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 Daniel Fortunov's Blog » Book Review: The Undercover Economist

 0 Comments- Add comment | Back to Personal Blog Written on 01-Mar-2010 by asqui

The Undercover Economist book cover Is the coffee in train stations expensive because the coffee retailers are exploiting the desperate and barely awake commuters who are "price-blind"? Not really. The reason the coffee is so expensive is that the retailer needs to pay the extortionate rent charged by rail company, which owns the train station and therefore has a monopoly on the first land those coffee-deprived commuters set foot on. It's that rail company, with its scarce resource, that makes the extra profit from your expensive coffee, not the coffee retailer.

Tim Harford is the Financial Times' Undercover Economist, and his book of the same name applies economic theory to explain everyday curiosities, in a similar manner to Freakonomics. Also like Freakonomics, The Undercover Economist is a fascinating read with no economics pre-requisites, which should appeal to any non-economists.

Why are airport departure lounges so crappy and uncomfortable? Is it because the airport is struggling for money and can't afford more comfortable chairs? Perhaps. How about Tesco own-brand products, with their plain red and blue packaging; is the cost of a few more colours a limiting factor in the design of this packaging? In truth, the regular departure lounges have to be sufficiently bare and uncomfortable to motivate the business and first class passengers to fork out for their drastically more expensive plane tickets (and the associated departure lounge experience). It's not that better product design would break the bank for Tesco’s own-brand vegetable soup, just that better design would make the customer less likely to fork out for the more expensive alternative option.

It is important for retailers to keep the “premium gap” open, and not let the budget options trail too closely behind the premium option. If the premium gap gets too narrow, then some premium customers will “leak” to the budget option when they decide it’s good enough for them.

This is the sort of analysis you can expect from The Undercover Economist, illustrated with engaging examples (such as explaining the effect of zero-marginal-cost by looking at the drunken chaos that results from offering fixed-entry unlimited-drinks parties to university students).

And if you haven’t had enough after reading the book, you can follow the More or Less radio show (also available as a podcast) hosted by Tim Harford and packed with more amusing and topical analysis.

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