from the first” (Wanamaker 1911: 47). In New York, in Paris, and in Philadelphia, the new retail emporiums and their fixed price policies proved enormously popular. Smaller retailers were forced to adopt the new policies whether they liked it or not—the introduction of fixed prices by one of the new giants into a new line of business often resulted in general conversion to the new prices. When Wanamaker started selling pianos in 1899, “such thing as a fixed price for a piano, marked in plain figures, was rarely known” (Wanamaker 1911: 87). Once Wanamaker entered the business, other piano makers adopted the fixed price system in order to compete.

The fixed price policy coupled with money-back guarantees spread from the great stores of the East Coast to the rest of the country. Wayland Tonning (1956) studied the spread of fixed pricing in Champaign-Urbana, Illinois. He found that there was very sporadic advertising of a “one-price policy” in various stores between 1866 and 1872. In 1872, the Scott & Willis store opened, advertising “All Goods Marked in Plain Figures and ONE PRICE Strictly Adhered To”. Competing stores gradually adopted the one-price policy combined with money-back guarantees. By the turn of the century, the one-price policy was the standard in Champaign-Urbana. This was simply one example of the process that occurred between 1870 and 1890, during which fixed pricing moved from being a rare exception to the norm for American retailers. By 1890, “One Price for Every Man” was being advertised proudly by grocers even in remote rural Georgia (Wetherington 1994: 172).

By the turn of the century, the fixed price policy was well on its way to being standard operating procedure for major retail establishments throughout North America and Western Europe. In 1905, prices in London stores were “almost invariably fixed, so that bargaining is unnecessary” (Baedeker 1905: 25). George Gissing’s novel Will Warburton (p. 33) (written in 1902–03, but published in 1905) has one merchant chide another who deviated from fixed pricing, “That’ll never do behind the counter, sir, never!”

As the twentieth century progressed, fixed pricing became more and more firmly established among American retailers. Nonetheless, a 1947 handbook advised returning American servicemen who opened small retail stores to: “Maintain a strictly one-price policy. All your merchandise should be ticketed with the exact price; under no circum-stance deviate from the price shown. Sometimes people are inclined to haggle and bargain with the owner of a small shop, whereas they wouldn’t think of questioning prices in a large store. Correct that impression; never bargain or compromise.”17 What is interesting is not the advice itself, but the fact that it was still thought necessary. Even in post-World War II America, the norm of fixed pricing needed to be enforced.

2.5.3 Why fixed pricing?

Fixed pricing was a critical component of the business model of the new department stores. For one thing, without fixed prices there could be no money-back guarantees. The two went hand-in-hand—mass-volume merchants could not keep the records needed to enable “money-back” guarantees. Under the new regime, the customer lost her right (if that’s what it was) to argue for a lower price. In return, the merchant relieved the customer of some of the risk of purchasing through the money-back guarantee.

Fixed prices were critical to the new stores in other ways. Many observers of contemporary markets within so-called “traditional” economies have noted the sophisticated skills required for sellers to thrive in these markets: not only must a seller be able to estimate the willingness-to-pay of each prospective buyer, they must also know the cost of each item and the magnitude of overheads in order to run a long-term business that not only sustains itself but provides a sufficient profit margin (Geertz 1978; Robertson 1983). In the small shops that preceded the advent of the department stores, sales clerks performed long apprenticeships before they could be trusted with full responsibility. List-pricing massively simplified the job. It enabled Wanamaker, Macy, and Boucicaut to recruit thousands of workers for their new stores who could become productive sales clerks after only minimal training.

Furthermore, fixed pricing enabled centralization of the pricing function and generated economies of scale in pricing. In a bargaining modality, selling 10,000 identical items requires 10,000 negotiations and 10,000 pricing decisions. In a fixed price modality, selling 10,000 identical items requires no negotiation and only a single pricing decision. The superior efficiency of fixed pricing was recognized by A. T. Stewart as early as 1826. Given that fixed pricing reduces the average time consumed for a new car sale by 82 percent (Business Week 2007) it is likely that the time savings from a fixed price policy were substantial, particularly as retail stores grew in size and scope. Some retail historians have claimed that, prior to the advent of fixed pricing, retailing required a much greater number of clerks relative to total sales than afterwards.18 The increased efficiency of fixed pricing led (p. 34) to savings that could be passed along to customers in the form of lower prices—thus further increasing the advantage of the larger stores.

The combination of low and fixed prices with unprecedented size and scope meant that the new stores were really something new under the sun. They were acknowledged as such not only by shoppers but also by writers, academics, and journalists. In Paris, Emile Zola was fascinated by Aristide Boucicaut and his creation, The Bon Marché, which he saw as a new, hygienic, and efficient mode of commerce, replacing the old world of small specialized shops and customer haggling. Zola’s novel, La Bonheur des Femmes—literally “The Ladies’ Paradise”—is based closely on The Bon Marché; and its entrepreneurial owner, Octave Mouret, is based on Aristide Boucicaut. In Zola’s novel,19 the new store attracts customers in droves with its bright lights, its modern design, and its seemingly endless displays of merchandise of all sorts, as well as with its fixed prices, listed on tags, and its return policy. The fixed and posted prices are an integral part of the machinery of commercial seduction: even outside the front door, “on the pavement itself, was a mountain of cheap goods, placed at the entrance as a bait, bargains which stopped the women as they passed by…. Denise saw a piece of tartan at forty-five centimes, strips of American mink at one franc, and mittens at twenty-five centimes. It was a giant fairground display, as if the shop were bursting and throwing its surplus stock into the street” (Zola 1883/1995: 4–5).

