Tim Harford's Trust Me, I'm an Economist Part 2: Shopping

Yes we have seen how economics can be a useful tool in the quest for nookie. Now let us see how it helps us in our shopping.

Now you would think that a topic like shopping fits in right with our idea of economics. Economics deals with money, right? So exchange of money for goods would be the perfect area to tell us about how economic analysis works. Stuff we get at the store and the money we pay for it, economics in a nutshell.

Or so you would think. But you are in the company of Tim Harford, one of the most celebrated economists in the world and he is hear to show you that economics can be used for practically any aspects of life. Harford asserts that the main purpose of economics is to not to look at the GDP or inflation and what not, but to study behavior, both individual and collective.

In the second episode of Trust Me, I'm an Economist, Harford takes on the idea of how to deal with shopping. Or in other words, how do big business ends up gouging the last bit of cash from your pocket and how you, the average consumer, enable them to do so.

So, this guy is just a glorified shopping consultant, you say. All he's telling me is how spend my money. Huh! I can do a better job than he can, I don't have to pay him to tell me anything!

Yes, but if I may suggest some patience? In dealing with consumer behavior and how big business succeeds in making them pay top dollars for their services, Harford poses a very interesting question: how do you get turkeys to vote for Christmas?

This is what he calls the “self incriminating” aspect of consumer behavior. How does big business gets the maximum amount of cash out of your pocket? The answer is simple: you tell them how by buying their product!

The first thing to do, Harford says, is to establish principles. There is a distinction between price of something and it's value. And the way a large corporation would like to ascertain how much value you place on something so that they can extract maximum price from you is you behavior. You tell them exactly what they want to know.

Just a simple trip to your local yuppie coffee shop demonstrates this principle. You could get a simple cup of coffee for $1.70. But if you choose a hot chocolate with marshmallows and cinnamon sprinkling, that might set you back a good five dollars plus tax. And the coffee shop loves a customer like that, not because they are willing to pay top dollar but because they reveal so much information about their preferences to the seller. They are going to use this information about your behavior to try and maximize their profit out of you. They will also cater to the guy who wants a simple cup of coffee.

But the chocolate drinker with all the frills is a very distinct type to consumer compared to the simple coffee drinker. Being able to charge both of them different prices is one of the strategies of profit maximization. This strategy is called price discrimination or, as Harford calls it price targeting.

A curious aspect of the electronic goods market seems to be the mass market paradox. In order for a product to be more appealing to a wider audience, companies often downgrade their products. This phenomenon is called “crippleware”. For example, Intel took their premium chip and disabled some parts of it to sell at a lower price. The low quality product cost more to produce but sold at a fraction of the original price.

You can buy a Sony mp3 player or an iPod but the heavy users of these products will tell you that the batteries cost the earth. Printers are cheap but the ink cartridges are very expensive, similar to cheap razors and expensive blades. Users to value the product most would pay more to maintain it. This is called quantity discrimination.

Well, looks like odds are stacked against the average consumer. So how to fight back? Be aware of how you are signaling to the seller with your behavior. Make sure that you are aware of what you are getting in exchange is worth the value. And most importantly, it would not hurt to go for the cheaper prices!

But then again, some prices are worth paying.