As the weather soured this past weekend, our plans for a long outdoor hike morphed into a long indoor marathon of Monopoly™. There were 5 of us, and figured that given the unexpected rainfall, we might as well dust off the Monopoly board and spend our afternoon keeping dry. To make the game a bit more interesting and reflect the current economic climate, we altered the rules – which we referred to as “recession-rules” Monopoly (as opposed to “normal-rules” Monopoly).
Instead of each player receiving $1500 at the start of the game, we would each receive $1000 (to reflect the $50 Trillion of wealth that has been lost in the last 18 months), and instead of collecting $200 for passing “Go”, each player would collect only $100 (to reflect the massive wage losses seen in the last 12 months). To further reflect the broader economic climate, no loans were permitted in the game (i.e., players were not allowed to mortgage their properties to receive cash from the bank, nor were players permitted to issue loans to one another). With these altered rules, our goal was to see how purchase behavior and wealth would unfold on this artificial economic landscape. The results were rather eye-opening, and sheds light on the fundamental dynamics of price in a down economy.
One startling feature of the game that remained consistent between “normal rules” and “recession rules” was that the price of any property on the board, or the price of any house/hotel was publicly displayed for all to see. This price conveyed essential market information about the value of “the goods”. Yet, despite the publicly known value of a property, property prices always deviated from the stated value once a buyer wished to purchase the property from a player that already owned it. Moreover, different buyers were prepared to pay different prices for the same exact property and in all cases the offered prices were higher than the stated value of the property (i.e., the price paid by the original buyer). This pattern was held true despite the recessionary conditions that were imposed on the game. There are a few important observations to note here:
- Different people were prepared to pay different prices for the same good.
- Those prices were always higher than the stated value of the good.
- Buying & selling still occurred despite lowered wealth levels.
- Buying & selling still occurred despite the unavailability of credit (no mortgages were allowed and no player-to-player loans were allowed).
We observe these same characteristics when… Monopoly is played under normal rules – so what was so different about how things turned out in our “recessionary-rules” Monopoly? Well, the first thing to note is that there was no difference at all on these 4 major characteristics of the game. In other words, despite overall lower levels of wealth and the unavailability of credit, we still see that buyers were prepared to pay prices that were above the lowest price stated on property value card and each player was prepared to pay a price different than what other players wanted to pay. Attenuation of wealth and credit did not reduce the price dispersion in this economic system, and in fact revealed that buying behavior did not rest on who provided the lowest prices for which properties. Rather buying behavior, and the prices that transacted, continued to rest on the specific utility or value that each player individually felt they could derive from a given piece of property. Even though the property is the same, each player’s valuation of that property is different (see Graph) – and no amount of wealth erosion or credit crunch could change this fundamental fact of the market.
So, now we come back to what were the differences between what we observed in “recession-rules” versus “normal-rules” Monopoly. First and foremost, purchases took longer. Players waited longer to accrue savings before deciding to purchase any property. Secondly, there was much heavier buyer concentration and interest in trading properties at the low-end of the pricing scale than at the high-end (not too much interest in Boardwalk, but Baltic was hot). Third, there was much more price dispersion for the low-end properties than for the high-end properties in ”recession-rules” Monopoly as opposed to “normal-rules” Monopoly. The key take-away from this is that with many more buyers for the same good, the odds are higher that there will be a broader spectrum of how each buyer values this good and the net result will be a greater dispersion in offer prices. In other words, the market becomes even more segmented for the low-end properties and this gives rise to a wide variation in prices. As a seller holding the property, the question of should I sell now or sell later where a different buyer with a higher valuation comes along is more important for those properties that we can predict will have more price dispersion because of their “average” low price.
Lesson Learned: Look at your prices and your product assortments simultaneously – don’t drop the wrong thing. In other words, don’t drop prices without thinking about dropping your assortments. If you have 10,000 SKU’s, create product bundles and price each bundle optimally and recognize that offering the lowest price in the market does not increase your chances of weathering this economic storm and may in fact lead to self-created demise.