Pricing by Proxy

A good is a bundle of attributes. For instance, an apple can be desired for its freshness, taste, or its color. Before we can price a product, we need to measure those valuable attributes. And measurement is costly. Therefore, we price those valuable attributes indirectly by say measuring the weight of an apple instead of the three valuable attributes mentioned above. Another example is labor. We value the output of labor, and sometimes we can price it directly using schemes such as piece rate. Sometimes we don’t as it may be too expensive to do so. So we try to find a proxy and use it as a guide in pricing. Time is one such proxy as we don’t value the time devoted by a worker in a particular job per se, but the output he makes.

In the first volume of “Economic Explanation”, Professor Cheung has some discussion on this issue. There is also a bit of discussion in his “Contractual Nature of the Firm” which is now reprinted in his collected works. Some other good reference sources include Yoram Barzel‘s (Professor’s former colleague at UW) “Economic Analysis of Property Rights” (2nd edition Cambridge 1997) and Yoram’s 1982 piece entitled “Measurement Costs and Organization of Markets” in Journal of Law and Economics.

For a discussion of Professor Cheung and Barzel’s place in the development of new institutional economics, there is a paper called “Yoram Barzel and the New Institutional Economics” downloadable via SSRN. The author, Dean Lueck (a student of Barzel’s), examines professor Barzel’s thoughts through the history of economics lense, a paper worth pondering.

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4 Responses to Pricing by Proxy

  1. says:

    Gary has given us a good lecture. When I first read such idea in Cheung’s Economic Explanation (to clarify, it is 經濟解釋三卷 in chinese instead of Economic Explanation for selected paper of Cheung in english), I was shocked. When we talk about price, I think most of us actually don’t know what we are talking about.

  2. kempton says:

    Gary,

    Thanks a lot for a great explanation of “pricing by proxy”. I now have a better understanding of price (relative to before I read your piece (smile)).

    Do I have the right section “Volume one, page 148 – What is Price?” or there are other pages that cover the concept of “pricing by proxy? I want to try to read Chueng’s original words again (after all, my first attempt has been disastrous and this fine collection has been collecting dust on my shelfs as the concepts were quite hard for this non-economist (smile)).

    The three volume has been my “A Brief History of Time” (a book that sits on way too may shelfs and very little read or understood by the buyers of the book).

    Cheers,
    Kempton

    P.S. I’ve added a few links to your articles as I was doing the research. I hope you don’t mind.

  3. Angel-a says:

    Thank you Gary, for this very reader-friendly explanation!
    And thanks to you too, Kempton – for linking the sources!
    We have a great team 🙂

  4. chanwall says:

    The subprime financial product also consists of a bundle of attributes, and most economists and bankers have problem to price them.

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