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Friday, June 20, 2014

Capitalism is a Failed Experiment: the Groupon Evidence

The whole idea of Groupon and Gilt City and their ilk is that businesses offer the same services to you, the savvy consumer who puts up with thrice daily emails, for less just because you happened to not mark emails from Groupon etc as "spam".


Unlike hunting through a factory outlet, fending off crazy people at a sample sale, or going out at midnight on Thanksgiving, the work required here is minimal - just commit ahead of time and click a button.  I used to think that the reason businesses opted to do this was the gift card theorem: offer a gift card to get the money now without actually losing any capital (in either time spent, services rendered, or goods) and then bet on the fact that the gift card holder will forget about it or lose it or never get around to using it.  That reminds me, I have a $200-something credit at Bloomingdale's from three years ago I should really try to find... Hmm...

But anyway, it's a smart move for companies, particularly if you're crunched for cash in the short run.  You get the money ahead of time and then when you're, ideally, more stable, you make good on the services.  Like a bond.  Or something, I don't know, I haven't gotten my MBA yet jeez.

More and more, I see that the offers available on these sites are from well known companies, companies that aren't just looking to get a little publicity or get their names out there.  Here, it seems the companies are saying they are aware their prices are vastly over inflated and so they can offer the same exact things for less money to you while the people eating next to you eat the same food for more money.

"Schmucks!" you might think.

But we're all the schmucks.  In the name of wanting to feel rich or luxurious we've allowed prices to soar unreasonably, to the point where businesses can tell us that they're ripping us off and we'll still go back for more.

The reason why people think capitalism works - in that it fosters competition in the marketplace so the service providers will offer the best possible options to compete for customers - is based on an inherently flawed assumption.  That assumption is that people want to do good by other people, i.e. not rip them off, and that they care more about competing with other businesses than colluding to raise prices.  This assumption has been proven wrong time and time again, particularly with the LIBOR scandal, and yet we still assume it to be true.

If the aim was to do good by your customers, these stupid coupons wouldn't exist because providers would be offering their services at the best prices they could.  Certainly that doesn't mean all things should be the same price as better products generally require better materials/ingredients, but that should be reflected by a linear increase in price rather than an exponential.

I guess the reason why people would opt to pay full price goes along with our desire to appear wealthy and as though we belong at all times.  Who wants to call up Per Se to make a reservation and have to preface that by telling them you have a Groupon for it, placing the big ugly printed voucher on the table when you sit, displayed for all to see so everyone knows you don't really belong there.

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