Foreign Guitars and Price Discrimination

So, I was thinking about guitars the other day. I got to thinking about how imported guitars are generally perceived as inferior quality compared to guitars made in the USA. Now, as an econ major, I can state quite confidently that there is no reason that a guitar made overseas should necessarily be of worse quality than one made in the US solely by virtue of the fact that it's foreign made.

Now, it may be the case (and I believe it is, in fact, the case) that, on average, foreign made guitars are lower quality than American-made guitars, but this isn't directly because of which side of the American border they're made on. There's nothing inherent about Americans that makes them better at building guitars than Koreans, or Mexicans, or the Vietnamese, etc. I suspect that American guitar makers (luthiers, to use the technical term) tend, on average, to be more skilled at guitar-making than foreign guitar makers, but this isn't because they're American. You could, undoubtedly, find and/or train perfectly talented luthiers in other countries, and they'd be able to produce guitars cheaper, because of the relative abundance of labor* in that country.

*note that the glaring flaw in my analysis here is the assumption that the labor required for building good guitars is either virtually the same as the labor required for building cheap guitars, or that it's different but both kinds of labor are relatively abundant in the other country. More on this later.


So, to try to illustrate my point, consider two guitars: the Fender Standard Stratocaster and the Fender American Standard Stratocaster. They're two variations on the same model, mainly distinguished by the fact that the latter is, unsurprisingly, made in America, instead of Mexico, like the former. The Standard Strat retails for $399.99, and the American Standard for $999.99. Now, there are concrete things, other than the country of manufacture, that make the American Standard Strat a better guitar. It has better pickups, better paint options, a better tremolo system, better hardware, better wiring, etc. However, there is no reason a guitar identical to the American Strat, with all the improved options, couldn't be made in Mexico. And if it were made in Mexico, it would be cheaper. AFAIK, and here's where the above asterisk comes into play, there is nothing about using the improved materials and hardware that requires a different sort of labor. So, in other words, Fender could make a guitar identical to the American Strat but make it in Mexico, and it would only cost, say, $600 as opposed to the $1000 they currently charge. Why don't they do this?

My best guess is price discrimination. Price discrimination is when a firm that faces a downward sloping demand curve tries to get different consumers to pay different prices based on what they're willing to pay. For example, let's say that a firm sells a product, and if they charge $100, they'll be able to sell 50 units of that product, and if they charge $50, they'll be able to sell 200 units of said product. Clearly, if these are the only two prices they can charge, they'll charge $50, because that generates a revenue of $10,000, as opposed to the revenue of $5,000 that charging $100 generates. However, if they charge $50, they're charging every customer that price, and there are 50 customers who were willing to pay $100 per unit (assuming each customer buys one unit) but are now only paying $50 per unit. If the firm could somehow charge these 50 customers the $100 they're willing to pay, they'd generate a revenue of $12,500. However, this is easier said than done, because it requires identifying the customers who are willing to pay more than $50 without actually going right up and asking them, because of course no one is going to come out and say how much they're willing to pay. A variety of firms in a variety of industries have found ways around this.

I suspect Fender is engaging in something similar. They're segregating the market into consumers looking for a low price guitar, and consumers willing to pay more for quality. By producing their highest quality guitars in America, they're charging consumers who want to pay more for quality, and are presumably willing to pay more, an additional surcharge for an American made guitar, while lowering the price on lower quality guitars (by having them made overseas) for consumers who are more concerned with low cost. This, I believe, is the reason that American-made guitars tend to be higher quality; not because Americans do a better job of making guitars, but the nature of the market means it makes sense to produce higher quality guitars in America.

(NB. It is, strictly speaking, inaccurate to refer to this as "price discrimination", because that refers to charging different groups of people different prices for the same product, which clearly Fender isn't doing. However, I feel that the basic idea is similar; at the very least, it made me think of the idea of price discrimination.)