Economics Questions

Re: The economics of overbilling vs. underpaying

CShirk — Sat, 12 Jan 2008 16:14:46 GMT

Nathyn, for your information, companies pay you off quickly because you CAN take them to court and get punitive damages - as well as get the contract terminated - and they know it. That's why the company was so willing to give your mom a refund in that first example you mentioned. If it wasn't expected of them, they'd just thumb their noses and hang up. Companies, by the way, have tried to get away with doing the latter, and had to pay massive punitive damages in court. The question you ask seriously makes me wonder if you've ever been in a contract or had to seriously pay bills. Believe it or not, the companies are under the exact same contract laws as you are. Usually, you've signed an agreement which says you pay a small late fee - my credit card late fee, I believe, is a whole ten bucks. That is nothing in comparison with what they would actually be legally justified in doing. What they CAN do is take me to court if I haven't paid within 30 days and really destroy my reputation - financial and otherwise! And it goes both ways, by the way. If they fail to give you the service you pay for, or if they are consistently overbilling you, then you also have the right to haul them to court under the exact same conditions. BY LAW, contracts go both ways. Your stance, frankly, shows your ignorance in this matter. If my credit card or insurance company consistently overbilled me beyond what has been agreed in the contracts, I would reserve the right to (and most certainly would) take them to court and get the contract terminated.

If a company charges you for a product or service, and is not delivering said product or service, then it is called a "scam" and you have quite a number of legal courses of action you can take.

Regardless, your question ignores the facts. The fact is that overbilling by a company does carry criminal and civil penalties. The thing of it is, most of us have the intelligence to realize that the company is made up of humans and ergo prone to human error. (The company realizes the same thing about you, by the way, which is why they simply tack on a late fee instead of hauling your sorry rear end to court.) Therefore, instead of sueing for breach of contract, we call them and fix the error. It becomes that simple. (That and most of us realize we don't feel like dealing with the courts every time someone makes a human foul-up.)

Re: The economics of overbilling vs. underpaying

Niccolò — Sat, 12 Jan 2008 14:05:32 GMT

Nathyn:
OK. And why do the consumers take the company's long-term costs into account, marginally?

For one, marginalism heavily relies on the broader concept that all individuals acts within their own self-interests subjectively and so asking why they do so is more a question for psychology and *gasp* praxeology than economics in the sense that you want to force down people's throats.

Two, it doesn't need to be in a marginal explanation. From a long term perspective if firm B continues to act inefficiently, their capital stocks will diminish with the increase in business, forcing them either out of the market or into the same course of action practised by A, in which case A will already have the advantage.

It's a tortoise-heir effect.

Re: The economics of overbilling vs. underpaying

waywardwayfarer — Wed, 09 Jan 2008 02:30:58 GMT

Nathyn:
waywardwayfarer:
Late (or underpayment) fees provide incentive for customers to pay in full and on time.
OK. And why do the consumers take the company's long-term costs into account, marginally?

They don't. A customer takes into account the company's ability to meet the needs he considers most important. All else being equal, customers generally prefer lower costs. To someone who habitually pays on time and in full, no late charges save nothing. Low interest rates and low monthly fees are of much greater value and importance to him. Now, which company is going to be able to offer lower rates and fees to entice that customer, the one that's hemorrhaging money by offering no late fees to risky customers, or the one that keeps its finances flowing and its losses minimal by discouraging delinquency? The company serves both its own interest and that of its customers by minimizing the risk of non-payment on accounts.

Re: The economics of overbilling vs. underpaying

Stranger — Wed, 09 Jan 2008 02:11:17 GMT

Nathyn:
waywardwayfarer:
Late (or underpayment) fees provide incentive for customers to pay in full and on time.
OK. And why do the consumers take the company's long-term costs into account, marginally?

Because the company offers them lower prices in exchange. I already told you that.

Re: The economics of overbilling vs. underpaying

Nathyn — Wed, 09 Jan 2008 01:38:59 GMT

waywardwayfarer:
Late (or underpayment) fees provide incentive for customers to pay in full and on time.

OK. And why do the consumers take the company's long-term costs into account, marginally?

