The Economics of the HDMI Cable Ripoff

by on June 12, 2009 at 7:05 am in Economics | Permalink

I just bought a blu-ray player.  (Actually my 10 and 7-year old bought it as a birthday gift for my wife; alas, neither they nor she were fooled for long, but I digress.)  To get the best performance you need an HDMI cable which must be purchased separately (itself a bit of a mystery since almost every blu-ray is going to be attached to a digital tv).  The price difference among brands of HDMI cable are bizarrely large – you can easily spend as much on Monster cable, the brand leader, as on the player itself yet at the same time you can buy decent HDMI cable for virtually nothing at Amazon.  The experts are clear that expensive HDMI cable is a ripoff

There are two puzzles.  First, we have a clear case of consumers wasting a reasonable amount of their own money in an area that involves neither politics nor medical care, the irrationalities of which my colleagues have devoted considerable effort to explaining.  I will have to go for the P.T. Barnum theory on this one.

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.

1 Scott Wentland June 12, 2009 at 7:25 am

How about differences in price elasticity?

We know that demand for big ticket items are very price-elastic, so they price those items very competitively. But, given that you’re already in the store buying something, you may have inelastic demand for the peripherals that you didn’t know you needed to buy (or, you didn’t know that it wasn’t included).

I think fast food works like this too. Their mark-ups on food are very low (given the many substitutes and high competition there), but, they make most their profits on drinks (i.e. the peripherals).

2 David Hecht June 12, 2009 at 7:54 am

One possible explanation for the lack of low-priced HDMI cables in big-box stores is that they are uneconomical to stock. Certainly it is the case that they are not nearly so economical to stock as the high-priced versions. And the competition from online vendors is less because the shipping costs are large as a fraction of the cost of the item (unless you are an Amazon Prime sorta guy, in which case you are unlikely to be buying consumer electronics in a big-box store to begin with).

3 Billy June 12, 2009 at 8:04 am

A lot of people actually think Monster Cable (and other overpriced cables) actually do make a significant difference. They’re a big name in the audio world as well, though usually mocked by those who know better.

For example, the following link
http://www.engadget.com/2008/03/03/audiophiles-cant-tell-the-difference-between-monster-cable-and/

“Audiophiles can’t tell the difference between Monster Cable and coat hangers”

Gets me thinking about Galbraith more than anything

4 John June 12, 2009 at 8:40 am

All the guys I know who worked at Best Buy when they were younger said that they had fat margins on monster cables. They got paid extra to sell ’em.

5 Miffed AsWell June 12, 2009 at 9:09 am

I think that Pat has got it: “watch the TV in its glory that day”

Some of us fools do all of the research to find the best model flat-screen television, spending, say, an hour or two on the Internet doing so; then, having that knowledge, go buy that competitively-priced TV at Best Buy…and the player.

oops! Am I going to go home with that TV and player alone? How will I tell my little Sponge Bob lover that he has gotta wait another week for a cable from Amazon?

peer pressure

6 Andy June 12, 2009 at 9:10 am

Well component doesn’t “really” support 1080p, so if you want that you have to use HDMI. And *yes* it is possible to tell the difference between 720p and 1080p in many cases.

7 Andrew June 12, 2009 at 9:15 am

I bought a set of speakers from an unnamed (recently defunked) chain. The salesperson got so indignant that I didn’t want his crappy cables and would be so foolish as to risk my speakers without his extended warranty plan that I nearly left the store without them. However, the store is out of business and my speakers are still getting funky.

8 David Meese June 12, 2009 at 9:22 am

I should add that in my experience with the audiophile world, Monster cables are considered crap as well. The really good ones are brands that most people have never heard of.

9 mark June 12, 2009 at 9:30 am

cosco sells HDMI cables for a reasonable price.

Ironically, as does the apple store – for 19.95.

10 johnny June 12, 2009 at 9:35 am

“I couldn’t bring himself to pay that huge markup at Best Buy. I got my cables at http://www.bluejeanscable.com/. I just checked their site and you can get a 6 foot cable for under $20″

Brendan, do yourself a favor next time and get your HDMI cables from Amazon, Alex linked to it above. Less than a buck for a 6 foot cable.

11 js June 12, 2009 at 9:39 am

I think it’s mainly that the margin on the cheap cables isn’t worth their stocking it. It’s like the old game of lemonade stand. If you make 60 cents on a cheap cable vs 30 dollars on a monster cable, you have to sell 50 cables to make the same profit. So having the cheap alternative available, if even one cable is sold, is a huge mark against your profitability since you lose the higher priced sale. And since people who just bought an expensive blue ray player want both the best picture available, and want to take it home and fire it up immediately, they’re inclined to just pay for it.

