Tim Harford The Undercover Economist

Articles published in August, 2006

With apologies to King Lear

Dear Economist,

I am 72 and about to prepare my will. Knowing that some of my daughters have married well, and the other will probably remain single (and therefore be financially disadvantaged in comparison), there seems to be a moral justification to be more generous to the latter. Observing that my unmarried daughter might be more likely to provide assistance to me in my old age, why should I not be more generous to her? I would, in economic terms, be repaying her for services (hopefully to be rendered) which her siblings will probably be either too busy, or too absorbed with their children, to offer. Please give me an economic justification for being more generous to my unmarried daughter.

Tom Holden, Australia

Dear Mr Holden,

Let’s deal with this one point at a time. Divorced women tend to take a financial hit while divorced men tend to be better off than they were when they were married. What does that tell you? You might think that it suggests divorce is bad for women, but it equally suggests that marriage is bad for them. Women must hate being married if they are willing to pay to get divorced. And men must like marriage, since they would be richer if they walked out the door. So don’t feel too sorry for your single daughter: her married sisters are probably praying for a chunk of inheritance so that they can afford to divorce their husbands.

A better justification is your unmarried daughter’s expected contribution to your care in your dotage. Perhaps you should be a bit more explicit about the arrangement: why not offer to pay her by the hour to spend time clearing up after you? To be fair you should also pay the others if they come to visit. This method may produce a hidden benefit: you can switch to a competitive tender on the open market. You may find that your children are not low-cost providers at all.

First published at ft.com

28th of August, 2006Dear EconomistComments off

Teenage Kicks

The Undercover Economist – FT Magazine

“Parents, brace yourselves.” With those words, Oprah Winfrey introduced news of a teenage oral-sex craze in the US. In Atlantic Monthly, Caitlin Flanagan wrote “The moms in my set are convinced – they’re certain; they know for a fact – that all over the city, in the very best schools, in the nicest families, in the leafiest neighborhoods, 12- and 13-year-old girls are performing oral sex on as many boys as they can.”

Are they right? National statistics on teen fellatio have only recently been collected, but the trend seems to be real. Professor Jonathan Zenilman, an expert in sexually transmitted infections at Johns Hopkins University, Baltimore, reports that both the adults and the teenagers who come to his clinic are engaging in much more oral sex than in 1990. For men as recipients it’s up from about half to 75-80 per cent; for women, it’s risen from about 25 per cent to 75-80 per cent.

In some quarters that might be regarded as progress, but how you feel about it probably depends on whether you are a teenager or a parent of teenagers. I am neither but, as an economist, I feel uniquely qualified to opine on why it is happening.

Schoolchildren are now bombarded with information about the risks of sex, particularly HIV/Aids. Oral sex can be safer than penetrative sex: it dramatically reduces the risk of contracting HIV and reduces the effects of some other sexually transmitted infections (although you can still pick up herpes, warts and thrush). An infection that might have made a girl infertile instead gives her a sore throat.

The rest is basic economics. When the price of Coca-Cola rises, rational cola-lovers drink more Pepsi. When the price of penetrative sex rises, rational teenagers seek substitutes. Perhaps we shouldn’t be surprised that even as the oral-sex epidemic rages, the Centre for Disease Control, a US government agency, reports that the percentage of teenage virgins has risen by more than 15 per cent since the beginning of the 1990s. Those who are still having sex have switched to using birth-control methods that will also protect them from sexually transmitted infections. Use of the contraceptive pill is down by nearly a fifth, but use of condoms is up by more than a third. The oral-sex epidemic is a rational response to a rise in the price of the alternative.

Now this is a glib explanation. A real economist would want a tighter hypothesis and serious data to back it up. That economist might well be Thomas Stratmann, who with the law professor Jonathan Klick has pushed the idea of the rational teenage sex drive. Their hypothesis is that if teenagers really did think about the consequences of their actions, they would have less risky sex if the cost of risky sex went up. They discovered a very specific source of that higher risk: in some US states there are abortion-notification laws, which mean that teenagers can’t get an abortion without their parents being informed. If teenagers are rational, such laws would discourage risky sex amongst teens, relative to adults.

Continued at ft.com

Product sabotage

Why would a company deliberately hide its best product?

Starbucks does.

Why would a company deliberately damage its best product?

