Tag: The Undercover Economist

💎 Why supermarkets change prices: it’s a way of ascertain who is price sensitive

One common situation is for two supermarkets to be competing for the same customers. As we’ve discussed, it’s hard for be systematically more expensive than the others without losing a lot of business, so they will charge similar prices on average, but both will also mix up their prices. That way, both can distinguish the bargain hunters from those in need of specific products, like people shopping to pick up ingredients for a cook-book recipe they are making for a dinner party. Bargain-hunters will pick up whatever is on sale and make something of it. The dinner-party shoppers come to the supermarket to buy specific products and will be less sensitive to prices. The price-targeting strategy only works because the supermarkets always vary the patterns of their special offers, and because it is too much trouble to go to both stores or to order two separate internet deliveries, carefully comparing the price of each good every time we go online. If shoppers could predict what was to be discounted, they could choose recipes ahead of time, and even choose the appropriate supermarket to pick up the ingredients wherever they’re least expensive.

Excerpt from: The Undercover Economist by Tim Harford

💎 Talk is cheap. Saying you’re trustworthy or high quality is useless

It’s for this reason that banks always used to build such impressive buildings. In the days before governments began to insure banking deposits and simply let banks collapse – such days seem a long time ago now – depositors needed to think hard about where to place their money. If they deposited their savings with a fly-by-night operation, nobody would come to their aid when the bank collapsed. Customers realise that crooks planning to run off with the money or gamble it away do not first clad their branches with bronze and marble: they’re in for the long haul instead. This is one reason, too, why you will pay more at an established shop than at a market stall if you buy a product about which you lack inside information about quality and durability. The established shop will still be there to refund your money in the case of a complaint, and that very possibility gives you an assurance that a complaint is less likely to be necessary.

Other economists have used Spence’s theory to explain enormously expensive advertising campaigns with no informational content.

Excerpt from: The Undercover Economist by Tim Harford