57 pages • 1 hour read
Tim HarfordThe Undercover Economist
Nonfiction | Book | Adult | Published in 2010A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Chapters 1-2Chapter Summaries & Analyses
Chapter 1 Summary: “Who Pays For Your Coffee?”
The chapter begins by introducing a Starbucks café at a metro station in Washington, DC, which is located in the path of busy commuters. Harford, acting as narrator, orders a cappuccino here for $2.55, noting that the “coffee in that cappuccino costs pennies” (8); still, customers are willing to pay an extreme markup for it. Through this example, he introduces the concept of scarcity, emphasizing that the customers’ choices don’t depend entirely on price. Customers’ other resources, including time, are limited by their circumstances and especially their location, which is why they don’t mind the inflated price. Furthermore, the landlord renting out this location to Starbucks can charge a high rate; if Starbucks refuses to pay, dozens of other coffee shops would swoop in to take over this prime location.
Harford further explores the concept of scarcity through the work of David Ricardo, an economist working at the beginning of the 1800s. Ricardo provides an example of a farmer seeking to rent meadowlands on which he can grow crops. There is plenty of land, so the landlords must compete with one another to provide the lowest rate since the farmer can choose any of their lots of meadowlands. The landlords would prefer to have a little rent rather than none. This example shows that the “person in possession of the desired resource” isn’t always the person with the most power (11). Also, relative scarcity can shift from resource provider to resource consumer. In this example, if many farmers follow the first and rent land, then at some point there will be no fertile meadowland left to rent. Then, the landlords can raise rents since they now have the “real bargaining power” (12).
Next, Harford explains Ricardo’s concept of “marginal” resources. Returning to the farmland example, if enough farmers arrive so that even the scrubland—which is less cultivable than meadowland—is completely cultivated, new farmers will have to turn to grassland, which is an even less cultivable resource. Suddenly, the inferior, rent-free scrubland will be worth more since the new farmer will bid for it instead of using the grassland. The rent on meadowland will always be relative to the profit differential between what can be produced on meadowland as opposed to scrubland. The scrubland, worthless compared to the meadowland but of value compared to the grassland, is “marginal” since it is “at the margin between being cultivated and not being cultivated” (13). Marginal resources point out the economic truth that “there is no absolute value” since everything is relative to better or worse options available (14).
Harford warns that though Ricardo’s 19th-century model impressively explains contemporary consumer culture, economic models often oversimplify complex issues. The propensity of economists to try to apply a reductive economic theory on the multivalent system of reality has led to, at best, incorrect theories and, at worst, the financial crash of 2006 and 2007, which “destroyed the banks […] and a good chunk of the world economy” (17).
Often, it is difficult to tell whether items are expensive because of natural scarcity or artificial scarcity through “legislation, regulation, or foul play” (20). Harford illustrates the concept of artificial scarcity by using the example of oil production. Until 1973, the Middle East’s “oil meadows” cheaply produced the world’s oil supply. Then, the Organization of Petroleum Exporting Countries (OPEC) took some of its own oil fields out of commission, ordering each member country to restrict their oil production. Oil prices rocketed up as a result, which demonstrates how artificial scarcity can be caused by legislation and regulation.
Moreover, in illegal trade and organized crime, people can prevent competition through violence. If “drug dealers want to enjoy strength through scarcity” (26), they have to use violence to dissuade the competition. Organized crime enterprises involve themselves in legitimate businesses and then use illegal methods to “discourage” competition. These are ways in which artificial scarcity is caused by foul play.
Chapter 2 Summary: “What Supermarkets Don’t Want You to Know”
Chapter 2 begins by introducing Costa Coffee, a coffee shop located next to the London Eye, London’s famous tourist attraction. Harford explains that Costa “hit upon an elegant strategy” to differentiate between customers willing to pay more money for their coffee while still selling coffee for a small profit to price-conscious buyers (35). It started to offer fair-trade coffee, which promises to give living wages to coffee farmers in other countries. This costs Costa very little to do, but customers are willing to pay extra to support the farmers. Starbucks’s model is similar: A cappuccino and a mocha cost about the same to make, but the mocha costs more. Coffee shops provide opportunities for customers to feel “lavish” by offering extra “frills” for a bit more money, and they also provide opportunities for customers to feel thrifty by refusing those frills.
