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The Economics of the HDMI Cable Ripoff
I just bought a blu-ray player. (Actually my 10 and 7-year old bought it as a birthday gift for my wife; alas, neither they nor she were fooled for long, but I digress.) To get the best performance you need an HDMI cable which must be purchased separately (itself a bit of a mystery since almost every blu-ray is going to be attached to a digital tv). The price difference among brands of HDMI cable are bizarrely large - you can easily spend as much on Monster cable, the brand leader, as on the player itself yet at the same time you can buy decent HDMI cable for virtually nothing at Amazon. The experts are clear that expensive HDMI cable is a ripoff.
There are two puzzles. First, we have a clear case of consumers wasting a reasonable amount of their own money in an area that involves neither politics nor medical care, the irrationalities of which my colleagues have devoted considerable effort to explaining. I will have to go for the P.T. Barnum theory on this one.
The second puzzle is, Why don't any stores stock cheap HDMI cable? I knew cables were a ripoff yet I could not find reasonably priced cables at Best Buy, Radio Shack, Target or even Wal-Mart. Ordinarily, we would expect competition to push prices down but in this case it seem as if the mere existence of Monster is anchoring high prices everywhere but online.
My best guess is that this is an unusually strong version of the hidden fee model of Laibson and Gabaix. In that model, firms overprice one aspect of service--such as a hotel charging exorbitant rates for telephone service--as an idiot tax. Crucially, the idiot tax is matched by an IQ-subsidy; the price of the hotel room is lower than it would be without the idiot tax--so the idiots don't know to shop elsewhere and the high-IQ types are, in fact, drawn to stores with an idiot tax. Thus, buy your blu-ray player at places such as Best Buy which sell a lot of expensive cable as well as massively overpriced extended warranties.
Posted by Alex Tabarrok on June 12, 2009 at 07:05 AM in Economics | Permalink
Comments
How about differences in price elasticity?
We know that demand for big ticket items are very price-elastic, so they price those items very competitively. But, given that you're already in the store buying something, you may have inelastic demand for the peripherals that you didn't know you needed to buy (or, you didn't know that it wasn't included).
I think fast food works like this too. Their mark-ups on food are very low (given the many substitutes and high competition there), but, they make most their profits on drinks (i.e. the peripherals).
Posted by: Scott Wentland at Jun 12, 2009 7:25:56 AM
A very topical example of such an idiot tax is the late fees and exhorbitant punitive interest rates charged by the credit card companies. We'll see how the overall pricing structure adjusts now that they've been banned by the recent legislation.
Posted by: Z. at Jun 12, 2009 7:43:32 AM
One possible explanation for the lack of low-priced HDMI cables in big-box stores is that they are uneconomical to stock. Certainly it is the case that they are not nearly so economical to stock as the high-priced versions. And the competition from online vendors is less because the shipping costs are large as a fraction of the cost of the item (unless you are an Amazon Prime sorta guy, in which case you are unlikely to be buying consumer electronics in a big-box store to begin with).
Posted by: David Hecht at Jun 12, 2009 7:54:08 AM
This would make sense except that if you are buying your HDMI cable online you might as well buy your player online too. It isn't as if Best Buy tended to have less-than-Internet pricing on anything.
Posted by: matt wilbert at Jun 12, 2009 7:55:18 AM
A lot of people actually think Monster Cable (and other overpriced cables) actually do make a significant difference. They're a big name in the audio world as well, though usually mocked by those who know better.
For example, the following link
http://www.engadget.com/2008/03/03/audiophiles-cant-tell-the-difference-between-monster-cable-and/
"Audiophiles can't tell the difference between Monster Cable and coat hangers"
Gets me thinking about Galbraith more than anything
Posted by: Billy at Jun 12, 2009 8:04:37 AM
I understand stores that sell HDTVs overpricing the cables to capitalize on people who really want to watch the tv in its glory that day.
I guess I'm surprised that stores that don't sell HDTVs don't sell cheap HDMI cables the way that websites do. Plenty of hardware stores out there that sell cables, can't just be that they're expensive to stock.
Posted by: Pat at Jun 12, 2009 8:14:08 AM
All the guys I know who worked at Best Buy when they were younger said that they had fat margins on monster cables. They got paid extra to sell 'em.