12 Leigh Caldwell June 12, 2009 at 9:48 am

It’s especially interesting in comparison with a well-known behavioural result: people are willing to travel 15 minutes across town to save $25 on a $100 cable, but would not travel 15 minutes to save $25 on a $1000 Blu-ray player. Rationally, 15 minutes is either worth $25 or it’s not. But people tend make the comparison proportionally instead of in absolute terms.

On this result, it should be the players that are overpriced and not the cables! But the real situation is a bit more complicated.

I believe that the real effect arises in the limited attention span of consumers. The price of the player includes a discount which is really a marketing expenditure, to attract people into the store. Once they get there and become aware of the need to buy cables and other consumables, it becomes rational for them to spend more money in situ rather than expending further time on searching for an alternative supplier. The store still needs to make sure it at least has a marginal profit from the player itself, otherwise it will lose out from savvy shoppers who will go there just to buy the player. But to make a net profit overall, it needs to be able to sell higher-margin products too.

Like in many cases, the rational overall behaviour if people are able to simultaneously take into account all relevant factors (player, cable, transport and delivery costs etc) is different from the path-dependent behaviour that arises from making the optimal choice at each decision point, when only part of the information is available.

13 neil June 12, 2009 at 9:52 am

In Ireland they are all pretty cheap, I bought one about a year ago for around 14 euro and I’ve never seen cost dramatically more

14 Dumitru June 12, 2009 at 9:56 am

Geeks buy cables from http://www.monoprice.com

And it’s obviously simply more profitable for BB to stock only expensive cables on which they have a gigantic margin and to simply pretend that cheaper cables do not exist.

15 Pat June 12, 2009 at 10:00 am

Rob, I did the same thing. I knew ahead of time that I would crack and buy the expensive cable rather than wait a few days

16 Orphan Cow June 12, 2009 at 10:04 am

you’d be better off not buying anything from best buy

17 Chris June 12, 2009 at 10:10 am

I worked at OfficeMax when I was in high school. One thing that was neat about the job was that I could use the back-office computers to look up the gross profit on any product we sold. Using the computers, I could see that OfficeMax made an 80% profit margin on USB cables and a 0-5% profit margin on printers. Other stores in the area charged similar prices on cables. I once asked myself the same question Alex is asking: why isn’t competition driving the price of the product down?

My theory was that customers spend a lot of time and effort researching the prices of high-ticket items, (printers, DVD players, etc.) but very little time researching the price of the add-ins (the cables, toner cartridges, etc.). Because of this, the stores can use the high-ticket items as a loss-leader to get customers into the store and then make the lion share of the profit on the add-ins.

18 Andy O. June 12, 2009 at 10:13 am

It is the same with other cables. Internet Cat-5 or Cat-6 patch cables, printer cables… all the retail brick and mortar shops have ridiculously high prices on these. It is a captive audience at its best. One buys the printer, the TV or the computer and he or she wants to use it immediately. I don’t know why a chain wouldn’t break this model — they would have runaway customer loyalty. It is like having reasonably priced food at a ballpark or at the turn at a golf course. In most cases, you feel as if you are being completely taken advantage of — in the rare case where these items are priced reasonably, you feel so much better.

A little searching on the web will yield even dramatically lower prices than found on Amazon.

19 Noah Yetter June 12, 2009 at 11:16 am

The correct place to get cables is monoprice.com, just FYI

20 tp June 12, 2009 at 11:27 am

Monoprice is your HDMI cable friend. It’s all about markup.

$7 for a 4 foot cable. You won’t find a better deal anywhere.

21 Jim Hu June 12, 2009 at 11:46 am

This probably isn’t true, but I can imagine that Amazon could use HDMI cables as a loss leader. Given the large fraction of the cost that goes to shipping, non-prime customers might bundle the purchase of a cable with buying other products to get free shipping.

22 Dan H. June 12, 2009 at 12:06 pm

Getting back to the economics of it, part of it is that Monster has tried to create a Veblenesque good – one whose value is attained partly from the fact that it’s expensive. You might notice that Monster cable is not drab and gray. It’s colorful, it looks very high-tech, it’s got space-age looking connectors on the ends. It’s meant to be seen. People who don’t know better feel good to have spent that kind of money on their cables, and when others see their systems they’re more impressed. It’s the same reason a Gucci purse might be $1,000, and it certainly isn’t 20 times better in raw quality than a $50 leather purse from Wal-Mart.

Education and the internet is destroying that model over time. Once the general public realizes that having Monster cables makes you look stupid, the cachet value will plummet.

