Bilko,
I didn't mean to suggest that you were trying to prove a new economic theory. What you were doing was providing a really good layman's explanation about a concept that you were able to understand intuitively. My point was that a) I don't think the specific relationship between price and quantity in the HDR/BM marketplace is as inelastic as you think it is and b) these chicas probably don't even think as intellectually as you or I do on the subject and their pricing decisions are not based on some carefully thought out understanding of economics.
As for your new numbers, I see the same problem as before. Of course they add up in your theoretical example, but would they fall out that way in practice? You keep presenting this as choice for them of either 1 for $100 vs 3 for $40 or now 2 for $100 vs 3 for $70. Naturally, they're not going to want to do all that extra work for so little extra money. However, what makes you think in your 1st example that they have to lower their rates to $40 to be able to get 3 customers. My assumption was they could either get 1 for $100 vs 3 for
$70. With that choice, which I believe is more likely, they have to work a little harder but they're looking at making $110 more instead of just $20, which should be enough to overcome a lot of laziness (or disgust). Similarly, I find your second example equally problematic. In a tighter market not only is it much less likely that they'll find 2 customers who will pay $100, they may not even be able to find 1. Maybe they wouldn't be able to find 3 for $70 either. Maybe they'd only be able to find 2 or maybe they'd have to go down to $60 to get 3. However $180 is more than $100 and $140 is more than possibly nothing. We could play around all day with theoretical numbers, but if truth be told none of us really knows how these numbers really play out, least of all the chicas who refuse to lower their rates to find out.
Your last point about how price wars cause all suppliers to lose is an interesting one, as is your strike analogy. Using your own analogy, just look at the airlines industry. Like BM chicas, pilots are highly compensated workers. They can try and hold together to keep their wages high but they also need to recognize the market in which they operate. In the case of pilots, the companies they are working for are losing tons of money. Many have already gone completely out of business putting all those pilots out of work. Some have taken early retirement or changed careers and some have found work on one of the remaining airlines. But those remaining airlines continue to lose a ton of money and have wound up getting wage concessions from all the pilots anyway. Chicas can band together for top dollar all they want but eventually they'll be forced to recognize the reality of the current market anyway. There is only so much money to go around. The big difference between the pilots' situation and the chicas' is that there are natural barriers to entry in the airline field but any chica who wants to can continue to try to market herself at the BM. In fact, as the overall CR economy worsens there are more and more chicas entering the market than before. In the face of a horrendous economy and a complete lack of any organized union, what makes you think the chicas can hold the line on declining wages any more than the pilots unions have? But the airline analogy can be carried even further. Look at the airlines themselves. They probably understand better than ANYBODY the effects of price wars (and the "kinked demand curve") and yet they can not keep from trying to undercut each other. If they can't do that with their published fares, what makes you think the chicas, who set their rates privately with each client, will do any better?
Pacifica55 wrote:
Pro - Your hypothesis assumes that the girl's goal is to make as much money as possible. An incorrect assumption, in my opinion.
Not at all. We were discussing 3 not mutually exclusive explanations for why chicas don't lower their prices. That part of the discussion only covered the very last explanation. You failed to note that I actually agreed with Bilko 100% on his first 2 pyscho-social explanations which do not at all assume revenue-maximization as the chica's goal (particularly #2). As for the 3rd economic part of Bilko's thesis, well you'll need to talk to him since he was the one who originally put it forward. My discussion of it was NOT about whether chica's act rationally or have perfect knowledge and understanding or have revenue-maximization as their primary goal. My discussion of it was, to the extent they are trying to make as much as they can, whether lowering prices would increase total revenue or not. Whether the demand curve is really inelastic as Bilko claimed or elastic as I believe it is.
The problem with looking at these explanations individually is that individually they oversimplify the situation. If truth be told I think there are a variety of motivations going on here and sometimes they ARE mutually exclusive. One of those motivations IS revenue maximization. Maybe the chicas have a $100 target each night, but I don't believe if some guy offered them $120 for an hour instead of $100 that they'd turn it down. Another motivation they have is to work as little as possible and that is where a conflict the profit motivation comes in. In their view, it may not be worth the extra $20 if they have to work 2 hours to make it rather than just 1. The problem is that the real choice may be standing around for 6-8 hours holding out for the $100 that never comes rather than accepting $60-70 a couple of times over those 6-8 hours. Even if they only get 1 gringo to go with them for $70 and they don't make their $100 mark for the night, one would think that would still be better than going home emptyhanded. But that is where yet another motivation comes in, the one that Bilko listed first, PRIDE (as in "pride goest before the fall")
Finally, there are other important assumptions in these economic theories besides revenue-maximization. For example, economic theories assume that all participants behave rationally and that they have perfect knowledge.
The rationality assumption is that an individual has the cognitive ability and time to weigh every choice against every other choice. Its not hard for anyone to see how RAISING prices can lead to increased revenue. It is less intuitively obvious how lowering prices can also sometimes lead to increased total revenue. Without getting into whether that latter situation applies in this case of the BM marketplace, any educated gringo at least knows that it sometimes holds true in other situations. It is less clear whether most chicas with very limited education fully grasp this concept.
Perfect information is a term used in game theory. A game is said to have perfect information if all players know all moves that have taken place. Tic tac toe is an example of a simple game with perfect information where both players can see all the possible moves of the other player and predict the outcome. However, what we do at the BM is more like a game of poker where players have imperfect information and don't know the cards the other player is holding. In terms of economics, perfect information would practically mean that all consumers (or suppliers) know all things, about all products, at all times, and therefore always make the best decision regarding purchase (or sale). In terms of the BM, the chicas don't know ahead of time that by holding out for $100 the probability that they'll wind up making nothing. If they did they probably would lower their prices (or find a different way to spend their evenings). Or maybe they'd lower their price most of the time but occasionally still swing for the bleachers or try drawing for that inside straight.
Again these last 2 concepts apply only to the economic part of our argument and the other purely non-economic factors of laziness, pride, self-worth, etc. also factor into their decision in a complex way that I don't think any of us can fully understand and which varies from chica to chica.
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