Posted by: John at Jun 12, 2009 8:40:32 AM
There's a lot of very interesting things about HDMI. One interesting thing is that Intel holds patents on it; this allows them charge exorbitant license fees, and also lets them impose a requirement that all HDMI-compatible devices support copy protection (encryption on the wire). It's entirely possible that the cheap Amazon cables aren't licensed, in which case the economic situation is simply that most cables have a monopoly rent built into the pricing.
But another is that HDMI's video quality isn't actually better than component (red-green-blue) for most people. In high-noise environments it might be better, and the fact that it uses one wire for both video and audio instead of five or more makes it easier to run and connect, but it's not actually higher quality in most environments.
Granted, most people wouldn't notice even if it *was* higher quality. You could probably write a book about the signals (no pun intended) sent by buying Monster cable.
Posted by: Brent Royal-Gordon at Jun 12, 2009 9:03:34 AM
I think that Pat has got it: "watch the TV in its glory that day"
Some of us fools do all of the research to find the best model flat-screen television, spending, say, an hour or two on the Internet doing so; then, having that knowledge, go buy that competitively-priced TV at Best Buy...and the player.
oops! Am I going to go home with that TV and player alone? How will I tell my little Sponge Bob lover that he has gotta wait another week for a cable from Amazon?
peer pressure
Posted by: Miffed AsWell at Jun 12, 2009 9:09:37 AM
I think that Pat has got it: "watch the TV in its glory that day"
Some of us fools do all of the research to find the best model flat-screen television, spending, say, an hour or two on the Internet doing so; then, having that knowledge, go buy that competitively-priced TV at Best Buy...and the player.
oops! Am I going to go home with that TV and player alone? How will I tell my little Sponge Bob lover that he has gotta wait another week for a cable from Amazon?
peer pressure
Posted by: Miffed AsWell at Jun 12, 2009 9:10:56 AM
Well component doesn't "really" support 1080p, so if you want that you have to use HDMI. And *yes* it is possible to tell the difference between 720p and 1080p in many cases.
Posted by: Andy at Jun 12, 2009 9:10:59 AM
I went through this same problem several months ago and was discussing with friends about the variability in price for HDMI cables. I also read that there was little difference in quality between the cheap ones and the expensive one. So, I purchased one for my mom and dad on Amazon.com for around $5 including shipping and handling.
Well, my mom calls several weeks later to say that the HDMI cable I bought was not functioning! This of course is anecdotal evidence, but it makes me question the advice given about there being no difference in quality between the most and least expensive HDMI cable.
Alex, if you buy the cheap one, let us know if it dies on you too.
Posted by: Tom at Jun 12, 2009 9:13:00 AM
I bought a set of speakers from an unnamed (recently defunked) chain. The salesperson got so indignant that I didn't want his crappy cables and would be so foolish as to risk my speakers without his extended warranty plan that I nearly left the store without them. However, the store is out of business and my speakers are still getting funky.
Posted by: Andrew at Jun 12, 2009 9:15:52 AM
I noticed that Best Buy and the other big box electronics stores charged exorbitant prices for these cables. When it first came out, you would pay over $100 for the only HDMI cable Best Buy had. I think it's the PT Barnum effect. Digital signals don't suffer from attenuation like analog ones do, but most people dont understand that. Best Buy and other big box stores make a killing off these cables - the sales people TELL you the shielded cables are better, and they probably dont know any better.
I am surprised that you were unable to get decent prices for the cables at WalMart. I used to be able to pick up HDMI for ~$25 there. Failing that, you might try Radio Shack. The cheapest cable you can find should do the trick, unless you have a commercial radio antenna inside your house (think 50,000 Watts).
Something else to consider is that there might be some form of licensing required to make these cables that has recently had a price hike.
When it comes to Audiophiles, a lot of people think specialty cables are BS. I know, from personal experience (my dad has a setup), that on sufficiently high end systems (tube amps, premium quality vinyl records, $5000 turntables), the cables make a difference. Some of the cables are hand made, and have markets of less than 1000 buyers. They really do sound different though. I remember comparing different sets of power cables that my dad was demoing back to back, and you could hear the difference. It gets to a point where one is not necessarily "better", just different.
Posted by: David Meese at Jun 12, 2009 9:20:09 AM
I should add that in my experience with the audiophile world, Monster cables are considered crap as well. The really good ones are brands that most people have never heard of.