But perhaps the biggest factor is the huge incentives stores get for carrying Monster and other high-end cables, and not carrying the cheap stuff. Not only are the store markups insanely high, but Monster tends to offer SPIFFS (basically financial gifts) to salespeople who sell their cables. This lowers the effective labor costs for the stores that carry Monster, and puts a lot of pressure on the management to not bring in lower priced cables. If a store brings in Monoprice cables and markets them fairly, they won’t sell a single Monster cable, and not only will their profits decline, but their salespeople will see a major hit to their incomes.

You could make a fair claim that Monster is engaging in anti-competitive practices by doing this, I suppose.

Monster is also highly litigious, suing anyone who threatens their business model if they can dredge up even the slightest justification for a lawsuit. This prevents a lot of reporting on the nature of the Monster Cable ripoff.

Finally, audiophiles are a strange bunch. Monster cable is but one of many incredible ripoffs and snake-oil products in the audiophile industry. This is an industry where people spend thousands of dollars on AC power cords and low-impedence speaker wire, and buy into snake-oil products like cables dipped in liquid nitrogen to ‘align their molecules’ or $500 plastic feet to hold their cables a few inches off the ground to prevent ‘ground effects’.

I have a theory about this – back in the analog days, hi-fi was a real hobby. People built their own gear, cleaned their phonograph needles, balanced their tonearms, changed their tubes, etc. It could be a fussy, technical hobby like HAM radio or model trains – highly appealing to certain types of people. Along comes digital, and everying just plugs together and works. But the hobbyists weren’t happy with that, so they came up with all sorts of justifications to keep tinkering, upgrading, and optimizing everything. They’re a ripe target for snake-oil salesmen, and the nature of the audiophile experience (seeking vanishingly small, non-measurable improvements in sound) keeps the snake-oil people immune from objective tests that would prove them to be charlatans.

BTW, if you want to start an instant fight, go on to any audiophile board and ask if a certain product has had double-blind or ABX testing done to prove out its advantages. This obvious and reasonable scientific approach is so hated in that community that many audiophile boards have an outright ban on any discussion of double-blind testing.

23 John Thacker June 12, 2009 at 12:36 pm

So, the “idiot tax” hidden fee model. With the recent credit card bill, credit card companies were boldly asserting that they followed a variation of that. “People who stupidly run a balance and run up fees, they allow us to offer much better rewards and cash back than we would otherwise. If you restrict our fees, we won’t be able to subsidize the good customers.”

24 BoscoH June 12, 2009 at 12:51 pm

Alex, I had the opposite experience of Tom above. A $40 cable my grandfather bought from WalMart before I knew about the scam did not fit snugly enough in the TV HDMI port and slipped out occasionally. I picked up a 5 pack of cables for $15 on Amazon and haven’t had a single problem with them.

Someone else mentioned that the cheap cables might not be HDCP compliant. Balderdash. They packaging will usually indicate which level. Read the descriptions on Amazon. They’ll tell you too.

All that aside, Best Buy is an insult to the intelligence of anyone with an IQ over 87. If you have to see your electronics in person, leave your wallet in the car and go check them out. But buy from Crutchfield.com. You can’t beat their price/service on non-grey-market goods. Still, buy those cables on Amazon!

25 Chris June 12, 2009 at 1:14 pm

@Dan H: Kickbacks to salespeople, anticompetitive? Perish the thought. How the heck do they get away with that?

26 David June 12, 2009 at 1:21 pm

Avoid Monster at all costs: http://www.bufferurinal.com/2009/04/because-monster-cable-belongs-in-urinal.html

As far as cables, try places on the Internet for almost any cable. Those $30 USB cables at Best Buy? $3 on the Internet. Best Buy had the audacity to charge over $100 for HDMI cables when they first came out. Try MonoPrice or PartsExpress instead.

27 Slocum June 12, 2009 at 1:55 pm

If you are the type you plans every detail in advance, add up the cost of all your planning and research to see what implied wage rate you are paying yourself.

You’ve got that backwards, I think. For Internet shopping, even better than the low prices, is that you can find what you want so quickly and have it directly delivered to your door. A trip to Best Buy, on the other hand, is at least 45 minutes (including driving both ways and time in the store). For the same reason, when you figure your time even at a low rate, it’s generally cheaper to buy used books online than go to the library.

28 EorrFU June 12, 2009 at 2:04 pm

Around 2000 I worked at a computer retailer that has since gone out of budiness. As a high school student the employee pricing attracted me because we got the products at cost. This worked well as an employee pricing structure because the big box items like computers or game systems were marked up less than 5%. I remember when the PlayStation to cam out it cost $299 dollars, cost was $298. Yet when you wanted to buy peripherals they were marked up on average 30% to 50%. The worst were cables. I remember a printer cable (the old style before usb) had a retail price of $19.99. When I looked up the cost of said cable it was $.87 which means they sold it at a 2300% markup. All the stores did this. It was a huge profit generator for the company.

