Monopolistic Competition

Caitlin Kenney has an interesting video story over at Planet Money about why her wedding dress cost so much money. As someone who will soon be married, I can appreciate this. It's not just clothes, it seems like everything associated with a wedding is wickedly expensive.



According to her research, the cost of producing the dress was about $500 in materials and $200 in labor. She doesn't explicitly mention other indirect costs, like shipping from China, overhead of the retail company that sold it, and other G&A. But let's round that off to an even $300 for argument's sake. Even if the total cost for the dress was $1,000, it was still marked up over 173%!

It seems like a terrible deal, and it would truly be a rip-off if the market for wedding dresses were perfectly competitive. But it's not... The market is monopolistically competitive. In other words, you don't walk into a store, find the first wedding dress in your size and walk out the door with it. Each one has its own style. The reason one costs more than another is because the buyer perceives that one style of dress is more valuable than the others.

Furniture makers are famous (infamous?) for exploiting this psychological cue. It costs roughly the same amount of money to make a couch that's a beautifully dark red color as it does to make one that's a disgusting green-vomit color. The one that looks nice can retail for more than the ugly one. The ugly one was probably made specifically to steer the customer to the higher-priced item.

The same is true for kitchen appliances. Why is a stainless steal range so much more expensive than a plain white one, even for the exact same model with the exact same features? Again, it's because you're paying for the finish and putting them side-by-side on display makes you want to pay more for the one that will actually go into your home.

The wedding dress market probably isn't much different. A 30-second search on the David's Bridal website turns up a number of dresses at the $100 price-point. Of course, I wouldn't be surprised if these were designed specifically to be the "ugly furniture" of wedding dresses, intended to get buyers to want to pay more for the nice looking products.

The other factors that Kenney mentions - signaling and information asymmetry - are reasonable explanations for why people pay so much for wedding dresses. But there's also the question of why the dress ought to be priced at its cost of production? If it cost $1,000 to make and sell the dress, is it a consumer's right to buy it for $1,000?

Retail culture is interesting. We now live in the Walmart/Amazon era were we expect that things will always be priced ridiculously low. We have stopped appreciating what it means for a store to sell something as a "loss leader" and feel entitled to buy it for less than even they paid for it.

Perhaps there's another way to think about this in economic terms. A bridal store is loaded with dresses, but at the end of the day, if the buyer decides there is only one dress in that whole store that she would be willing to buy, and there's no others that she'd be willing to consider, no matter the price; then the market has essentially become a monopoly. She will pay whatever the seller asks for, even if the mark-up is through the roof.

2 comments:

    On April 06, 2012 Angie said...

    CONGRATS, DUDE!!!

     
    On April 08, 2012 dan said...

    You are getting married soon? That's great. Congratulations. My wife made her wedding dress (we had little money) & we had our wedding in my in-laws backyard (they did live on Lake Michigan then, so that was especially nice). It was not an expensive affair by those long-ago standards, and I don't think anyone missed the extravagance that might have been.