Tim Harford The Undercover Economist

Articles published in February, 2007

Left on the shelf

Dear Economist,

When purchasing perishable food items I look for those that have the longest “use by” date, even if I intend to consume them immediately. As a result I often bypass items that will be within their “use by” date when I intend consuming them, in preference for items with an even longer shelf life. Can I be accused of being wasteful by not purchasing items with the shortest acceptable shelf life, since I am increasing the likelihood that they remain unsold?
Yours sincerely,
Andrew, London

Answer at ft.com, subscription free.

24th of February, 2007Dear EconomistComments off

Pretty vacancies – Undercover Economist

Senator Joe Biden did himself no favours when he “praised” his fellow presidential hopeful, Barack Obama, as “the first mainstream African-American who is articulate and bright and clean and a nice-looking guy”. It did not take long for the implication to sink in: does Senator Biden think that previous black candidates such as Jesse Jackson and Al Sharpton are inarticulate, dim, dirty or ugly?
Senator Biden has been charging around apologising to everybody, but what nobody really wants to admit is this: one of Senator Obama’s qualities is that he is handsome, and handsome politicians have a habit of getting elected. Economists have found evidence that voters prefer a pretty face in the UK, Australia, Finland, Germany and the US.

Researchers have to be careful when they observe simple correlations between subjective beauty and electoral success. Amy King and Andrew Leigh, who studied Australian elections, wondered whether the findings were driven by ageism or racism: perhaps (mostly white) voters see a black face and believe the face’s owner is both unattractive and unfit to govern. That sounds miserably plausible, but it is not driving the results: restricting analysis only to white politicians, or those in a narrower age band, produces similar estimates of a beauty premium.

It is not just politicians that we prefer to be beautiful. A number of studies, many involving the American economist Daniel Hamermesh, have found that “ugly” people earn less in many walks of life, from advertising to law. The beauty premium seems to apply even in professions where there is no reason to expect that beauty counts…

Continued at ft.com, subscription free.

Cheap tricks – Undercover Economist

There are, of course, two types of price: the ones you see coming and the ones you don’t. I write this from an inexpensive hotel room, but you would not guess that from the price list in front of me. ₤1 a minute for phone calls (price on planet earth: 5p); ₤10 for a day’s wireless access (earth price: ₤10 a month); ₤2 for a chocolate bar. It’s like being in a bizarre alternate universe. If I’d known that the hotel was going to try to pick my pocket I might have considered somewhere that cost a little more up front and charged terrestrial prices for all the add-ons.

Perhaps, however, these hidden extras aren’t quite so bad. In fact, I think the world might be more expensive – and more unfair – without them. If that seems counterintuitive, it’s because we tend to assume that the alternative to hidden charges is no charges at all.

That seems unlikely. The hotel room is fairly cheap because the hotel wants to get me through the door, hoping that I’ll spend more on the phone and the minibar than I will on the room itself. The more incontinent my spending habits, the more it is worth having me as a guest and the lower the advertised price will fall. The logical extreme is the complimentary VIP suite in Las Vegas for the high-rolling gambler…

Continued at ft.com, subscription free.

Addictions

Dear Economist,

My stepfather is an alcoholic and spends his time and money on nothing but self-intoxication. This results in me experiencing great anger and wanting to do something stupidly aggressive.

My mother has less and less money to run the house. I no longer live there but will soon have to contribute money to prevent my mother entering a downward spiral of debt. How do I control an alcoholic who is content only with a bottle in his hand? How do I solve the financial problem? How do I stop myself becoming wound up by my stepfather’s actions?

Name and address supplied

Answer at ft.com, subscription free.

17th of February, 2007Dear EconomistComments off

Say it with roses – and air miles

The UK International Development Secretary, Hilary Benn, has argued that Valentine’s Day flowers can be flown in from Africa with a clear conscience because it’s less energy intensive to do that than grow them in Dutch greenhouses. Given my own research on the subject I am not surprised.
This is one reason why we need a carbon tax: our intuitions about what is and is not environmentally damaging are just awful.

13th of February, 2007MarginaliaComments off

Updating the site

If you are watching in RSS and the site seems to be going crazy, apologies. My trusty assistant Sophy is posting all the old Dear Economist columns so that they are available in one place and on one RSS feed.

12th of February, 2007MarginaliaComments off

Jams today – Undercover Economist

When I first moved to one of the less genteel parts of London, I was nervous that I might get shot. My house is, after all, on a famous “murder mile”. My brother-in-law was quick to set me straight.

“You’re not going to get shot,” he told me, cheerfully. “You’re going to get mugged.” Fortunately, the same sensible precautions can be used to avoid both muggers and flying bullets, so I faced no practical dilemma.