Many high-tech companies do that, and even my favourite local restaurant does.

It doesn’t sound like a winning formula, but it’s at the heart of the way many companies do business.

Take the secret cappuccino, which you can buy in two of the leading coffee chains, Starbucks and Coffee Republic.

The sales assistants know what the drink is and they have a little button on their cash tills to ring it up. It’s cheaper than the other drinks on offer, but it doesn’t appear on the menu.

Starbucks claims that’s because they don’t have room on the menu board. Coffee Republic doesn’t even have that excuse: there’s a blank space with no price where this drink should be listed.

It’s called the “short cappuccino”, and it’s smaller, cheaper and better than the smallest size on the menu, the “tall”.

So what is going on?

It’s all part of an attempt to aim different prices at different types of customer.

Any shop would love to be able to charge high prices whenever they could, while still offering low prices to customers who would otherwise shop somewhere else.

Of course, if shops just asked their customers whether they would like a discount, every customer would say “yes”, so shops need to get a bit smarter about working out which customers will pay which price.

Some of the attempts are obvious, such as discounts for students or pensioners.

You didn’t think it was out of a sense of social justice, did you? Companies simply charge more to people who have jobs, because those people are willing to pay more.

Similarly, when a restaurant or a tour operator offers free meals or accommodation for kids, that’s just a way of charging more to charging childless people who usually have more disposable income…

Continued at BBC Online

The original verison of this article incorrectly said that travel agents offer deals for families with children. In fact these deals are offered not by agents but by tour operators and other suppliers of holiday fun. Apologies to my readers and to offended travel agents.

25th of August, 2006Other WritingComments off

Shifting popcorn

Dear Economist,

When I go to a restaurant a dish that costs more to make – perhaps lobster or the product of an expensive chef’s imagination – costs more to purchase. The same is true when I go to a clothes store.

However, when I go to see a movie at my local cinema, no matter what the film, no matter how much it cost to make, it costs the same to see.

As I only go to big-budget flicks that have been praised to the rafters, I feel I am being subsidised by the poor folks who are watching cheap run-of-the-mill pictures. Why don’t movie theatres have adjustable pricing?

Arthur Spirling, Rochester, NY

Dear Mr Spirling,

You are confused. You are not consuming a film but a film screening, and film screenings cost the same to produce no matter what is in the projector. The price of producing the film in the first place is irrelevant.

Nevertheless, there is a puzzle here. While we shouldn’t expect big-budget films to command higher ticket prices, these prices should surely vary in an attempt to get every seat in the house full. It’s not obvious that popular movies should be more expensive: the most popular books tend to enjoy the greatest discounts. But completely uniform pricing is odd…

Continued at ft.com

19th of August, 2006Dear EconomistComments off

Knock-out blow

The Undercover Economist – FT Magazine

The view from my upstairs window in Hackney has changed a little now that the beautiful old neighbourhood church has been flattened. The church disappeared almost overnight despite attempts to preserve it – or, more accurately, because of attempts to preserve it. No surprise to an economist, but what’s going on?

The story is simple. Hackney Council was discussing the possibility of extending a conservation area to include the church. Once that happened, it would be difficult to get permission to demolish the church and build something else. The developers weren’t stupid, and knocked the old building down while they still could.

In the US, the Endangered Species Act of 1973 gives broad powers to federal agencies to restrict development in order to protect species. This can produce the same perverse incentives as Hackney’s conservation area. Economists Dean Lueck and Jeffrey Michael studied what happened when the rare red-cockaded woodpecker was discovered in commercially valuable forests in North Carolina. Forest owners who were unwilling landlords to the woodpecker were, of course, not allowed to cut timber. But woodpeckers tend to move about, so there are no prizes for guessing that the forest near the woodpecker, but outside the restricted zone, was cleared immediately.

Michael Margolis, Daniel Osgood and John List found a similar situation in Arizona regarding rare pygmy owls. In 1997, developers discovered that large tracts of land near Tucson were about to be designated “critical habitat”, which would mean restrictions on development. Naturally, the developers didn’t wait.

In many cases, “pre-emptive development” is relatively harmless. Land is developed sooner than it might be, and the environmental regulations don’t do what they were supposed to, but that’s the end of it. However, sometimes the development would never have happened. The church in Hackney might have stood for another hundred years; the North Carolina forests might have been thinned or even left standing forever. If the development was worthwhile, it would already have happened.

