According to Tim Harford this is what economics is about. In his book titled The Undercover Economist, Harford provides the inside scoop on how the puzzles of everyday life are part of a system, what we call “economies”, that endeavors to understand people – individuals, partners, competitions and members of societal organizations alike.
Recently, I stayed at a Hilton Hotel in New Orleans for a conference and was astounded at the high prices of everything. The meals in the Hotel restaurant extremely expensive – about $20.00 for a buffet breakfast, for example. I had to purchase the wireless Internet service from my room at the tune of $12.95 per day or $58.00 per week (the cheap plan/slower connection). Finally, I tried to go see if I could use the gym and found out that they charged $12.00 per day or $20.00 for two days – but they had to be consecutive.
Mamma mia! As we say spontaneously at this outrageous listing. No wonder Paris Hilton sits on an empire. If you’re like me, you’d like to dig a little deeper and figure out what makes this system we call economics tic. Thanks to Harford’s book and his articles for the Financial Times, I now have a better idea.
Who Pays for your Coffee? In this opening chapter of the book, you will discover the relationship between scarcity and bargaining power. While you learn that the person in possession of the desired resource does not always have as much power as one would think, the high price of some coffee is indeed determined by the location of the shop. Have you paid attention to where Starbucks shops are located?
What Supermarkets Don’t Want you to Know is that pricing varies for those who are willing to pay more, rather than those who can afford to do so. How can that be? Groups self select to do so by going to a certain store. Think about what you’re willing to pay for organic food at Whole Foods, for example. And here’s the in store trick, see if you notice it next time you’re shopping: the organic produce of one kind, for example garlic, is placed right next to the regular onions, not the regular garlic. The harried shopper will need to do a little more work to compare prices.
And here’s the self selection principle –- what Whole Foods patrons consider basics is quite different from say what Safeway stores customers consider basic.
And here’s the ultimate lesson on sale prices: they are designed to uncover the bargain hunters from those in need of specific products from those who are shopping with a specific list in mind.
Supermarkets’ price targeting strategies work because the patterns they use for special offers vary so shoppers cannot predict what will be discounted -- it’s the unpredictability either way, down or up, that prevents us from planning ahead and allows the stores to make a profit.
When I first picked up Harford’s book I thought I would discover all the tricks and get upset at the price-targeting strategies. As I continued reading, I found out many reasons why that was actually good. From game theory to cross-town traffic to the world of truth, Harford covers a lot of ground in an easy style with plenty of examples.
My takeaway, and the lesson intended in the book –- economics is about people. It’s about you, and me, and how we operate in the context of our lives. Who wouldn’t want to discover that? [disclosure: I received this book as a bonus gift from Random House with a copy of Made to Stick. Thank you, Debbie.]