The Undercover Economist
The Undercover Economist

The Undercover Economist

if there’s a profitable deal to be done between somebody who has something unique and someone who has something which can be replaced, then the profits will go to the owner of the unique resource. (Location 213)

Bargaining strength comes through scarcity: settlers are scarce and meadows are not, so landlords have no bargaining power. (Location 227)

Note: Bargaining strength comes through scarcity

The willingness to pay top whack for convenient coffee sets the high rent, and not the other way around. (Location 278)

How can we tell the difference between things that are expensive because they are naturally scarce, and things that are expensive because of artificial means – legislation, regulation or foul play? (Location 369)

Every day people all around us are trying to avoid competition or reap the rewards of others who have succeeded in doing so. (Location 424)

Mafia groups often get involved in legitimate businesses, such as wholesale laundry, which can make big profits only if entry is deterred. One way to deter entry is to threaten rivals. This is fairly easy, since laundry trucks and laundries themselves are much easier to find and damage than a bag of cocaine. It’s even easier to threaten customers. Fans of The Sopranos know that the Mafia provides overpriced laundry services to restaurants as a way of extorting money. The reasons are clear enough: restaurants are particularly vulnerable to extortion because it doesn’t take much disruption to put off customers, while collecting the extorted cash by providing an expensive service makes the protection money tax deductible. Profitable businesses usually attract competition, but in this case the competition reckon that there must be a safer way to make a living. (Location 463)

Note: The mafia ran laundry services, threathening competitors to maintain a monopoly and keep prices high

The trade union is designed partly to bargain collectively, but partly to block too much entry into the profession. As mass-mechanisation spread in the nineteenth century, the incentive to unionise was considerable. Workers were a plentiful commodity: all gathered together in urban concentrations, easily substitutable for each other. Without unionisation, wages could be kept very low. With it, competition could be excluded and wages would rise – for the lucky ones inside the union. In the United States, trade unions were kept at bay by the law: anti-trust laws designed to prevent collusion between large companies were also directed against unions. But as the political climate changed, these laws were ruled inapplicable and trade unions grew in strength. If trade unions were especially successful, then we might expect unionised industries to enjoy enormous salaries, and there have been times and places – such as the American car industry in the 1960s and 1970s – when this has been true. But trade unions face several obstacles to this kind of success. When unions are perceived as making unreasonable demands, causing prices to rise to a level that’s deemed unacceptable by a large portion of the public, the public in turn puts pressure on politicians to regulate the unions. Sometimes the unions have their scarcity challenged by international competition, as in the case of American car workers, who enjoyed excellent wages and job security until the Japanese car industry used more efficient methods and started putting American manufacturers under pressure. (Location 477)

Note: Trade unions bargain collectively for employees and prevent others from entering the profession

Some blame resistance to immigration on the racism of the unedu cated. An alternative, and more convincing, theory suggests that everybody is acting in his own self interest. New workers are good for people who have assets that become relatively scarcer, whether those assets are meadows or degrees; but it is understandable if new workers are loathed by established ones. (Location 522)

Tags: immigration

Note: People act in their own self interests regarding immigration

fair trade coffee allowed Costa to find customers who are willing to pay a bit more if given a reason to do so. By ordering a fair trade cappuccino, you sent two messages to Costa. One message may or may not have interested them: ‘I think that fair trade coffee is a product that should be supported.’ The second message is the one that they were straining to hear: ‘I don’t really mind paying a bit extra.’ (Location 590)

Note: Fair trade premiums enabled costa to charge price insensitive customers more

By charging wildly different prices for products that have largely the same cost, Starbucks is able to smoke out customers who are less sensitive about the price. Starbucks doesn’t have a way to identify lavish customers perfectly, so it invites them to hang themselves with a choice of luxurious ropes. (Location 616)

The important concept is this: when I raise the price, how much do my sales fall? And when I cut the price, how much do my sales rise? Economists tend to call this ‘own-price elasticity’. Personally I think ‘price sensitivity’ is a bit more descriptive. (Location 650)

Note: Price elasticity refers to the flucuation in demand with price changes

So here’s my advice: if you want a bargain, don’t try to find a cheap store. Try to shop cheaply. Similar products are, very often, priced similarly. An expensive shopping trip is the result of carelessly choosing products with a high mark-up, rather than wandering into a store with ‘bad value’, because price-targeting accounts for much more of the difference between prices than any difference in value between one shop and another. (Location 762)

