The Economics of HDMI Cables

When you get a Blu-Ray player or an HDTV receiver, if you want to get maximum performance you need to hook it up to your television using an HDMI cable. Meanwhile, HDMI cables come in a huge assortment of prices. Here’s a short one for $3.49 whereas Radio Shack is selling a longer Monster brand cable for over $120. Fortunately for me, my high school physics teachers one day went on an extended tirade about the evils of Monster cables and illustrated the non-superiority between the expensive and cheap version of AV cables.

Alex Tabarrok’s puzzled by the phenomenon:

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.

I think that’s probably an unduly pejorative terminology. He says “ordinarily, we would expect competition to push prices down.” But what that really means is “assuming perfect information we would expect competition to push prices down.” And it’s pretty clear that insofar as accurate information about the relative quality and available price points of HDMI cables spreads, competition will push prices down. But not surprisingly, most people don’t seem to actually have much information about this. So the tax on low-information consumers works. But I don’t think I want to call them “idiots” just for not knowing about this. It happens to be the case that I’m a pretty informed consumer about electronics, but I think it stands to reason that there’s some other field of purchasing endeavor in which I’m regularly getting hosed.

The other really egregious example of this is the prices Apple charges for RAM. Identical RAM upgrades can be purchased online for substantially less and installed in the comfort of your own home.