Without regulations, the church’s owner would not have leapt to demolish it. Depending on various imponderables, it might have been more attractive to use the church for fancy apartment conversions, rather than raze it and throw up a cheap new building. It was probably worth waiting to see how the local market developed.

Leaving the church standing preserved what economists would call a “real option”, analogous to a “stock option” in the financial markets. The proposal to extend the conservation area destroyed the real option, and with it the church. It was simply too risky to wait and see. Faced with “now or later”, the developer chose “now”. Given time, “later” might have become “never”.

One solution is to introduce temporary restrictions without notice and then start a process of consultation as to whether they should be made permanent. That is far too draconian for my tastes, especially since “temporary” regulations usually aren’t.

A better idea is for governments to preserve land or buildings not by regulating but by buying it. That sounds expensive, but in fact simply transfers the expense from the property owner to the government that wishes to take away his property rights. It might persuade government to be a little more selective with its regulations – before deciding whether to preserve old churches or rare woodpeckers, we should be willing to pay the going rate to do so.

All’s Fair in Love, War and Money

From BBC Online

What do love, war and poker have in common?

High stakes, perhaps.

Certainly, in all three you spend a lot of effort trying to work out what the other side is really thinking.

There is another similarity: economists think they understand all three of them, using a method called “game theory”.

Game theory has been used by world champion poker players and by military strategists during the cold war.

Real enthusiasts think it can be used to understand dating, too.

The theory was developed during the second world war by John von Neumann, a mathematician, and Oskar Morgenstern, an economist.

Mr von Neumann was renowned as the smartest man on the planet – no small feat, given that he shared a campus with Albert Einstein – and he believed that the theory could be used to understand cold war problems such as deterrence.

His followers tried to understand how a nuclear war would work without having to fight one, and what sort of threats and counter-threats would prevent the US and the Soviets bombing us all into oblivion.

Since the cold war ended without a nuclear exchange, they can claim some success.

Another success for game theory came in 2000, when a keen game theorist called Chris “Jesus” Ferguson combined modern computing power with Mr von Neumann’s ideas on how to play poker.

Mr Ferguson worked out strategies for every occasion on the table.

He beat the best players in the world and walked away with the title of world champion, and has since become one of the most successful players in the game’s history.

Game theory is a versatile tool.

It can be used to analyse any situation where more than one person is involved, and where each side’s actions influence and are influenced by the other side’s actions.

Politics, finding a job, negotiating rent or deciding to go on strike are all situations that economists try to understand using game theory.

So, too, are corporate takeovers, auctions and pricing strategies on the high street.

But of all human interactions, what could be more important than love?

The economist using game theory cannot pretend to hand out advice on snappy dressing or how to satisfy your lover in the bedroom, but he can fill some important gaps in many people’s love lives: how to signal confidence on a date, or how to persuade someone that you are serious about them, and just as importantly, how to work out whether someone is serious about you.

The custom of giving engagement rings, for instance, arose in the US in the 1930s when men were having trouble proving they could be trusted.

It was not uncommon even then for couples to sleep together after they became engaged but before marriage, but that was a big risk for the woman.

If her fiance broke off the engagement she could be left without prospects of another marriage.

For a long time, the courts used to allow women to sue for “breach of promise” and that gave them some security, but when the courts stopped doing so both men and women had a problem.

They did not want to wait until they got married, but unless the man could reassure his future wife then sleeping together was a no-no.

The solution was the engagement ring, which the girl kept if the engagement was broken off.

An expensive engagement ring was a strong incentive for the man to stick around – and financial compensation if he did not.

Modern lovers might think the idea of engagement ring as guarantee is a thing of the past, but they can still use game theory to size up their partners.

When a couple with separate homes move in together, selling the second home is an important signal of commitment.

That second home is an escape route – valuable only if the relationship is shaky.

If your partner wants to hang on to his bachelor pad, do not let him tell you it is merely a financial investment.

Game theory tells you that he is up to something.

Tim Harford is a Financial Times columnist and author of “The Undercover Economist”. He presents a new BBC series, Trust Me, I’m an Economist, starting on BBC Two at 7pm on Friday 18 August.

18th of August, 2006Other WritingComments off

Can economics solve everyday problems?