Re: The economics of overbilling vs. underpaying

waywardwayfarer — Wed, 09 Jan 2008 00:37:55 GMT

Late (or underpayment) fees provide incentive for customers to pay in full and on time. Offering a credit service without such a penalty is likely not only to encourage late payment, but to attract a preponderance of customers of the sort prone to habitual late or non-payment. Such a service is likely to be of much less interest or value to responsible customers - if it's their practice generally to pay in full and on time, the penalty doesn't affect them, so neither does the absence of it. Those customers - the most desirable ones - are more likely to be swayed by low interest rates, absence of monthly fees, etc, rather than by lack of punishment for delinquency.

Since credit companies generally deal with thousands or millions of customers, there's a possibility of very great losses, which means higher operating costs, and either less or negative profit for the company (which will likely go out of business) or higher costs for its customers (which means fewer customers, especially the most desirable sort, and thus also a likelihood of going out of business.) It's entirely possible that the reason examples of companies that do business this way are rare or non-existent is because it's simply not a viable way of doing business.

On the other hand, customers do business with a small number of companies (relative to the number of customers with whom companies do business,) and the total amount of money at stake for an individual customer is generally much smaller. The probability of a billing error, and the overall impact to the individual customer when one does occur, may not be of enough consequence to him to be a serious impediment to his doing business with a company. Thus, companies might gain very little by offering interest on overbilling - perhaps less than it would cost them to implement such a system. They may stand to gain more business and profit by how rarely they make errors, and by how quickly and conveniently they correct them, than by paying ten days' worth of interest on a $100 overcharge.

Re: The economics of overbilling vs. underpaying

Deist — Tue, 08 Jan 2008 23:33:00 GMT

How come some of the entries were deleted? not a problem just curious.

Re: The economics of overbilling vs. underpaying

pairunoyd — Tue, 08 Jan 2008 02:59:30 GMT

Nathyn:

pairunoyd:

There are an endless number of pros and cons you can bring up. You happen to pick late fees and then somehow relate it to 'overbilling fees'.

It's not a tenuous comparison: Knowingly underpaying even when you have the money is no different than being unable to pay and then paying a late fee later. Companies don't care whether you can pay it or not. All they care is that they receive payment. "Late fees" is just a more common term than "Underpayment fees." That's the reason for the comparison.

OK, the firm should pay late fees. What else can they do? They can take customers to the doctor. They can provide a massuer 24-7 at everyone's home. They can grow organic fruits and vegetables and have a top chef prepare them for all their customers. Why should we compromise? Why should do w/o anything? I'm just stupidly giving this firm 100's of dollars every month and am not getting what I really want!

Re: The economics of overbilling vs. underpaying

Grant — Tue, 08 Jan 2008 00:26:26 GMT

You'd be surprised how many bills to firms go unpayed. In the cases of things like hospital bills, sometimes firms are happy just to get anything. Remember, tacking on extra fees doesn't do any good unless the firm actually expects that person to pay. Sure they can pursue legal recorse, but the vast majority of the time its not worth the money to do so. With some services, such as mortgages and home repair, its easy for a underpaid firm to put a lein on your property, which makes it easier to get firms to do the work. Just because you get a bill in the mail doesn't mean you'll be forced to pay it at gunpoint. Even the IRS doesn't (usually) go after people who they don't think are worth enough to justify their expense.

By the way, merchants do end up eating a lot of charges which occur due to credit card theft. So while those charges appear to just "go away" to you, someone is eating the cost.

Nathyn, there aren't very many Austrian Economists here. In fact, I'm not sure I've even seen one post. There are a lot of ametures with interests in Austrian economics, and maybe some economists-in-training, but thats about it. That you may find faul with the reasoning on these forums is not indicative of Austrian economics, but is instead indicated of a flawed methodology of seeking out information on Austrian economics. If you question ametures, you will get ameture responses; to expect anything else is foolish. Even the Mises.org articles aren't all by professional economists, and the ones that are aren't indicative of all "Austrian" thinking everywhere.

If you dislike the ameturish nature of these forums, I'd suggest going somewhere else, such as the Austrian Economists blog. Your bitching will not grant anyone here a PhD.

Re: The economics of overbilling vs. underpaying

Deist — Mon, 07 Jan 2008 22:25:49 GMT

Nathyn you said "If Austrian economics is true, firms shouldn't develop at all, because no one can ever gain any greater negotiating power. They may have variations in wealth stemming from individual ability, but that can't explain the existence of large firms."

