Price data

There is a considerable body of data about prices going back a very long time ... but rather less about what these prices mean.

Learning about prices

When I became the CFO of Continental Seafoods I needed to get an understanding of the dynamic of the industry ... I needed this to be a deep understanding that was likely to be right ... and I needed to get this quickly. I asked a lot of questions and did my best to mine the knowledge of everyone in the company ... and friends of the company, and that was a good start.

I also plotted shrimp prices in the US market month by month from 1946 to 1974. The data were available in a government produced market report ... but taking the data out of a table and plotting it on graph paper told a story. Four weeks into my new job, I knew more than most about shrimp prices ... and this gave me a good insight into the potential for the company as we went forward.

This time series plot told me a lot about the long term trends ... and it told me about price behavior month by month during the year, and how different industry conditions impacted this behavior.

We know a lot about some prices, and rather little about other prices. Some prices seem to be hidden from public view ... and one has to wonder why?

What prices should be

It is relatively easy to make a judgment about what something should be priced at. From this it is reasonably easy to judge that a transaction reflects a fair price ... and is probably an honest transaction. But that presupposes that it is possible to see the price of a transaction ... and this is usually not the case.

A colleague had a job in one country (around 1988) where he had to review big contract pricing to help reduce corruption and kick backs ... and he did his work very conscientiously. He refused to OK one big contract because the pricing was way too high ... only to have the contract resubmitted again some months later with the price even higher. The explanation turned out to be that now it was going to take even more bribery to get the contract approved!

And even where there is publicity about prices, it is not always clear what the information really means ... price disinformation is as common as price information.

Example

Government data about prices is often obtained using a crude system of telephone questioning ... while it gets the information reasonably right it is not perfect by a long shot. It certainly does not have accounting precision.

I was not told about this until after I left the company ... but it turned out that whenever we had a large stock of a specific item we advised the price surveyors that this particular product was selling at a particularly high price ... and when we had low stocks, we reported that the market price was low. In the real world we were then able to discount the one item below market and move the product and overprice the product we did not have, and not be embarrassed by the lack of inventory.

It did not distort the price statistics that much ... but it certainly was a clever little ruse to help keep product moving!

Transfer prices

Prices are critical to corporate profit ... which in turn has a disproportionate impact on value as measured by capital markets.

But price is transient ... and just a part of the data needed to understand and record an economic transaction. It does not matter much if one barrel of crude oil sells for $200 a barrel ... but it matters very much if 100 million barrels of crude oil sell for this price.

In value chain analysis, the transfer price determines how the value adding is shared between the entities in the chain it is very important. Because of its importance very little information is available about transfer prices. The idea that the “market” determines the price assumes a high degree of information and this is rarely the case. Transfer pricing serves those that have the control.

Because of its importance very little information is available about transfer prices. The idea that the “market” determines the price assumes a high degree of information and this is rarely the case. Transfer pricing serves those that have the control.