Fixed prices were even part of the marketing displays at La Bonheur des Femmes:

There was something for every whim, from evening wraps at twenty-nine francs to the velvet coat prices at eighteen hundred francs. The dummies’ round bosoms swelled out the material, their wide hips exaggerated the narrow waists and their missing heads were replaced by large price tags with pins stuck through them into the red bunting round the collars, while mirrors on either side of the windows had been skillfully arranged to reflect the dummies, multiplying them endlessly, seeming to fill the street with these beautiful women for sale with huge price tags where their heads should have been (Zola 1883/1995: 6).

As Zola recognized, fixed and posted prices made possible entirely new retail and marketing strategies. When a small silk retailer, Robineau, tries to undercut the price of silk at the Ladies’ Paradise by 10 centimes, he inadvertently starts the first price war. “And, in fact, the following week Mouret boldly reduced the price of the Paris-Paradise (silk) by twenty centimes… those twenty centimes meant a dead loss, for the silk was already being sold at cost. It was a severe blow for Robineau; he had not thought that his rival would lower his prices, for such suicidal competitions, such loss-leading sales were then unknown” (Zola 1883/1995: 197). Mouret triumphs by his ability to go ever lower than his competitor and Robineau is ultimately forced out of business.

Fixed prices combined with the power of advertising also enabled the “loss leader”:

“We’ll lose a few centimes on these goods, I’ll grant you. But so what? It won’t be such a disaster if it enables us to attract all the women here and hold them at our mercy, their heads turned at the sight of our piles of goods, emptying their purses without counting!… After that you can sell the other goods at prices as high as anywhere else, and they’ll still think yours are cheapest. For example, our Cuir-d’Or, that taffeta at seven francs fifty, which is on (p. 35) sale everywhere at that price, will seem an extraordinary bargain, and will be sufficient to make up for the loss” (Zola 1883/1995: 39).

The climax of The Ladies’ Paradise is the much-advertised and much-anticipated sale which generates a frenzy of buying:

Outstretched hands were continually feeling the materials hanging at the entrance, a calico at thirty-five centimes, a wool and cotton grey material at forty-five centimes, and above all an Orleans cloth at thirty-eight centimes which was playing havoc with the poorer purses. There was much elbowing, a feverish scrimmage round the racks and baskets in which piles of goods at reduced prices laces at ten centimes, ribbons at twenty-five centimes, garters at fifteen, gloves, petticoats, ties, cotton socks and stockings were disappearing as if devoured by the crowd. In spite of the cold weather, the assistants who were selling to the crowd on the pavement could not serve fast enough. A fat woman screamed. Two little girls nearly suffocated (Zola 1883/1995: 239–40).

The force of Zola’s work comes from the fact, that, at the time, all of this was new. The arrival of the grand magasins “changed everything” in the relationship between merchant and seller as well as between merchant and merchant. Price-wars, loss-leaders, promotional prices, sales—none of this had any precedent in the old world of haggling in small shops. A new urban pastime—shopping—was born. Previously, entering a Parisian shop implied an obligation to buy20—much as sitting at a table in a restaurant today implies an obligation to order—but the grand magasins adopted a policy of “free entry” by which people could wander about and simply browse or merely pass the time. The new retailers relied upon the power of their merchandising, the seduction of low prices, the very design of their buildings to drive customers into a sort of buying frenzy. However, Parisian consumers were not simply passive victims of the new technologies of retail seduction—Zola also chronicled the birth of what is now called the “strategic customer”. When Madame Marty, on impulse, buys a red parasol at fourteen francs fifty, her friend, Madame Bourdelais chides her, “You shouldn’t be in such a hurry. In a month’s time you could have got it for ten francs. They won’t catch me like that!” (Zola 1883/1995: 245).

Merchants portrayed their fixed price policies in high-minded terms: fixed prices were not only efficient, they promoted harmony. “New, fair and most agreeable relations were established between the purchaser and the seller,” enthused John Wanamaker (1911). The sentiment is not entirely self-serving—with fixed pricing in place, merchants indeed no longer had to “compete with the customers”, in Clifford Geertz’s phrase. There is no question that an environment of continual haggling could lead to serious disagreements and even worse—the earliest meanings of the word “bargain” include “struggle” and “fight”. The police in pre-revolutionary Paris continually worried that haggling over the price of bread between customers and bakery owners could lead to riots (Kaplan 1996). In La Ventre de Paris, a dispute between a merchant and a buyer threatens to turn into a general melee (Zola 1873/2007). The anthropologist Clifford Geertz described marketplace bargaining as “A personal confrontation between intimate antagonists” (Geertz 1978: 32). With fixed pricing the relationship between merchant and buyer was both less intimate and less antagonistic. Pricing had become impersonal.

(p. 36) 2.5.4 Fixed pricing as impersonal

In Looking Backward (1888), Edward Bellamy described a retail store in the Utopian society of the distant future:

Legends on the walls all about the hall indicated to what classes of commodities the counters below were devoted….it is the business of the clerks to wait on people and take their orders; but it is not the interest of the clerk or the nation to dispose of a yard or a pound of anything to anybody who does not want it…. I saw then that there was fastened to each sample a card containing in succinct form a complete statement of the make and materials of the goods and all its qualities, as well as price, leaving absolutely no point to hang a question on. (Bellamy 1888/2005: 79–80)

To this extent—if in little else—Bellamy’s vision has been realized. Retail stores in the early years of the second millennium are indeed characterized by standardized goods; clerks as order-takers rather than active seller; and marked, fixed prices. In fact, much retail trade has gone even further and eliminated the human element altogether. In the words of Stephen Gelber, “posted prices depersonalized the marketplace by making each customer a stranger and, by the same token, ensuring every stranger (customer) that he or she was not being cheated” (Gelber 2005: 121–2).

