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:

1. Different people were prepared to pay different prices for the same good.
2. Those prices were always higher than the stated value of the good.
3. Buying & selling still occurred despite lowered wealth levels.
4. 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.

Let’s say hypothetically that this printer has 10 different attributes like the ones mentioned above on which every buyer places a value, even it happens to be zero. There is a segment of the printer-buying population that wants all 10 attributes, including the HP brand name of the seller, and that segment is willing to pay a higher price. No other seller can satisfy all 10 attributes, giving HP a monopoly on that attribute set. But as a seller, HP operates within constraints since other sellers offer the same exact printer at a lower price in return for providing fewer attributes. Thus, HP cannot set its prices as a pure monopolist, because an excessively high price will drive too much of the market to the next lowest price tier. HP’s competitive position is what I call a micro-monopoly (or “Micropoly” if you prefer the conflation, as I do). The explanation for this price dispersion is that every seller of this printer satisfies a unique mix of attributes demanded by a particular segment of the market. For that segment, the seller has a limited amount of micro-monopoly pricing power.

When viewed from this angle, it becomes easy to see why it makes more sense to set prices based on what your customers value rather than what your competitors charge. The reason is that one firm may compete only tangentially with another firm that sells the same products. The obvious question then is what happens when two firms fulfill the same exact mix of attributes. At this point, firms would then compete on price, but I think this logical extension can be somewhat misleading. In the real world, no two firms ever truly occupy the same attribute space. There will always be at least some differences in the total experience and feel that the customer gets from making the purchase, and thus the potential for price differentiation exists. Multiple optimum prices for the same product can exist in the marketplace. A profit maximizing firm’s objective should not be to race to the bottom in a low price battle with competitors, but rather to understand very clearly what its price ceiling is.

A single price captures everything that makes you special.  It embodies the value the market sees in your product, the value of your product in this particular season, the value your brand wields in the marketplace, the degree to which your product satisfies the needs of specific customer segments, the degree to which buyers are willing to pay for your reputation, the degree to which buyers are loyal to your product despite competing products, etc.

Once you reveal your prices to the world, your competitors instantly know how much brand equity you have, they immediately see how much value your product has in this particular season, they immediately see your reputation is strong, they are able to assess the amount of loyalty you command, and so forth.  By putting your prices out there for all to see, you implicitly give your competitors a leg-up.  To compete against you, all they need to do is see your price and shoot for something just a tad lower.

What would a future world look like where you only… show your prices to your customers and to no one else?  Only those who are committed to buy your product are actually privy to the price, and this price is zealously protected like the Coca-Cola recipe from all of your competitors.

To see this future world, we can actually look to the past and examine yesteryear’s bazaars.  Prices of the day’s harvest did not appear on some store shelf.  Rather, farmer Jack brought his tomatoes to market and as you held his tomato in your hand, you asked him his price.  And once he told you, you inevitably countered with a lower offer.  After some back and forth, you and Jack settled on a price and the transaction closed.  Jack’s competitor – farmer John –sat at the other end of the bazaar and sold his tomatoes in perfect ignorance of the price Jack just charged.  Researchers have found that in such bazaars there is no single optimal price, and indeed, there is very large price variation for the same good (see Figure below from Epstein & Axtell).  This is ferreted out in multiple computer simulations as well, where the basic laws of buying and selling behavior are imposed on artificial buyers & sellers, and over time the prices offered and counter-offered are seen to drift all over the place, but the drift does narrow over time.

Of course, farmer Jack is just as ignorant as John of his competitors’ prices – he has little idea how much farmer John is charging for his tomatoes.  And if you return day after day to purchase your tomatoes from Jack, you build a rapport and a loyalty – this loyalty is reciprocated by Jack.  He holds the best tomatoes for you, he offers you reasonable discounts in exchange for your loyalty, during times of hardship he may have even give you a free tomato.

Meanwhile, John builds up his own loyal following and sets his own set of prices where no two customers get the same price.  Why should they?  After all, no two customers are the same.  No two customers derive the same utility from a tomato.  No two buyers experience the same satisfaction in the conversation they have with John.  By concealing their prices, Jack and John force their customers to negotiate individual prices, and in the process, Jack and John respectively build “micro-markets” of buyers within the larger market of buyers in this medieval bazaar.

So, did our medieval farmers possess greater pricing wisdom than we do today?  They closely guarded their prices, and achieved the marketing holy grail of one-to-one relationships.  Did they know that their prices were a valuable asset, and therefore should be whispered and meticulously haggled with each individual customer?  Or, did history finally catch up with our farmer Jack?  Was there an economic renaissance where Jack awoke one day and realized that if he broadcast his price to the entire bazaar – even at the risk of letting John know his price – and coupled this broadcast with a marketing message that he has the best tomatoes in the market then he could not only serve many more customers per hour (i.e., he no longer had to spend 10 minutes per customer haggling), he can attract customers.

This historical awakening marks the rise of marketing.  The ascent of marketing is deeply entwined with prices becoming uncloaked.  Your prices are indeed an asset.  They are indeed your most valuable intellectual property.  But, it need not be kept secret because the prices you charge, and can charge, are unique to you.  Only you can charge the prices that you are able to charge.  And that is because you occupy a unique position in the marketing sphere.  There are attributes about you that the market holds dear, and your marketing has influenced the market to hold these very attributes with a unique level of dearness.

That uniqueness gives you the ability to charge prices that need not be the lowest in the market – your marketing uniqueness gives us an optimal price that you can scream to the market with a megaphone and not worry about becoming competitively undermined even if your competitor offers the same exact product.  Because of your marketing uniqueness, your competitors cannot replicate your price.

But, the key is that you need to remember that there is indeed an optimal price that you can charge and you must shy away from the temptation to charge the lowest possible price in the market.  You must recognize that your prices and your marketing go hand-in-hand.  The race to capture customers should not be forsaken with a race to the bottom of the barrel pricing.  Your marketing gives you brand equity, it gives you loyalty, it gives you reputation, it exposes many different customers to you– and all of this gives you a certainly ability to charge prices that lie outside the ability of what our competitors can charge.

We have grown beyond our medieval forbears.  Gone are the days of the bazaar where Jack knew all of his customers by name.  Today, we may not know all of our customers by name – but, thanks to the advent of modern pricing technology and deep analytics, we can know our customers better now than ever before in history.  In fact, our data warehouses and our data mining capabilities allow us to know many more customers with much more intimacy than Jack’s comparatively feeble mind could fathom, and we can optimally market ourselves to all of them and we can mathematically determine the best prices to charge and we can do all of this without spending a single breath haggling.

But, to broadcast prices to the world without using modern pricing science would make us more primitive than our medieval forbears, where in the absence of pricing science they at least knew they had to guard their prices.

If you’re going to let your guard down, do so with prices that you know are optimal for you!