I was reminded of that conversation by the current debate about climate change. We are told, for instance by the recent Stern Review, that we must act because catastrophe is possible, even though the likely result of climate change is something less serious. Fair enough. Even a modest risk of catastrophe, like a modest risk of being shot, is worth taking steps to avoid.

Yet some of the policies that might fight climate change would also combat an appalling environmental problem that gets little attention from environmentalists: traffic jams. Okay, I’ll admit, the Stern Review on Traffic Jams doesn’t sound like the sort of thing to keep you awake at night. Traffic jams are less dramatic than catastrophic climate change, just as being mugged is less dramatic than being shot.

I realise it seems ridiculous to compare traffic jams to climate change, but I am not sure why. If climate change ever begins to have the same impact on our lives that congestion does today, it will be a dark day indeed. Think about the delays; the uncertainties; think about the lengths big-city dwellers have to go to in an effort to avoid traffic. Then think about how severely the climate would need to change before it had the same effect on your daily routine…

Continued at ft.com, subscription free.

Ethical piracy

Dear Economist,

I am often offered the chance to have an unauthorised copy of a current film downloaded from the web. As family circumstances presently preclude cinema trips, these offers present my only chance to see some films promptly.

I do not believe in enjoying the fruits of other people’s labours for free. So is there any way in which I can make financial reparation for watching an unauthorised copy?

I live very close to a cinema so one option is to buy a ticket for a screening even though I won’t actually be there. Or I could buy a copy of the DVD when it comes out, even though I don’t really want to own it.

If I cannot put this right in economic terms, my conscience tells me not to watch!

Yvonne, London

Answer at ft.com, subscription free.

10th of February, 2007Dear EconomistComments off

Breadline

Dear Economist,

I have a question for you. You have a piece of bread and you are full enough to give it to someone else. In front of you, 10 guys are waiting for your charity. You can say only one sentence to them.

But with only this one sentence, you need to find out who is the most hungry guy. What are you going to say?

Myeong Hyeon, via e-mail

Answer at ft.com, subcription free

3rd of February, 2007Dear EconomistComments off

Match me if you can

Whenever I shop at John Lewis, I see its price promise, “Never knowingly undersold”, displayed in an attempt at reassurance. It makes me very suspicious indeed. Not that I doubt the promise to meet any competitor’s price. I’m sure that happens regularly. What bothers me is the possibility that this kind of promise drives prices higher, not lower.

The problem with a promise to match a competitor’s price is that it will discourage the competitor from cutting its price in the first place. If I went into business, one obvious way to win some customers would be to reduce my price. If the competitor’s emporium across the road boasted a price promise, I might not bother.

Imagine that a company threatened its competitors with the following statement: “We guarantee that there is no point in you trying to beat us on price. We send people around to your stores to make sure you’re not trying any funny stuff. Better, we pay our customers to look at your prices and tell us about them. So forget it. Keep your prices high and so will we, and nobody will get hurt.”

John Lewis doesn’t say that, and nor do any of the other businesses that make price-matching promises. Any company that tried it would be hauled up before the Office of Fair Trading in short order, not to mention the fact that customers would be unlikely to approve. Still, I am not sure that the difference between the promise to customers and the threat to competitors is anything more than rhetorical.

Price transparency is a double-edged sword. If customers can easily compare lots of prices, then they will seek out the best deal. But if customers can easily compare lots of prices, so can competitors, and if they quickly cut prices in response, they will also win back customers very quickly. Companies will realise that cutting prices to win market share is a mug’s game.

The price of airline tickets, for example, used to be notoriously opaque. Now you can log into a consolidator website and compare lots of different prices, but it’s far from clear that this has led to more cut-throat offers.

I asked for some quotes just now for a week-long return trip from London to New York in a fortnight’s time. The internet broker dug up 200 offers from five different airlines, most of which were for the exactly same price: ₤299. Only one itinerary, between less popular airports, beat that price, and did so by less than a fiver.

Of course, that pattern might indicate ferocious price competition, but since the last time I flew on that route it was on a half-empty aeroplane, I doubt that price transparency has given airlines much incentive to slash prices until every seat is sold. The fact that Byzantine regulations stand in the way of new competitors who want to fly the route cannot help: it makes it yet more tempting for the existing players not to fight too hard for market share. It is the possibility of new entrants to the market, rather than apparently fierce competition between a small number of players, that provides a more reliable source of competitive pressure.

It is all part of what economists call the “topsy-turvy principle” of competition: the more room there is for aggressive competition, the less likely it actually is to happen – loosely, cutting prices in a transparent market is like starting a war with a nuclear superpower. In some cases, at least, we should regret the coming of internet price-comparison sites. A market where nobody knows what price the competition is offering is also a market in which it is worth haggling and shopping around.

First published at ft.com.

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