Posted by: David Meese at Jun 12, 2009 9:22:38 AM
I couldn't bring himself to pay that huge markup at Best Buy. I got my cables at http://www.bluejeanscable.com/. I just checked their site and you can get a 6 foot cable for under $20,
Posted by: Brendan at Jun 12, 2009 9:25:54 AM
cosco sells HDMI cables for a reasonable price.
Ironically, as does the apple store - for 19.95.
Posted by: mark at Jun 12, 2009 9:30:04 AM
It's the margin issue. Retail stores tend to be very cheap places to buy hd tvs and say ps3's (beating online due to shipping and return policies), but they make the money back off of expensive cables and extended warranties.
Posted by: anon at Jun 12, 2009 9:34:33 AM
"I couldn't bring himself to pay that huge markup at Best Buy. I got my cables at http://www.bluejeanscable.com/. I just checked their site and you can get a 6 foot cable for under $20"
Brendan, do yourself a favor next time and get your HDMI cables from Amazon, Alex linked to it above. Less than a buck for a 6 foot cable.
Posted by: johnny at Jun 12, 2009 9:35:49 AM
I am surprised that you were unable to get decent prices for the cables at WalMart. I used to be able to pick up HDMI for ~$25 there.
I think I paid under $5 for my last HDMI cable (shipping included). EBay is your friend for these kinds of things.
Posted by: Slocum at Jun 12, 2009 9:36:19 AM
I think it's mainly that the margin on the cheap cables isn't worth their stocking it. It's like the old game of lemonade stand. If you make 60 cents on a cheap cable vs 30 dollars on a monster cable, you have to sell 50 cables to make the same profit. So having the cheap alternative available, if even one cable is sold, is a huge mark against your profitability since you lose the higher priced sale. And since people who just bought an expensive blue ray player want both the best picture available, and want to take it home and fire it up immediately, they're inclined to just pay for it.
Posted by: js at Jun 12, 2009 9:39:07 AM
HDMI cables are expensive at Best Buy for the same reason beers are expensive on an airplane. People put a lot of time and effort into researching the best possible price for big-ticket items (TVs, airline tickets), resulting in razor-thin margins that companies have to make up somewhere else to a captive audience.
Posted by: Josh at Jun 12, 2009 9:45:37 AM
It's especially interesting in comparison with a well-known behavioural result: people are willing to travel 15 minutes across town to save $25 on a $100 cable, but would not travel 15 minutes to save $25 on a $1000 Blu-ray player. Rationally, 15 minutes is either worth $25 or it's not. But people tend make the comparison proportionally instead of in absolute terms.
On this result, it should be the players that are overpriced and not the cables! But the real situation is a bit more complicated.
I believe that the real effect arises in the limited attention span of consumers. The price of the player includes a discount which is really a marketing expenditure, to attract people into the store. Once they get there and become aware of the need to buy cables and other consumables, it becomes rational for them to spend more money in situ rather than expending further time on searching for an alternative supplier. The store still needs to make sure it at least has a marginal profit from the player itself, otherwise it will lose out from savvy shoppers who will go there just to buy the player. But to make a net profit overall, it needs to be able to sell higher-margin products too.
Like in many cases, the rational overall behaviour if people are able to simultaneously take into account all relevant factors (player, cable, transport and delivery costs etc) is different from the path-dependent behaviour that arises from making the optimal choice at each decision point, when only part of the information is available.
Posted by: Leigh Caldwell at Jun 12, 2009 9:48:12 AM
This is exactly what I did when I purchased my HDTV (I already had a TiVoHD). I purchased a cheap HDMI cable a few weeks in advance, and when Best Buy dropped its price for a few days on the HDTV, I bought just the TV. But, if I hadn't purchased the cable in advance, there is no way I would have waited the 2 to 3 days for one to ship, and I would have spent the $70 on a monster cable. Your hidden fee theory is spot on - nobody chooses Best Buy over another vendor because of cable pricing.
Posted by: Rob at Jun 12, 2009 9:50:17 AM
In Ireland they are all pretty cheap, I bought one about a year ago for around 14 euro and I've never seen cost dramatically more
Posted by: neil at Jun 12, 2009 9:52:08 AM