How is this statement true. If there are different people with different abilities heading different firms then yes some firms will be large as there are small firms. Austrian economics states we need people for division of labor and hence we form multi person units. Also Austrian economics does state we all have different powers of persuading and it goes on to say that without physical force the diffuse knowledge will GRADUALLY spread through the market and the society. This idea is inherent in the Austrian view on monetary policy. Have you really read any Austrian literature? Hayek for instance? It honestly sounds like you are reading an odd abstract view of completely equal individuals into this economic school of thought. Austrian economics believes that gradual improvements in our standard of living are driven by an evolutionary process of trial and error. But as far as negotiotions being equal it is not meant in the sense that you and I have equal things to offer but in the sense that it is a free interaction devoid of force. Hence improvments in workers benefits happened with gradual technological change and various other factors. For instance flex time is growing more and more and being offered by more and more firms not because the worker has equal or greater knowledge but because other firms desire to get a greater share of the labor pool at the other firms expense. You are espousing a view that equal knowledge is what everyone has under Austrian theory but that is explicitly denied by the literature.

Re: The economics of overbilling vs. underpaying

Nathyn — Mon, 07 Jan 2008 18:45:55 GMT

pairunoyd:
There are an endless number of pros and cons you can bring up. You happen to pick late fees and then somehow relate it to 'overbilling fees'.

It's not a tenuous comparison: Knowingly underpaying even when you have the money is no different than being unable to pay and then paying a late fee later. Companies don't care whether you can pay it or not. All they care is that they receive payment. "Late fees" is just a more common term than "Underpayment fees." That's the reason for the comparison.

pairunoyd:

Every company out there could offer 'overbilling fees' but so what! If a company's typical customer is paying them $100 per mth and it's costing the company $90 per mth to provide the service, they're grossing 10%. If they start paying overbilling fees and their cost of doing business increases from $90 per mth to $110 per mth, they'd probably charge you about $122 per mth. So now you've got your overbilling fees and your paying $22 per mth to cover them.

If you're going to continue to invoke the company's costs as justification for individual preferences, I am not going to respond.

Costs do not affect preferences until they're reflected in price, even if they would be reflected in price were an agreement to be reached. You're continuing to put forth arguments which blatantly contradict marginalism. You then make this Austrian fallacy:

pairunoyd:
To avoid late fees and overbilling, don't do business with them. Is that a better alternative? If you want to avoid late fees and overbilling at ALL cost, don't do business with ANYONE.

Occasionally in discussions about economics, I am told by Libertarians, "So, why don't you do X!" As I noted previously in this thread, this is not about me.

This is an analytical discussion, not a normative one. I'm not saying, "Damn, I'm so upset about these late-fees!!" I don't care either way. I agree they may be beneficial in reducing costs, which is reflected in price.

I'm saying that such an arrangement cannot be reached marginally, under Austrian assumptions. The widespread existence of fees for underpayment without the corresponding existence of fees for overbilling make Austrian claims about equal access to information and equal bargaining power untenable.

Re: The economics of overbilling vs. underpaying

pairunoyd — Mon, 07 Jan 2008 17:56:04 GMT

There are an endless number of pros and cons you can bring up. You happen to pick late fees and then somehow relate it to 'overbilling fees'. Every company out there could offer 'overbilling fees' but so what! If a company's typical customer is paying them $100 per mth and it's costing the company $90 per mth to provide the service, they're grossing 10%. If they start paying overbilling fees and their cost of doing business increases from $90 per mth to $110 per mth, they'd probably charge you about $122 per mth. So now you've got your overbilling fees and your paying $22 per mth to cover them.

You could also say that overbilling fees would encourage the company to bill more carefully. You could say that penalty fees would encourage more timely payments so that the company could provide better oversight on their accounting practices. Ad infinitum.

To avoid late fees and overbilling, don't do business with them. Is that a better alternative? If you want to avoid late fees and overbilling at ALL cost, don't do business with ANYONE.

Re: The economics of overbilling vs. underpaying

Nathyn — Mon, 07 Jan 2008 17:06:59 GMT

nirgrahamUK:
>>>>Pairunoyd, if that's true, then why don't the existence of late fees create an incentive for firms to try to cheat?<<<
reputation

How does "reputation" affect firms but not consumers? Firms are simply made up of individuals, after all.

