January 5, 2008

Hidden Price Discrimination (Chapter 1-5 Highlight)

In reading the first five chapters of Harford’s book, what really appealed to me was his ability to explain common queries about different parts of life with such simple economic analysis. Granted, there is more to the stories Harford tells, but the underlying causes of the things he goes into are readily explained using fairly easily understood concepts.

My favorite chapter was “What Supermarkets Don’t Want You to Know”. Every time I go to a supermarket or any store with a wide variety of similar items, I’m always a little suspicious about the justifications for charging more for certain things and whether or not it’s to simply account for extra cost or to exploit people who don’t want to bother investigating. Reading the chapter made me feel a little better about being paranoid. Harford’s explanation of how companies price discriminate by offering alternatives at different prices. When one buys a cup of coffee and adds to the original product with cream or sugar or frothy milk, usually they are too busy or too apathetic to inquire as to whether an extra shot of some flavoring should really cost an extra 20-50 cents.

What was especially fascinating in the supermarket chapter was how supermarkets purposefully delineate between “quality” brands and “generic” brands such as pop-tarts versus toaster pastries or dr. pepper versus dr. thunder. One of my favorite things in life is searching for the most absurd looking knock-offs of popular products, mocking them, and then indulging in them with my friends because we are admittedly too lame to think of better things to do. While I acknowledged the sharp differences in presentation (clever slogans and cartoon characters with bright colors everywhere in high end products as opposed to a box that looks almost ridiculous in comparison with its shoddy attempts at eye-catching colors and pitch-characters) I never considered that it was on purpose. To identify consumers willing to pay more for an item by putting them off the cheaper option through boring presentation is something that never considered to me. However, like all the other examples Harford gives, it made a lot of sense. It was more obvious with the coach/first class distinctions on planes.

The ability of companies to price discriminate without openly stating it and maximize profits through it is a very intriguing concept and one that Harford not only explains through very simple economic terms but also stimulates interest for further investigation in. Reading that particular chapter has possibly made me more paranoid about how much I should be paying for any given item I wish to consume.


Douglas Loeper said...

Enjoyed reading this bit Jake (next time you and your friends get together to have a mock the produce party let me know I'll bring the Cheery O's!).

As I read your paper I thoguht of the portion Harford wrote about in the book regarding the coffee example in the world of truth where you walk out of the coffee store with a 92 cent cup of coffee because you found out exactly what it cost them to create and that other alternatives were available. I related this to your questions in your article about should flavoring really cost an extra 20-50 cents and why quality and generic brands warrant such a price difference.

And then I remembered something Professor Brock shared with us in Econ 101. Don't blame the people they're just responding to incentives (not saying you're blaming anyone, it just made me think of this). We choose to participate in the economic scheme so is the paranoia warranted? Can we blame them they're just trying to make a buck? Can they blame us we're just trying to save a buck? Just some thoughts, but great piece!

Anonymous said...

Perhaps I should have mentioned I was describing my paranoia with my tongue firmly planted in my cheek. I'm not one to get all huffy about companies and their profits. It's the goal of any firm to maximize profits, I was just astonished that I didn't consider some of the tactics they use in profit maximization before I read Harford's book.