29 Ross Williams June 12, 2009 at 2:40 pm

I’ll vote for hyperbolic discounting as the main factor involved in this. People want to use their blue ray player today, not wait in the mail three days for a cable. BTW, go to amazon and you can get a cable for $3. Don’t worry about name brands, digital is digital, either the bits get there or they don’t.

30 Enlightenment June 12, 2009 at 3:27 pm

$4.02 USD

High Speed HDMI 1.3a Category 2 Certified Cable 28AWG – 8ft w/Ferrite Cores (Gold Plated Connectors) – BLACK

http://www.monoprice.com/products/subdepartment.asp?c_id=102&cp_id=10243

31 babar June 12, 2009 at 3:45 pm

does nobody but me see the irony of shopping for cables over a wireless internet connection?

32 Mike C June 12, 2009 at 4:00 pm

I buy almost all of my cables off the internet from stores like monoprice, which have pretty much every cable under the sun for less than 5 dollars. I’ve never had a problem.

I would agree with the poster above that most likely it’s all about time preference rates. I know I am MORE than guilty plenty of times paying extra for something to have it that day rather than wait online. When you factor in that it probably “costs” (in terms of time) more for the average Best Buy customer to go online and search, who knows, sometimes that more expensive cable might just “cost” less.

33 Brock June 12, 2009 at 5:06 pm

My cousin is a floor manager at a Best Buy, and we have spoken about this. The “idiot tax/watch-TV-today” model is correct. Best Buy doesn’t make a lot of money on the TV or BR-players; all the profits come from the warranties and cables.

HOWEVER, if all you do is not buy the cable and warranty you are missing a big chunk of the IQ subsidy. If you pile the cables and warranty cards into you cart and ask for a break on the TV you’ll often get one. You can just return them the next day.

34 sk June 12, 2009 at 7:33 pm

You can get a HDMI cable at frys for about $7 here in San Diego.

35 Dave June 12, 2009 at 11:13 pm

Yeah, pretty clear that they sell high margin HDMI cables to customers who want to enjoy their new toys immediately, as js mentioned. These customers didn’t plan ahead with the cheaper cables and value immediate gratification from the bluray purchase more than the money they’d save while waiting for the shipment from Amazon.

36 TruePath June 12, 2009 at 11:27 pm

I suspect a large part of the benefit of a high-end video/audio setup is simple appreciation of how ‘good’ it is (relative to your friends?) and an enjoyment of improving your setup. So $100 cables provide the customer the chance to make his setup $100 ‘better’.

Of course this only works as long as the customer isn’t directly told the more expensive cables don’t make a difference. If best buy stocked $10 cables and $50 cables plenty of customers who might otherwise be happy buying $50 of pointless shielding would ask employees about it and get directed to the cheaper option.

37 mickslam June 13, 2009 at 9:28 am

What does it mean for Alex’s theory when you can find a blu ray player for the same price or better on Amazon?

38 Vin June 15, 2009 at 12:41 pm

Monoprice.com is your best cabling friend. I’ve used them and never had issues. They get rave reviews on major AV forums from true AV-philes. Monoprice is the only way to go…

39 Tyler June 16, 2009 at 12:18 am

I still think the economics of bottled water are worse than HDMI cables. As far as I know, you can’t get any HDMI cables for free, but my tap is still spewing the wet stuff out at no cost.

40 Ken July 20, 2009 at 6:07 pm

There really are differences among ANALOG audio interconnects and speaker cables. But for digital such as HDMI it’s largely bull. I’m going to buy a 3 ft high speed HDMI cable for like 7 bucks.

41 Greg August 13, 2009 at 11:17 am

HDMI Cables are more expensive at retail stores because of high commissioned sales reps, money spent on marketing, packaging, etc. The fact is, they are all going to perform equally as long as the cable is working.

HDMI Cable

42 TechGromit May 26, 2010 at 4:53 pm

Quoted: “I think it’s mainly that the margin on the cheap cables isn’t worth their stocking it. It’s like the old game of lemonade stand. If you make 60 cents on a cheap cable vs 30 dollars on a monster cable, you have to sell 50 cables to make the same profit.”

So you stock the cheap cables that cost you 60 cents each, sell them for $50.60, make a $50 profit, instead of a $30 profit off of monster cables. Have the $100 monster cables right next to them, I say you’ll have trouble keeping the “cheaper” cables in stock.

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