Saturday, January 07, 2006

Econfusius say--

(1) Make your cheap products look bad, sell more; and
(2) Echoing Yogi Berra: No one goes to the mall immediately after Christmas anymore, because it's too crowded.

Tim Harford, a columnist for the Financial Times and author of the recently published book the The Undercover Economist, apparently seeking to ride the pop-econ wave of Freakonomics, had this article in yesterday's explaining why Starbucks offers the "short" cappuccino for the person on a budget, but it doesn't want you to find out about it. Here's a hint at what Harford is getting at: he says its the same reason why airports make their ordinary lounge so damn uncomfortable.

And in this piece in FT, Harford attempts to explain that the post-holiday sales are really bad for everyone--and then compares government subsidies to post-holiday sales.

I agree with the theory Harford propounds/summarizes in the first article, although I have some difficulties with the contentions he makes in the second piece. To be sure, there are some instances in which the Government or some other third party "distorts" the market such that, as Harford puts it, "
tremendous amounts of money are spent but the beneficiaries are scarcely better off, if at all." In my view, however, there are clearly instances where subsidies do in fact make people better off: to take a straightforward example, there are certain products (such as cars) the market just does not price well because they generate a positive or negative benefit (pollution, for instance) that is not fully captured by the buying or selling party. The government, through subsidies or taxes--the traditional economist views subsidies and taxes as the same--can adjust the price so that consumption more closely mirrors what one would expect if all the factors were taken into account. (Hank, if you are reading this, and you disagree, please throw your hat in the ring. I would love to read what you have to say on this.)

I also think it is a little shady to analogize post-holiday sales to government hand-outs. For one thing, the post-holiday slash-and-burn pricing could be explained by the fact that stores are trying to unload one season's products at any price above marginal value, or for that matter, below-marginal value, if the product's lifespan is truly limited.

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