Few readers of this site will need convincing, but here is a short video interview with the BBC in which I talk about the new show, “Trust Me, I’m an Economist” and argue the case for the economics of everyday life.

Profile of me in ThisIsMoney

Tim Harford is one of a new breed of economists who promise to solve everyday problems with the power of economic theory. He claims to be able to show people when and where they’re being ripped off and so learn how to get a better deal…

read more.

17th of August, 2006MarginaliaComments off

Where shoplifters should work

Dear Economist

I notice that your book, The Undercover Economist, has a list price of £17.99. In it you emphasise that rationality and calculation underlie economic behaviour. If so, why do so many prices end in .99? Do consumers really think that £17.99 is only £17?

Daniella Acker, via e-mail

Dear Daniella,

A more likely explanation – from Steven Landsburg, an economist at the University of Rochester – is that these prices are designed not to exploit incompetence but to fight dishonesty.

A typical bookshop will experience a certain amount of shoplifting, especially of products as tempting as my book. Nobody is better placed to benefit from shoplifting than the shop assistants.

If books – or any products – were roundly priced at œ10, œ15 or œ20, then customers would frequently offer the correct change. In such cases it would be simple for the shop assistant to bag the item without ringing it through the till, and to pocket the cash.

The book would appear to have been stolen by the customer, but this is a far more attractive proposition than trying to fence a stolen copy of A la recherche du temps perdu, or even The Undercover Economist, and the risk is probably lower. All rational shoplifters should get jobs in shops.

However, the more awkward the pricing, the more unlikely those thieving till-jockeys are to be able to pull off the trick…

Continued on ft.com

12th of August, 2006Dear EconomistComments off

Passing Trade

The Undercover Economist – FT Magazine

The coffee-chain cappuccino is an excellent barometer of pricing, since it is, unlike a salad or a plate of spaghetti, a uniform product. The Economist magazine has taken advantage of this fact by constructing a “Starbucks tall-latte index” to check currency valuations, but budget constraints for the humble Undercover Economist meant that my own investigations took me no further than Watford Gap.

Watford Gap is the oldest motorway service area (MSA) in the country. After a long wait in the queue there, I purchased a Costa Coffee cappuccino – which, apart from being 10 per cent more expensive, was identical to the high-street product in all respects – and something called a “ham and three cheese tostato”, which was quite disgusting and carried nearly the same premium. Most travellers will recognise the distinctive motorway experience of high prices and low quality, but they may not know who is to blame. Underneath the elevator music and sad Formica tables for the single traveller lies a remarkable government campaign, as old as Watford Gap itself, to make MSAs as grim as possible.

Naturally, the companies that provide motorway services could do a better job and charge less. But anyone who expects that result from the benevolence of the butcher and the baker will be disappointed. Companies give us what we want only when their competitors are doing likewise. MSAs do not pit Starbucks against Costa because they know that that sort of intense competition, while good for customers, will drive down prices and lower profits.

Competition between MSAs could fix all that, and this is where the government campaign against the motorist comes in. First, it is almost impossible to build a new MSA. Entrepreneurs must first persuade the local planning authority that there is a need – as if anyone would be tempted to offer roadside snacks when nobody was buying. They must distance themselves from competitors. (One government agency, the Office of Fair Trading, tries to stop such attempts to limit competition, but the Department for Transport makes them mandatory.) Then they must secure permission from the local authority, whose constituents are the last to benefit from a vast car park in their back yards. Finally, they must build slip roads and maintain free car parks and toilets all year round. Small wonder that despite the sky-high prices, there are few new entrants.

Even stranger is the desperate attempt to deny motorists information on the quality of the product. No information about the MSA can be signposted on the motorway until half a mile before the junction; even then, only the company name can be listed, which means the big players have been forced to resort to changing their names to incorporate their strongest offerings. Instead of Moto and RoadChef we have “Moto M&S” and “RoadChef Costa Coffee”.

None of this matters much. You could always pack your own sandwiches. But it is a lesson. Advertising is often denounced as garish commercialism or, worse, insidious mind-control, but move to the MSA world where advertising is illegal and you will find yourself wishing for the sight of a familiar logo. When advertising is impossible, why provide anything worth advertising?

Regulations on business are often supposed to protect the rights of consumers. Sometimes they do. But consumers are the first to suffer from incompetent regulations – if they ever get to the front of the queue.

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