Depersonalization can be a signal of “fairness” in the sense of lack of discrimination among buyers. However, it is also a way that a retailer can discourage haggling. Consider the case of the airlines. By the 1960s many major passenger airlines were operating globally. Yet passenger reservations still required phone calls and faxes and the reservations them-selves were typically stored in huge files full of index cards. It took an average of two hours to process a reservation and seats could not be sold more than 30 days prior to departure. In 1964, after six years of planning, design, and programming, American Airlines and IBM introduced the computerized Sabre. One purpose of the Sabre system was to provide a data storage and management system for flight reservations. The other purpose was to provide a pipeline by which prices, availabilities, and bookings could be transmitted instantaneously between the airlines and the growing global network of travel agents. As a consequence of this system, airline price distribution—and ultimately hotel, rental car, and cruise line price distribution—was fully mechanized. Prices could be set and updated centrally and immediately transmitted to travel agents worldwide—or at least those with a Sabre computer terminal (Barnes, Chapter 3).

The mechanization of pricing distribution for the airline was more than a simple technical breakthrough. As with the original institution of fixed prices by the early retailers Sabre consciously and conspicuously disempowered sales agents. Airline fares read from a computer screen were clearly non-negotiable—they were set by “the computer”. Well into the 1960s, some customers were inclined to bargain over airline and hotel prices. This was a source of low-level stress for sales and travel agents. Sabre and competing automated distribution systems put an end to that—the human being audibly and visibly clicking the keys on his computer terminal was quite clearly a mere order-taker, not a price-setter. “I’m sorry but the computer won’t let me do that”, is an unanswerable response to any attempt to haggle. The Internet has extended this level of depersonalization to the pricing of almost everything imaginable.

(p. 37) 2.5.5 Fixed pricing as normative

It is striking evidence of the triumph of retail fixed pricing that it has become strongly normative in industrialized societies. In retail markets, deviations from fixed pricing are often considered “unfair”, even when potential buyers cannot fully articulate the reason why they consider them so (Haws and Bearden 2006). The fixed pricing norm has carried over from retail store purchases to automated selling. Even when there is no human being involved, customers expect machines to exercise “fair pricing”. The ballyhoo over Coca Cola’s expressed intentions to develop a vending machine that would change prices based on temperature is a perfect illustration. In a 1999 magazine interview, Douglas Ivester, CEO of Coca-Cola, expressed the opinion that,

Coca-Cola is a product whose utility varies from moment to moment in a final summer championship, when people meet in a stadium to enjoy themselves, the utility of a chilled Coca-Cola is very high. So it is fair it should be more expensive. The machine will simply make this process automatic.21

Customers had a different view of “fairness” and complained vociferously. Coca-Cola dropped its plans and none of the vending machines have been deployed, almost a decade later.

When the on-line bookseller Amazon was suspected of charging different prices to its DVD customers based on their past buying behavior, many of its customers were outraged. “Amazon is over in my book!” was one of the more moderate on-line postings. In this case, a perceived deviation from fixed pricing was viewed as provocative and unfair. “I don’t like the idea that someone is paying less than I am for the same product, at the exact same instant”, as a reporter covering the Amazon story wrote.22 Survey data have shown that most customers perceive paying a higher price than other customers as “very unfair” (Haws and Bearden 2006) and at least one empirical study has suggested that pricing differentials perceived as unfair by customers can lead to reduced demand (Anderson and Simester 2008).

Certainly, it has not always been the case that “fixed pricing” was viewed as normative. In pre-revolutionary Paris, the police insisted that bread shops allow haggling in order to benefit the working poor (Kaplan 1996: 88–9). Nor is it the case that all buyers necessarily preferred or welcomed fixed pricing. Daniel Defoe felt that it was the buyers, rather than the sellers, who wanted to bargain.23 However, the idea that a fixed price is “more fair” than bargaining is an old one. Quaker commercial behavior was in line on the injunction from George Fox that “if a child were sent to their shops for anything, he was as well used as his parents would have been” (Kent 1990). The association of fixed prices with fairness was firmly established by 1907 when the Baedeker’s Guide to Paris reassured British and American visitors that “The ‘prix fixe’ system now obtains almost universally and, in the (p. 38) larger and more reputable establishments especially, strangers run little risk of being fleeced” (Baedeker 1907: 48).

Certainly the early American merchant princes advertised their fixed price policies in egalitarian terms. Rowland Macy, himself a Quaker, echoed George Fox’s sentiment, “By adopting one price and never deviating, a child can trade with us as cheap as the shrewdest buyer in the country” (Scull 1967: 83). John Wanamaker crowed that “New, fair and most agreeable relations were established between the purchaser and the seller, the poor and the rich, the wise and the unwise—there was no favoritism” (Wanamaker 1911: 47). Many writers argued that fixed pricing was ethically superior to the bargaining modality that it replaced—to the extent that it provided moral justification for the wealth amassed by its pioneers: “Stewart, Wanamaker, Marshall Field, and a host of others who sprang up and flourished all over the country demonstrated that the retail merchant had a genuine and useful function to perform—fortunes awaited the merchant who served his customers by providing them with honest goods at honest prices.… And by becoming rich through honest methods they justified personal wealth as it had never been justified before” (Crow 1946: 151).