There are consumer agencies which review firms' behavior, but there are also agencies which review consumer behavior, like credit agencies

Re: The economics of overbilling vs. underpaying

nirgrahamUK — Mon, 07 Jan 2008 17:01:51 GMT

>>>>Pairunoyd, if that's true, then why don't the existence of late fees create an incentive for firms to try to cheat?<<<

reputation

Re: The economics of overbilling vs. underpaying

Nathyn — Mon, 07 Jan 2008 06:20:31 GMT

Deist:

Alright, I have made my point several times here. I have to ask you a question now in order to better understand where you coming from. What type of contract would you endorse as justified? Since every contract is about give and take and is about making both sides stand up to their end of the bargain how are they all not slavery by your definition of the term? Slavery totally takes all ability of independence away including your contract ability. Other contracts merely cause limited obligations and are not nearly as total in their aspect. Also for the last time the reason the customer always gives in is because they want the product more then other aspects of the contract and the firm views is dependent on the costumer for it's income and hence demands to allow certain safeguards on it. Also I said this could change or not due to future developments. Keep in mind companies that take in billions of dollars still have profits in the single digits because after they take in the money they then have to dish it out on tons of expenses. For instance if you check out the report on walmart they on average have a three precent profit. This is included so that you can think about the subjective demands of the two agents as having a real world basis. If you still think I am saying it is up to the customer getting everything they want this debate has reached its conclusion. And for the record I may not be an anarcho capitalist. I never stated what I was. I have been arguing on a general basis of economics not the political structure.

An agreement, "I pay you money for a monthly subscription service" is a simple give-and-take. I give you money, you give me the service.

It's not clear, as I said, why late fees would tend to exist on top of that, unless firms tend to have more negotiating power. This is something Austrians seem to deny.

Frequently, Austrians invoke the existence of voluntary contracts to prove the fact that a contractual free-market society would be pretty fair and equitable for everyone. But if contracts which are "seemingly" unfair can exist, like the one described in the OP or like Walter Block's slave-contracts, you can't really make this argument. That's my main point.

pairunoyd:

Nathyn:

pairunoyd:

If you want to be able to charge people for late payment you should start loaning people money or provide some such service, eg insurance.

So you should. But do companies do that? No. I have XBOX Live. I don't receive any "insurance" from having an account.

The act of charging people for late payment in no way inherently protects a person from risk.

You're saying these big companies have an advantage because it's not tit-for-tat - "I'm paying a late fee but they're not paying an overcharge fee." If this is such a big plus for them then why don't you go into that business?

Ad-hominem.

pairunoyd:

Also, why not write up your own contract, telling them they have to pay you a penalty for overcharges. How much success do you think you'd have? If you think you'd have no success, try some alternatives. You can use coercion to make them sign your contract. You can utilize the market advantages they're utilizing by providing similar services and reaping the benefits of 'no overcharge penalties. You can self-provide said services.

This is not about me. This about explaining the existence of certain trends in market behavior.

pairunoyd:

Nathyn:
Why do consumers repeatedly compromise in the firm's favor?

The same reason I compromise in Wal-Mart's favor and actually drive to them rather than them driving to me.

Why don't both drive and meet halfway?

If large firms already exist, yes, it's more efficient for lots of consumers to all meet one retailer in the same place.

However, let's disregard the assumption that large firms already exist. Say you're in an economy made up of individuals. How should such a pattern of behavior develop? If Austrian economics is true, firms shouldn't develop at all, because no one can ever gain any greater negotiating power. They may have variations in wealth stemming from individual ability, but that can't explain the existence of large firms.

pairunoyd:

Nathyn, youre also using parallel analysis (my term). Youre picking out things that are similar and attempting to make your case upon that. If the company did pay for overcharges, this would provide an incentive for customers to cheat. This would in turn require more diligence by the company to fully investigate all claims. Net result - the overall price goes up. If mom is paying $600/mth for health ins., I'd bet it'd go up to $700-$800 at least, w/i the first yr or so. It's cheaper the way theyre doing it.

Pairunoyd, if that's true, then why don't the existence of late fees create an incentive for firms to try to cheat?

Also, again, you're invoking the costs of the firm as a justification for consumer preferences. That's goes against marginalism. Consumers don't take companies' costs into account until theyare reflected in price, even if they would be reflected in price if they made the decision to agree with the firm. You follow what I mean by that?

Firms "reducing the amount of fraud to reduce prices" does help serve long-run utility, but not marginal utility. In marginalist terms, there is no fraud: There's just the consumer and the firm, and what both can provide for eachother right then and there.