The Alchian–AllenTheorem is a lesser known but still very interesting economic theory. It states that when a fixed cost is added to substitute goods, the more expensive one becomes relatively less expensive, and so people are likely to increase consumption of the higher quality good. I think the best way to illustrate the theorem is with examples.
Suppose there is a country that makes wine. They can make good wine or mediocre wine. Mediocre wine costs $5 to make and good wine costs $10. Suppose that shipping costs to foreign countries is $5 per bottle. The price of the wine in foreign countries is $10 for mediocre and $15 for expensive. The ratio of prices at home is 1:2, but abroad it is 1:1.5. Abroad, the more expensive wine is relatively less expensive, meaning foreigners will consume more of the expensive wine. Similarly, if shipping costs…
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