The rise of list pricing was accompanied by the increasing perception of haggling and bargaining as outmoded and declassé. In Victorian England, “bargaining for necessities” was something one’s servants did. In post-war America, buying wrapped meat at a fixed price was modern and middle class—haggling with the butcher was old-fashioned and lower class. This phenomenon is not confined to the developed world, in the 1970s, Ralph Beals noted that in Mexico, “many people aspiring to higher social status in the city and larger towns (feel) that bargaining is demeaning. Such buyers are much less apt to bargain or shop around for lower prices if they feel that the offering price is fair” (Beals 1975: 201). Fixed pricing, on the other hand, seems egalitarian by nature—it is well suited for the modern democratic world of commerce where customers from all classes may rub shoulders while buying groceries at Safeway or Whole Foods.

The upshot of almost 150 years of fixed pricing is that consumers in most Western economies not only expect fixed pricing, the process of bargaining or haggling often makes them uncomfortable. The word “haggling” itself has gained a pejorative connotation. “Besides, when you think about it, haggling is un-American” a 2007 Business Week article declared. The same article noted that 65 percent of all car buyers (and 72 percent of women) say they would rather not bargain when buying a car. “Negotiating price just isn’t in our culture”, according to a consultant who is working with automotive dealerships to develop “haggle-free” auto selling (Business Week 2007). Furthermore, fixed and fair prices seem to be part of the implicit contract that customers have established, at least mentally, with sellers. Bargaining can erode that understanding—“People soon lose confidence in a merchant with whom they can bargain, because they leave the store feeling that your goods are not worth what they paid for them” (Greenberg and Schindall 1946: 64–5).

2.5.6 The future of fixed pricing

Outside the developed economies, bargaining is still an everyday activity for much of the population. Very often, fixed price and bargaining modalities exist side-by-side. In 1983, Claire Robertson noted that, in Ghana, “Even in areas where one would not expect it, like (p. 39) imported goods, people occasionally bargained with storekeepers.… Bargaining is such a way of life in Ghana that it cannot be eradicated by such annoyances as price controls” (Robertson 1983: 479). An on-line guide to “Haggling and Bargaining in Gambia” recommends hard bargaining with all “market and street vendors” and at “goods shops” as well as whenever “hiring the services of local skilled craftsman such as a plumber, bricklayer or construction contractor.” On the other hand,

Do not bother haggling over prices charged in the supermarkets, restaurants, bars, night-clubs, and “Bitiks” as they tend to have fixed prices. Likewise don’t bother with small items purchased from the local “Pular” corner shop such as a packet of razors, insect spray, fruits, peanuts, purified water bags, bread or coffee. However, if you are approached on the beach by a fruit seller or other hawker then do ask for a reduction. If you have bought a lot of items in bulk from a supermarket then it is worthwhile asking them to reduce their price as they are often willing to offer a discount particularly to valued customers. If your room lacks any promised facility or you are intending to stay over 2 weeks then it might be worthwhile asking for a reduction of room rates.24

This broad description is a credible characterization of markets in many non-industrialized economies in which fixed prices coexist with bargaining, just as they did in Paris prior to the advent of the grands magasins. As the relentlessly bargaining grocer, Madame François, complains in Zola’s The Belly of Paris, “Oh, these Parisians! They’ll haggle for an hour over half a sou and then go and spend everything in a bar” (1873/2007: 15). This passage implicitly contrasts the fixed pricing modality at the bar with the bargaining modality in the market. In “mixed” economies, natives know instinctively which transactions are customarily performed in which modality—visitors are often not sure. This can cause disorientation and anxiety for visitors—should I bargain or not? Have I gotten a good deal? The bargaining and haggling skills that used to be needed to negotiate everyday transac-tions are disappearing from developed economies.

It seems highly likely that the fixed price modality will continue to gain ground at the expense of bargaining as many of these markets become more integrated into the global economy. Bargaining is not only “inefficient”, it disadvantages the foreign buyer. Clifford Geertz observes that information in the bazaar is “poor, scarce, maldistributed, inefficiently communicated and highly valued” (Geertz 1978: 21). Local sellers have much more infor-mation on cost, competing prices, and market conditions than foreign buyers. It is likely that the pressure to sell on global markets will lead to continued expansion of fixed pricing into these markets. Within developed economies, fixed pricing or “haggle-free pricing” is making inroads into such traditional bastions of bargaining as auto-selling and real estate.

Ultimately, fixed pricing should be considered one of the many innovations that both accompanied and enabled the rise of consumer capitalism. Fixed pricing was both more efficient (in terms of time and effort required) and more scalable than haggling. Fixed pricing was necessary for the development not only of the large department stores, but also for the later development of national and international chain retailing. Along with other elements of consumer capitalism, it has spread from its origins in America and Western Europe to industrial and industrializing nations worldwide.