Note: DIifferent shops will price target different items. Certain items considres the baics will be cheap whilst others will have large profit margins

The typical restaurant has less scarcity power than a cinema because in most towns there will be a variety of alternatives. Whenever there is little scarcity power, prices need to reflect costs. Yet even the most ordinary restaurants seem to charge a lot for wine. A better explanation is that one of the big costs in a restaurant business is table space. Restaurateurs would therefore like to charge customers for dawdling, but because they cannot do that, they charge higher prices for products that tend to be consumed in longer meals: not just wine but also starters and desserts. (Location 818)

The shoddy quality of most airport departure lounges across the world is surely part of the same phenomenon. If the free departure areas became decent places to spend time – last time I went through Heathrow’s brand-new Terminal Five, I couldn’t find a working power socket for my laptop – then airlines would no longer be able to sell business-class tickets on the strength of their ‘executive’ lounges. (Location 846)

Tags: pricetarget

Note: Businesses purposefully make conditions bad o that those who can afford to upgrade do s .pricetarget

In the supermarkets, we see the same trick: products that seem to be packaged for the express purpose of conveying awful quality. Supermarkets will often produce an own-brand ‘value’ range, displaying crude designs that don’t vary whether the product is lemonade, bread or baked beans. It wouldn’t cost much to hire a good designer and print more attractive logos. But that would defeat the object: the packaging is carefully designed to put off customers who are willing to pay more. Even customers who would be willing to pay five times as much for a bottle of lemonade will buy the bargain product unless the supermarket makes some effort to discourage them. So, like the lack of tables in standard train carriages and the uncomfortable seats in airport lounges, the ugly packaging of ‘value’ products is designed to make sure that snooty customers self-target price increases on themselves. (Location 853)

Note: Supermarkets have poor branding on their own range of goods so that more affluent customers buy the more expensive goods .pricetarget

IBM’s ‘LaserWriter E’, a low-end laser printer, turned out to be exactly the same piece of equipment as their high-end ‘LaserWriter’ – except that there was an additional chip in the cheaper version to slow it down. The most effective way for IBM to price-target their printers was to design and mass-produce a single printer, then sell it at two prices. But of course to get anyone to buy the expensive printer they had to slow down the cheap one. It seems wasteful, but presumably it was cheaper for IBM to do this than design and manufacture two completely different printers. (Location 872)

Tags: pricetarget

Note: .pricetarget

That’s not coincidence. Services and convenience products are the most fertile grounds for price-targeting strategies, because they don’t leak. The really great pricing tricks take place on airlines, in restaurants and cocktail bars (not many bookshops have a ‘happy hour’), in supermarkets and at tourist attractions. (Location 892)

Tags: pricetarget

Note: .pricetarget

some companies have scarcity power and can set prices that are far above their true cost, which is where they would be in a competitive market. This is why economists believe there’s an important difference between being in favour of markets and being in favour of business, especially particular businesses. A politician who is in favour of markets believes in the importance of competition and wants to prevent businesses from getting too much scarcity power. A politician who’s too influenced by corporate lobbyists will do exactly the reverse. (Location 1265)

Note: Competition is important to ensure companies dont have too much scarcity supply and cant set prices too high

three big problems are called ‘market failures’: scarcity power, which we discussed in Chapters 1 and 2; missing information, which we will discuss in Chapter 5; and the subject of this chapter, decisions that have side effects on bystanders. Economists call the side effect an ‘externality’ because it lies outside the original decision, for instance, the decision to buy petrol. Whether because of scarcity power, incomplete information or an externality, when the economy fails to live up to the idealised ‘world of truth’, trouble is in store. (Location 1294)

Note: Scarcity power, missing information and externalities are three problems with the market

it’s almost certainly true that anyone taking a trip in a car is benefiting from driving. But they are doing so at the expense of everyone else around them – the other drivers stuck in traffic, the parents who dare not let their children walk to school, the pedestrians who risk their lives dashing across the street because they are tired of waiting for the lights to change, the office workers who even in the sweltering summer cannot open their windows because of the roar of the traffic. (Location 1308)