Pricing elasticity and over-keystone retail


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Posted by RGB on January 20, 2003 at 08:17:01:

I'm a woodturner, relatively new to the wholesale market, after doing a fair amount of consignment work for a few years. It took me a while to make the mental adjustment to keystoning on consignment sales, but now I'm struggling with the "2.3 to 2.7" number that Wendy Rosen used at the new artists talk at my first wholesale show.

In the Price Elasticity FAQ, John includes the phrase, "The implied assumption here is that a relatively small change in price either way will greatly affect demand." If we go with this, then the question quickly arises: How does the gallery make more money with a 2.5 multiplier than with a 2.0 multiplier? Obviously the answer depends on the actual elasticity of the product.

Suppose I'm wholesaling a widget for $100. If the gallery multiplies this by 2.5, to a $250 retail, and sells 4 widgets in a given period, then the retail take is $1000, of which the gallery gets $600 over the $400 they paid me.

Whether the gallery could make more money at keystoning depends primarily on the actual pricing elasticity of the widget. If they lowered their price to keystone ($200), they would presumably sell more units, automatically benefitting me, the artist. If they sell 5 widgets, rather than 4, then I get an extra $100, while they lose $100. If they sell 6, then I get an extra $200, while the gallery breaks even. If they sell 7, then we both benefit, by $300 and $100, respectively.

My actual question is something like this: I realize that the numbers John uses in his example in the FAQ are purely that -- an example. Should I, the artist, conclude from the current pricing strategy of the galleries with whom I wish to do business that there is not, in fact, great elasticity in the demand for art/craft? Or are there other, more subtle conclusions I could/should be drawing?

Understand, I'm not particularly disputing the size of the gallery's cut, but rather noting that two different entities (myself and the gallery) have the ability to affect the retail price of my widget, and trying to understand the effect that the gallery's attempt to maximize profits has on my own profitably and control over same.

Many thanks to anyone who can usefully penetrate this murk,
Russell



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