(p. 40) 2.6 Summary

Perhaps the most important message of this chapter is simply that pricing has a history— pricing modalities that we take for granted are not ahistorical and immutable, they have been strongly shaped by changes in technology, in institutions, and in broader societal attitudes. Pricing modalities can and will change—American retailers moved from bargaining to fixed pricing in less than two decades. Seemingly idiosyncratic or suboptimal modalities such as the upfront market for television advertising can persist and flourish through such major institutional changes as the end of the “big three networks” oligopsony and the rise of scores of competing channels. And, of course, the influence runs both ways. As list-pricing became dominant practice, it also became normative. The posted, fixed price—almost unknown in the United States before the Civil War—has become the standard for fairness in retail trade.

Once established, pricing modalities can be quite stable over long periods of time—hence the persistence of the upfront market for television advertising and the “single price” policy for movie theaters. Industry pricing modalities rarely seem to change due to a bold move on the part of one seller. In fact, attempts by a single seller to unilaterally change the pricing modality within an industry have had very mixed results. American Airlines is credited with successfully introducing advanced-booking discount fares into the airline industry. However, it spectacularly failed in its attempt to introduce a simplified fare structure in 1992 when competitors such as Northwest and Continental refused to go along (Barnes, Chapter 3). Stelios Haji-Ioannou, who founded easyJet, failed in his attempt to introduce more dynamic and differentiated pricing into movie theaters. Pricing modalities seem to come into being in times of institutional, technological, and regulatory changes. One example would be the origin of the television advertising upfront market in the switch from sponsored programming to slot sales in the mid to late 1950s. Over time, a modality becomes embedded in the structure of a market. Expectations, institutions, and infrastructure are built up to support the modality. In many cases, organizations not directly involved in the transaction develop an interest in the preservation of a particular structure—just as equity analysts have an implicit stake in the continuation in the upfront market.

It is important for pricing analysts, pricing vendors, consultants and even academics to recognize that they are part of this process. The more that an organization invests in developing expertise in a particular modality, the more invested they become in the continuation of that modality. The immense investment that commercial airlines put into developing automated reservation and yield management systems generated hundreds of millions of dollars in incremental revenue and profit. However, it also meant that the airlines were deeply invested (in both senses of the word) in a particular approach to managing prices in the marketplace—that of opening and closing discrete booking and capacity classes during the period of a flight booking. This may have left them more vulnerable to more nimble dynamic pricing employed by a new breed of low-cost competitors such as Southwest and easyJet.

Since pricing has a history, it has a future. As technologies, institutions, regulations, and societal attitudes change, so will pricing modalities. New modalities will arise in conjunction with new markets and market opportunities. A clear example of this is the “keyword auction” market for Internet advertising described by Vudali and Atherton (Chapter 7)—a (p. 41) market in which pricing rules are still in flux and the details of the final “equilibrium” modality are still undetermined. These situations present an opportunity for economists, sociologists, and historians to be “present at the birth” and gain a better understanding of how pricing modalities emerge, how they change, and how they become locked in. Ultimately, this should give us a better view of the complex and multi-form interactions among economic institutions and social and historical changes.


Ackroyd, P. (2000) London: The Biography. London: Chatto and Windus.Find this resource:

Allaz, B. and Vila, J.-L. (1993) “Cournot Competition, Forward Markets and Efficiency.” Journal of Economic Theory 59/1: 1–16.Find this resource:

Allen, A. P. (2008) The Ambassadors of Commerce. London: T. Fisher Unwin.Find this resource:

Allen, B. and Hellwig, M. (1986) “Bertrand-Edgeworth Oligopoly in Large Markets”, Review of Economic Studies 53/2: 175–204.Find this resource:

Anderson, E. T. and Simester, D. I. (2008) “Does Demand Fall When Customers Perceive that Prices are Unfair? The Case of Premium Pricing for Large Sizes”, Marketing Science 27/3: 492–500.Find this resource:

Baedeker, K. (1905) Baedeker’s 1905 Guide to London. Leipzig: Karl Baedeker Publishing.Find this resource:

——(1907) Baedeker’s 1907 Guide to Paris. Leipzig: Karl Baedeker Publishing.Find this resource:

Beals, R. L. (1975) The Peasant Marketing System of Oaxaca, Mexico. Berkeley: University of California Press.Find this resource:

Bellamy, E. (1888/2005) Looking Backward. Edited with an introduction by Daniel H Borus. Boston: Bedford Books.Find this resource:

Benjamin, W. (1999) The Arcades Project, trans. Howard Eiland and Kevin McLaughlin. Cambridge, MA: The Belknap Press.Find this resource:

Bertrand, J. (1883) Review of “Theorie Mathematique de la Richesse Sociale”, Journal des Savants 67/2: 499–508.Find this resource:

Boddy, W. (1990) Fifties Television: The Industry and its Critics. Urbana: University of Illinois Press.Find this resource:

Business Week (2007) “Car Dealers Stake Out Haggle-free Zones”, October 23.Find this resource:

Camerer, C. F. (2003) Behavioral Game Theory: Experiments in Strategic Interaction. New York: Russell Sage Foundation.Find this resource:

Casson, L. (1974) Travel in the Ancient World. Baltimore: The John Hopkins University Press.Find this resource:

Castleman, H. and Podrazik, W. (1982) Watching TV: Four Decades of American Television. New York: McGraw-Hill.Find this resource:

Clark, T.D. (1944) Pills, Petticoats and Plows: The Southern Country Store. Indianapolis: The Bobbs-Merrill Co.Find this resource:

Crow, C. (1946) The Great American Customer. New York: Harper and Brothers Publishers.Find this resource:

Dana, Jr., J. D. (1998) “Advanced-Purchase Discounts and Price Discrimination in Competitive Markets”, Journal of Political Economy 105/2: 395–422.Find this resource:

David, P. A. (1985) “Clio and the Economics of QWERTY”, American Economic Review 75/2: 332–7. (p. 42) Find this resource:

David, P. A. (2000) “Path Dependence, its Critics and the Quest for ‘Historical Economics’ ”, in P. Garrauste and S. Ioannides (eds), Evolution and Path Dependence in Economic Ideas: Past and Present. Cheltenham: Edward Elgar.Find this resource:

Defoe, D. (1726) The Complete English Tradesman. London: Charles Rivington.Find this resource:

Diamond, J. (1997) “The Curse of QWERTY”,

Einav, L. (2007) “Seasonality in the U.S. Motion Picture Industry”, RAND Journal of Economics 38/1: 127–45.Find this resource:

Ekelund Jr., R. B. and Hébert, R. F. (1999) Secret Origins of Modern Microeconomics: Dupuit and the Engineers. Chicago: University of Chicago Press.Find this resource:

Eliashberg, J., Elberse, A., and Leenders, M. A. A. M. (2006) “The Motion Picture Industry: Critical Issues in Practice, Current Research, and New Research Directions”, Marketing Science 25/6: 638–61.Find this resource:

Emmet, B. and Jeuck, J. E. (1950) Catalogues and Counters: A History of Sears, Roebuck and Company. Chicago: University of Chicago Press.Find this resource:

The Emporium (1952) “How to Avoid Wasteful Markdowns” Pamphlet. San Francisco.Find this resource:

Ephron, E. (2003) “The Fascinating Story of the Upfront,” reprinted in 2005 Ephron on Media: Organized Crime Keeps Better Books. New York: Ephron, Papazian, and Ephron, Inc., 6–12.Find this resource:

Fehr, E. and Schmidt, K. M. (1999) “A Theory of Fairness, Competition, and Cooperation”, Quarterly Journal of Economics 114/3: 817–68.Find this resource:

Foreman, R. L. (1962) “The Dilemma of the TV Advertiser”, Television Quarterly 1/1: 42–7.Find this resource:

Friedman, W. (2007) “Analysts still up on the upfront”, Variety, May 4: 3.Find this resource:

Gallego, G., Huh, W. T., Kang, W., and Phillips, R. (2006) “Price Competition with the Attraction Demand Model: Existence of Unique Equilibrium and Its Stability”, Manufacturing and Service Operations Management 8/4: 359–75.Find this resource:

Geertz, C. (1978) “The Bazaar Economy: Information and Search in Peasant Marketing”, American Economic Review 68/2: 28–32.Find this resource:

Gelber, S. M. (2005) “Horseless Horses: Car Dealing and the Survival of Retail Bargaining”, in P. N. Stearns (ed.), American Behavioral History. New York: NYU Press, 118–42.Find this resource:

Granovetter, M. (1985) “Economic Action and Social Structure: The Problem of Embeddedness”, American Journal of Sociology 91/3: 481–510.Find this resource:

—— (1992) “Problems of Explanation in Economic Sociology”, in N. Nohria and R. G. Eccles (eds), Networks and Organizations: Structure, Form and Action. Boston, MA: Harvard University Press, 453–75.Find this resource:

Greenberg, D. B. and Schindall, H. (1946) A Small Store and Independence: A Practical Guide to Successful Retailing. Fourth Printing. New York: Greenberg Printers.Find this resource:

Greif, A. (2006) Institutions and the Path to the Modern Economy. Cambridge: Cambridge University Press.Find this resource:

Haws, K. L. and Bearden, W. O. (2006) “Dynamic Pricing and Consumer Fairness Perceptions”, Journal of Consumer Research 33/3: 304–11.Find this resource:

Heighton, E. J. and Cunningham, D. R. (1976) Advertising in the Broadcast Media. Belmont, CA: Wadsworth Publishing Co.Find this resource:

Henrich, J., Boyd, R., Bowles, S., Camerer, C., Fehr, E., Gintis, H., and McElreath, R. (2001) “In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies”, American Economic Review 91/2: 73–8.Find this resource:

—— —— —— —— —— and—— (eds) (2004) Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies. Oxford: Oxford University Press. (p. 43) Find this resource:

—— —— —— —— —— ——Alvard, M., Barr, A., Ensminger, J., Henrich, N. S., Hill, K., Gil-White, F., Gurven, M., Marlowe, F. W., Patton, J. Q., and Tracer, D. (2005) “ ‘Economic Man’ in Cross-Cultural Perspective: Behavioral Experiments in 15 Small-Scale Societies”, Behavioral and Brain Sciences 28/5: 795–855.Find this resource:

Hettinger, H. S. (1933) A Decade of Radio Advertising. Chicago: The University of Chicago Press.Find this resource:

—— and Neff, W. J. (1938) Practical Radio Advertising. New York: Prentice-Hall.Find this resource:

Hessel, E. (2007) “Why do Theaters Charge the Same Price for all Tickets?”, Forbes January 29: 36.Find this resource:

Hopper, M. (1990) “Rattling SABRE—New Ways to Compete on Information”, Harvard Business Review, 68/4: 118–30.Find this resource:

Kaplan, S. L. (1996) The Bakers of Paris and the Bread Question 1770–1775. Raleigh, NC: Duke University Press.Find this resource:

Kent, S. A. (1990) “The Quaker Ethic and the Fixed Price Policy”, in W. H. Swatos, Jr. (ed.), Time, Place, and Circumstance. New York: Greenwood, 139–50.Find this resource:

Lazear, E. P. (1986) “Retail Pricing and Clearance Sales”, American Economics Review 76/1: 14–32.Find this resource:

Leslie, P. (2004) “Price Discrimination in Broadway Theater”, RAND Journal of Economics 35/4: 520–41.Find this resource:

Lewin, P. (ed.) (2002) The Economics of QWERTY: History, Theory, and Policy Essays by Stan J. Liebowitz and Stephen E. Margolis. New York: New York University Press.Find this resource:

Lotz, A. D. (2007) “How to Spend $9.3 Billion in Three Days: Examining the Upfront Buying Process in the Production of US Television Culture”, Media, Culture & Society 29/4: 549–67.Find this resource:

McClellan, S. (2010) “Upfront Preview: Behind the Bust”, AdWeek February 2: 16–17.Find this resource:

McMillan, J. (2002) Reinventing the Bazaar, A Natural History of Markets. New York: Norton.Find this resource:

Mashon, M. (2007) “NBC, J. Walter Thompson, and the Struggle for Control of Television Programming, 1946–58”, in M. Hilmes (ed.), NBC America’s Network. Berkeley: University of California Press.Find this resource:

Miller, M. B. (1981) The Bon Marché: Bourgeois Culture and the Department Store, 1869–1920. Princeton: Princeton University Press;Find this resource:

Norris, J. B. (1962) “One-Price Policy among Antebellum Country Stores”, Business History Review 36/4: 455–8.Find this resource:

North, D. (1990) Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press.Find this resource:

Orbach, B. Y. (2004) “Antitrust and Pricing in the Motion Picture Industry”, Yale Journal of Regulation, 21/2: 318–66.Find this resource:

—— and Einav, L. (2007) “Uniform Prices for Differentiated Goods: The Case of the Movie-Theater Industry”, International Review of Law and Economics: 129–53.Find this resource:

Papadimitriou, C. (2007) “The Complexity of Finding Nash Equilibria”, in N. Nisan, T. Roughgarden, È. Tardos, and V. Vazirani (eds), Algorithmic Game Theory. Cambridge: Cambridge University Press.Find this resource:

Petronius (1997) The Satyricon, trans T. G. Walsh. Oxford: Oxford University Press.Find this resource:

Phillips, R. L. (2005) Pricing and Revenue Optimization. Stanford: Stanford University Press.Find this resource:

Resseguie, J. (1965) “Alexander Tunney Stewart and the Development of the Department Store, 1823–1870”, Business History Review 39/3: 301–22.Find this resource:

Riley, J. and Zeckhauser, R. (1983) “Optimal Selling Strategies: When to Haggle, When to Hold Firm”, Quarterly Journal of Economics 98/2: 267–89. (p. 44) Find this resource:

Robertson, C. C. (1983) “The Death of Makola and Other Tragedies”, Canadian Journal of African Studies 17/2: 469–95.Find this resource:

Strausz, A. K. (2007) Hotel: An American History. New Haven: Yale University Press.Find this resource:

Sawhney, M. S. and Eliashberg, J. (1996) “A Parsimonious Model for Forecasting Gross Box-office Revenues of Motion Pictures”, Marketing Science 15/2: 113–31.Find this resource:

Scull, P. (1967) From Peddlers to Merchant Princes: A History of Selling in America. Chicago: Follet Publishing Company.Find this resource:

Spang, R. L. (2000) The Invention of the Restaurant: Paris and Modern Gastronomic Culture. Cambridge, MA: Harvard University Press.Find this resource:

Stauffer, T. (2007) “Movie-ticket Prices could Fluctuate as Airline, Hotel Fares Do”, Arizona Daily Star January 6: B1.Find this resource:

Tardos, E. and Vazirani, V. (2007) “Basic Solution Concepts and Computational Issues”, in N. Nisan, T. Roughgarden, È. Tardos, and V. Vazirani (eds), Algorithmic Game Theory. Cambridge: Cambridge University Press.Find this resource:

Tonning, W. A. (1956) “The Beginning of the Money-Back Guarantee and the One-Price Policy in Champaign-Urbana, Illinois, 1833–1880”, Business History Review 30/2: 196–210.Find this resource:

U.S. Bureau of Labor Statistics (2007) “Consumer Expenditures in 2005”. U.S. Department of Labor, Report 998. February.Find this resource:

Walsh, C. (1999) “The Newness of the Department Store: A View from the Eighteenth Century”, in G. Crossick and S. Jaumain (eds), Cathedrals of Consumption: The European Department Store 1850–1939. Aldershot, UK: Ashgate.Find this resource:

Wanamaker, J. (1911) The Golden Book of the Wanamaker Stores: Jubilee Year 1861–1911. Privately published.Find this resource:

Weinstein, D. (2004) The Forgotten Network: DuMont and the Birth of American Television. Philadelphia: Temple University Press.Find this resource:

Wetherington, M. V. (1994) The New South Comes to Wiregrass Georgia, 1860–1910. Knoxville: University of Tennessee Press.Find this resource:

Yakubovich, V., Granovetter, M., and McGuire, P. (2005) “Electric Charges: The Social Construction of Rate Systems”, Theory and Society 34/5: 579–612.Find this resource:

Zola, E. (1873/2007) The Belly of Paris, trans Brian Nelson. Oxford: Oxford University Press.Find this resource:

—— (1883/1995) The Ladies’ Paradise, trans Brian Nelson. Oxford: Oxford University Press.Find this resource:


I would like to gratefully acknowledge the useful comments of Mike Harrison of the Stanford Business School, Danielle Logue of Oxford University, Özalp Özer of the University of Texas at Dallas, Richard Steinberg of the London School of Economics, Kalinda Ukanwa Zeiger, and an anonymous referee.

