Naked Economics by Charles Wheelan Read Free Book Online Page A

from Chicago to San Francisco; someone flying to cousin Irv’s wedding will shell out no more than $250. If the airline charges the high fare, it will lose all of its pleasure travelers. If it charges the low fare, it will lose all the profits that business travelers would have been willing to pay. What to do? Learn to distinguish business travelers from pleasure travelers and then charge each of them a different fare.
    The airlines are pretty good at this. Why will your fare drop sharply if you stay over a Saturday night? Because Saturday night is when you are going to be dancing at cousin Irv’s wedding. Pleasure travelers usually spend the weekend at their destination, while business travelers almost never do. Buying the ticket two weeks ahead of time will be much, much cheaper than buying it eleven minutes before the flight leaves. Vacationers plan ahead while business travelers tend to buy tickets at the last minute. Airlines are the most obvious example of price discrimination, but look around and you will start to see it everywhere. Al Gore complained during the 2000 presidential campaign that his mother and his dog were taking the same arthritis medication but that his mother paid much more for her prescription. Never mind that he made up the story after reading about the pricing disparity between humans and canines. The example is still perfect. There is nothing surprising about the fact that the same medicine will be sold to dogs and people at different prices. It’s airline seats all over again. People will pay more for their own medicine than they will for their pet’s. So the profit-maximizing strategy is to charge one price for patients with two legs and another price for patients with four.
    Price discrimination will become even more prevalent as technology enables firms to gather more information about their customers. It is now possible, for example, to charge different prices to customers ordering on-line rather than over the phone. Or, a firm can charge different prices to different on-line customers depending on the pattern of their past purchases. The logic behind firms like Priceline (a website where consumers bid for travel services) is that every customer could conceivably pay a different price for an airline ticket or hotel room. In an article entitled “How Technology Tailors Price Tags,” the Wall Street Journal noted, “Grocery stores appear to be the model of one price for all. But even today, they post one price, charge another to shoppers willing to clip coupons and a third to those with frequent-shopper cards that allow stores to collect detailed data on buying habits.” 7
     
     
    What can we infer from all of this? Consumers try to make themselves as well off as possible and firms try to maximize profits. Those are seemingly simple concepts, yet they can tell us a tremendous amount about how the world works.
     
     
    The market economy is a powerful force for making our lives better. The only way firms can make profits is by delivering goods that we want to buy. They create new products—everything from thermal coffee mugs to lifesaving antibiotics. Or they take an existing product and make it cheaper or better. This kind of competition is fabulously good for consumers. In 1900, a three-minute phone call from New York to Chicago cost $5.45, the equivalent of about $140 today. Now the same call is essentially free if you have a mobile phone with unlimited minutes. Profit inspires some of our greatest work, even in areas like higher education, the arts, and medicine. How many world leaders fly to North Korea when they need open-heart surgery?
     
     
    At the same time, the market is amoral. Not immoral, simply amoral. The market rewards scarcity, which has no inherent relation to value. Diamonds are worth thousands of dollars a carat while water (if you are bold enough to drink it out of the tap) is nearly free. If there were no diamonds on the planet, we would be inconvenienced; if all