Developed in 1964 by economists Armen Alchian and William R. Allen, the [Alchian-Allen] theorem states that adding a per unit charge to the price of two substitute goods increases the relative consumption of the higher price good.
--Marginal Revolution, pulled from a post that's actually about long-distance relationships.
Can you think of substitute goods for which the Alchian-Allen theorem seems to get it backwards? In particular, a particular set of goods whose pairwise price difference at the same location is almost always exactly 10 cents per unit, but whose unit prices have basically doubled over the past few years?
Gas, of course.
Am I right, though? When gas prices go up, don't people become slightly more likely to get regular rather than premium? The A-A theorem would suggest the opposite.
Posted by Matt Bruce at February 11, 2008 12:26 PMJudging from what I read in today's headlines, I'm guessing you're thinking of (regular first-class and postcard) postage stamps.
Posted by: Paul at February 11, 2008 03:56 PMI have found the A-A theorem to apply to me in terms of gas. We have two vehicles, a minivan that gets about 20 mpg and a Mercedes that gets about 23 and must use premium gas. With regular at $1.30 and premium at $1.50, it was cheaper to drive the van. With regular at $2.60 and premium at $2.80, it's cheaper to drive the Mercedes.
Posted by: Godboy at February 11, 2008 07:44 PMOur Volkswagen GTI takes premium. While it hasn't actually altered our driving or octane-buying behavior, I have often had the same thought while filling up.
Posted by: Richard at February 13, 2008 11:01 PMUh, by "same thought" I meant that the Alchian-Allen theorem works, not that it doesn't work. I feel better about buying the premium when it's a smaller percentage increase in price.
Posted by: Richard at February 13, 2008 11:03 PM