Trump quote:\" When I build something for somebody, I always add $50 million or
ID: 1189560 • Letter: T
Question
Trump quote:"When I build something for somebody, I always add $50 million or $60 million onto the price. My guys come in, they say it's going to cost $75 million. I say it's going to cost $125 million, and I build it for $100 million. Basically, I did a lousy job. But they think I did a great job."
who is affected by the Trump approach? Is he simply managing expectations? is he misleading the other party? is he taking unfair advantage? what happens if pricing does not reflect cost? what would happen if all contactors did this?
Explanation / Answer
"Underpromise and overdeliver" is an old and popular advice. Underpromising and overdelivering is just what Mr Trump is doing here. He is trying to trick the other party by manipulating their expectations. He underpromises by not providing as much as he should in $75. He is trying to make the other party feel happy by doing for them in $100 a job that they thing will cost $125.
Both Mr Trump and the other party are at loss here. The other party is paying more than the actual cost. At the time of negatiation, Mr Trump is losing all those customers that can pay an amount between $75 million and $125 million. In case of competition from other firms, Mr Trump is likely to lose this particular customer too. Trump is trying to take unfair advantage, but in due process, he stands to lose.
The economic theory suggests that when pricing does not reflect cost, the market outcome is distorted, resulting into deadweight loss. If all contractors add an unfair markup to the price of their product, the supply curve will shift leftwards. As a result of that, some customer will leave the market and a lower quantity will be demanded, and thus some contractors will also go out of business. The total economic surplus will go down.
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