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ECON1001 Week 14: Price Level, Behavioural Economics and Szechuan Sauce

ECON1001 Week 14: Price Level, Behavioural Economics and Szechuan Sauce

WORDS BY JEFFREY KHOO

In early October, McDonald's gave away a select few packets of 1998 Mulan Szechuan nugget dipping sauce, and all hell broke loose. After lining up for hours, some Rick and Morty fans immediately flogged them on eBay, fetching unspeakable amounts.

The Szechuan sauce saga is a dream come true for economists and keen economics majors like myself. It's a clear example of how market forces come into play, and calls into question what is possibly the most fundamental assumption of classical economics.

Perfect competition, equilibrium and shortages

The market on eBay for Szechuan sauce is a perfectly competitive market as: (1) the goods being sold in the market are virtually identical, and (2) there isn't interference from government - sellers and buyers decide on market outcomes themselves. 

For every possible quantity of the sauce traded in the market, eBay sauce sellers decide on a selling price that allows them to comfortably recoup the costs of obtaining the sauce, which increase as more units are produced (marginal cost). Meanwhile, buyers try to quantify the benefit they'll gain from consuming that quantity of sauce, which will decrease as they consume more (marginal benefit). If those two curves intersect, you've got a deal at the "equilibrium price" (Fig 1).

Picture1.png

If there's limited supply of sauce (20 packets per store) but large demand for it (actual riots when people didn’t get their sauce), it creates a shortage, and consumers are willing to outbid each other to get it (Fig 2).

Picture2.png

In a more normal case, sellers would realise that if they up their production, people would still buy; but as McDonald's is the sole producer of Szechuan sauce, they've got all the power, and they're currently choosing to maintain a permanent shortage, for reasons that are more branding- and PR- related than just economics. 

Demand and hype

You could also argue that over time, as the hype around the sauce kept building, people were willing to pay higher prices for the same quantity of sauce (Fig 3). People's preferences changed their demand independently of the price or quantity of sauce available changing.

Picture3.png

To be fair, arbitrage and price gouging probably had a role in inflating the price of sauce more than what it would have naturally been. And as more and more people begin to attempt to replicate the sauce and sell it, the market will move closer to perfect competition again.

Tulipmania, all over again

As crazy as this all seems, it's nothing new. In the early 1600s, tulips were so sought after in the Netherlands that they transformed from a common good - i.e. something you can buy, sell and consume instantaneously - to an asset (something you hold for long periods of time to accumulate wealth). As the price of tulips rose due to natural demand, speculators poured in, creating a bubble which inflated prices past the point of stupidity. When the bubble burst, some investors were left with no money, no house - having traded that in for a tulip - and no self-respect. While it’s unlikely that Szechuan sauce packets will become assets, it goes to show how these periods of economic mania can and do happen.

Why? No, seriously, why?

The answer to how we solve this imbalance most likely can be found in behavioural economics. It's an exciting field of economics which draws from psychology, sociology and anthropology. It discards our assumptions about humans always making rational choices (case in point: literally this whole insanity over sauce), and aims to quantify the pull of non-financial factors on people and how those factors might affect the broader economy.
 
Behavioural economics explains the Szechuan frenzy in at least two ways: "framing", that consumer choices are heavily, even primarily motivated by how the product is marketed and sold to them (for example, how Rick and Morty as a cultural phenomenon elevated the price of Szechuan sauce over salad dressing, which is apparently what it tastes like); and "market inefficiency", structural flaws in the market which amplify irrational behaviour (for example, that the sauce was only distributed in certain US locations; that postage costs may distort the true price of the sauce; eBay’s system of displaying and prioritising certain auctions over others).

Conclusion: rational agency?

It should be clear by now that humans in many ways betray the assumption that agents will make rational decisions. Our value system is complex and in many ways based more so on social and psychological influences than economics. If anything, this whole episode points to the difficulties in aligning market models with the real world - and, possibly, the lengths that some people will go for a sweet, sweet taste of sauce.

Appendices

Appendix A: Table listing details of Szechuan sauce price per ounce, including descriptions of purchase

Picture4.png

Appendix B: Graph of the price of Szechuan sauce against time, based on a number of news articles and eBay auctions. Due to practicality, the time axis is not linear (but aims to roughly represent the passage of time sequentially from Event A to Event I), and I had to log the price axis to better represent values on the lower end of the scale. We see that during the period there was no consistent pricing per ounce of sauce - but that within a short period after the giveaway, the supply of sauce was practically fixed.

Appendix C: Sources for the pricings

Event A: http://brobible.com/entertainment/article/mcdonalds-szechuan-sauce-ebay/
Event B: https://www.ebay.com/itm/263127382560?ssPageName=STRK:MESELX:IT&_trksid=p3984.m1558.l2649
Event C: US$170.50 http://comicbook.com/tv-shows/2017/10/07/szechuan-sauce-prices/
Event D: http://ew.com/tv/2017/10/08/rick-morty-szechuan-ebay/
Event E: https://www.ebay.com/itm/McDonalds-Szechuan-Sauce-packet-sealed-unopened-Rick-and-Morty-/302480410246?hash=item466d3cc686:g:LTAAAOSwKZ5Z2U2L&afsrc=1&rmvSB=true
Event F: https://www.ebay.com/itm/McDonalds-Szechuan-Sauce-packet-sealed-unopened-Rick-and-Morty-/302480494967?hash=item466d3e1177:g:LTAAAOSwKZ5Z2U2L&afsrc=1&rmvSB=true
Event G: https://www.carsales.com.au/cars/results?sortby=TopDeal&limit=12&q=%28And.%28C.Make.Volkswagen._.%28C.Model.Golf._.Badge.GTI.%29%29_.Year.range%282004..2004%29.%29 AND     http://www.thedrive.com/sheetmetal/15047/woman-trades-single-packet-of-mcdonalds-szechuan-sauce-for-volkswagen
Event H: https://www.ebay.com/itm/RICK-AND-MORTY-Authentic-McDonalds-Szechuan-Sauce-Packet-RARE-161-/182814749976?hash=item2a909bb518:g:xMAAAOSwfglZ2X3b&afsrc=1&rmvSB=true
Event I: https://www.ebay.com.au/itm/McDonalds-Rick-Morty-SZECHUAN-Sauce-1oz-Packet-NEW-SEALED/362142664730?hash=item545162881a:g 

 

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