(1) See, for example, the commentaries and responses in Henrich et al. (2005).

(2) Both the specifics of the triumph of the QWERTY keyboard over the Dvorak and the concept of path-dependence have been strongly contested. In Lewin (2003), Liebowitz and Margolis argue that the Navy tests were biased in favor of Dvorak and that there is no firm evidence that the Dvorak keyboard is actually superior to the QWERTY keyboard. They go on to argue that path-dependence—at least in the sense that David defined it—does not play an important role in the evolution of economic institutions. See David (2000) for his response.

(3) We note that the fact that players will agree on some standard in most situations is often explainable using game theory—even when the nature of the standard that is chosen is not. Traffic lights provide an excellent example—the value of a “coordinated equilibrium” over all possible non-coordinated equilibria is sufficiently high for all players (drivers) that the rise of some coordination mechanism seems inevitable (Tardos and Vazirani 2007: 14–15.) However, the widespread adoption of stop lights with “green means go”, “amber means caution”, and “red means stop” rather than, say “blue means stop” while “white means go”, is only explainable by reference to details of technological and institutional history.

(4) For more information on electric power pricing, see the chapter by Wilson, Chapter 4.

(5) A fascinating exception to this pattern was the so called “fourth network”; the DuMont Television Network. Founded by DuMont Laboratories, a television set manufacturer, in 1946, DuMont did not have a radio heritage. Because of this, and because it was under severe financial stress for almost the entirety of its existence, DuMont was far more flexible than the “big three” networks in how it sold advertising. It would air unsponsored programs and allow advertisers to buy individual or multiple slots (Weinstein 2004: 411–13.). However, DuMont ceased effective operations in 1955 and did not play any meaningful role in the development of the future television advertising market.

(6) See, for example, the pricing scheme for the Colorado Rockies in Phillips (2005: 106).

(7) Quoted in Stauffer (2007).

(8) Calculations were based on 2006 expenditure figures by category available on-line at http://www.bls. gov/news.release/cpi.t01.htm. Details of underlying calculations are available from the author.

(9) The Romans in particular made widespread use of auctions—Trimalchio in The Satyricon is going to sell his “surplus furniture” at auction [Petronius 1997: 29]. In 193 ad, the Praetorian Guard, after killing the emperor Pertinax, sold the entire Roman Empire at an auction. Didius Julianus won with a bid of 250,000 sesterces per man.

(10) Reprinted in Crow (1946: following p. 18).

(11) Quoted in Ekelund and Hébert (1999: 225).

(12) In some stores, basic commodities such as tea, sugar, salt, meal, and flour were sold at fixed prices prior to the Civil War (Norris 1962: 456).

(13) So much so that many merchants falsely identified themselves as “Quaker”, leading to an appeal by representatives of the Religious Society of Friends to the New York Legislature to prohibit the fraudulent use of the word “Quaker” in trade. See “Fight for Name ‘Quaker’ “, The New York Times, p. 32, March 26,1913.

(14) Defoe (1726: 245). Allen (2008: 37) describes the tension in a small store between an assistant who bargains with a customer and the Quaker owner who expects the goods to be sold “at the prices marked”.

(15) See, for example, Resseguie (1965).

(16) Macy had maintained a fixed price policy (along with a cash-back guarantee) at four different stores before coming to New York City. All four failed, but Macy maintained a firm belief in fixed prices and money-back guarantees. A. T. Stewart opened his first store in 1826, on a “one-price policy” in order both to make his clerks more efficient and to increase customer loyalty (Scull 1967). “Not two prices,—one price and only one,” was John Wanamaker’s motto when he founded his first store—a men’s and boys’ clothing store—in 1861 (Wanamaker 1911: 28).

(17) Greenberg and Schindall (1946: 64, italics in original).

(18) For example, Crow (1946: 142–3) claims that “Old account books show that before the days of fixed prices and retail advertising the storekeeper had to employ two or three times as many clerks as needed today to sell the same quantity of goods”. Note also Walter Benjamin’s speculation that “The gain in time realized by the abolition of bargaining may have played a role initially in the calculation of department stores” (Benjamin 1999: 60).

(19) To avoid confusion, I refer to the novel as The Ladies’ Paradise and the store as La Bonheur des Femmes.

(20) See Miller (1981: 24). The ubiquity of the “obligation to buy” in early eighteenth-century and seventeenth-century shops has been challenged by Walsh (1999).

(21) Ivester’s statement was originally made in an interview with the Brazilian magazine Veja so he was referring to a soccer match. The quotation and more discussion of the reaction to the “temperature sensitive vending machine” can be found in Phillips (2005: 302–3).

(22) The quotes are from Phillips (2005: 302–3 and 312).

(23) “Indeed, it is the buyers that make this custom necessary; for they, especially those who buy for immediate use, will first pretend positively to tie themselves up to a limited price, and bid them a little and a little more, till they come so near the sellers’ price, that they, the sellers, cannot find in their hearts to refuse it, and then they are tempted to take it, notwithstanding their first words to the contrary.”