Customers who are “cavalier about price” are valuable to retailers since they spend freely (38). Retailers use different strategies to discover them. The first is the “unique target” strategy. Retailers tailor the price to a specific person, but they must keep this information from the consumer since it would be unpopular if discovered. The second strategy is similar but much less objectionable: The “group target” strategy offers “different prices to members of distinct groups” (39). No one has a problem with children or the elderly being offered a lower rate for the same experience or product. However, companies do not have affordability in mind when they do this; they want repeat customers as well as business from people who don’t care as much about price. The third strategy to discover customers is “the cleverest and most common” (41): the “self-incrimination” strategy. This is employed to get customers to “confess” that they don’t care about price. A coffee shop can accomplish this by offering frills. Even location can be used for self-incrimination. For instance, a ready-made sandwich right in front of a customer is worth more than an identical sandwich 20 minutes away at a grocery store.
Supermarkets also engage in the same strategies as coffee bars. The same store can charge different prices for the same product at various locations, depending on the convenience of the location. Additionally, like Costa Coffee, supermarkets also engage in providing a presumably superior product for a markup: in this case, organic food. Although organic food costs more to transport and produce, the markups are much higher than the actual increased cost, but they’re not high enough to dissuade customers from buying the organic food at all.
Next, Harford introduces the example of sale pricing. Sales lower the average price of a product for a limited amount of time, and customers are used to stores putting seemingly random items on sale at different times. From the outside, this doesn’t make sense: Instead of a significant decrease in prices at some times and not others, why not a small decrease in price all the time? The answer to that question involves the same paradigm of the price-sensitive shopper and the price-blind customer: “If some customers shop around for a good deal and some customers do not” (48), then having intermittent bargains along with full-price products allows customers to self-target. Stores “jump between extremes” to satisfy bargain hunters but also to take full advantage of price-blind customers (48). However, if shoppers could easily predict what is going to be on sale, they would plan their shopping around those sales. Additionally, stores often take advantage of the psychology of the consumer in raising or lowering prices: The price of a vegetable can be raised and the price-blind customer will still buy it, while the bargain hunter will just pick another vegetable. In order to get the best prices, Harford reminds readers that “observation is [their] best weapon” (50). Noticing, remembering, and comparing prices is the best way to secure a bargain.
Though companies seem all-powerful in this model of customer-supplier relations, that is untrue. “No company has power unless it has scarcity” (50), and sometimes a company only has the illusion of scarcity. A good example is the fact that restaurants often charge much more for wine than grocery stores might. This is because restaurants often prioritize table space. Customers who “dawdle” compensate for the longer table time by paying an inflated price for the components of a longer meal: wine, appetizers, and desserts.
However, there are times when even price-blind customers are difficult to persuade into paying a higher price. The author describes this as “leaks” in the price-targeting strategy. The first “leak” is introduced through the example of travel options. Airlines and trains offer first-class seating, which is much more expensive than coach seating, and they both accomplish the same task of getting to the destination. Even price-blind customers would be reluctant to spend more on these seats. In order to get people to pay more for first class, airlines and trains “exaggerate the difference between best service and the worst” (52). They make coach class extremely uncomfortable to convince less price-sensitive customers to pay more for a less terrible traveling experience. Price-sensitive customers, on the other hand, will swallow the negative consequences of cheaper seats and accept shoddy treatment as the cost of saving money. In the same vein, supermarkets also produce a store-brand “value” range of products, which are often noticeably crude or unattractive in their designs. They want to put off customers who are conceivably willing to pay more, while bargain hunters will not be deterred by the ugly packaging. This is a prime example of self-selection, which means that customers choose the price category they will be a part of.
IBM’s printer line also engaged in price targeting by creating two functionally identical printers, the “LaserWriter” and the “LaserWriter E.” Though IBM saved money by simply making only one type of printer, the LaserWriter was more expensive even though the two products were the same. In order to justify that, IBM added a chip to the E version that purposely slowed it down, intentionally harming their own product in order to make the more expensive version a better product. Companies plug the first “leak” by deliberately sabotaging their own products to convince customers to shell out for the more expensive versions.
The second “leak” is that some products are in and of themselves “leaky.” Online items like digital media or software are “expensive, easy to transport, and nonperishable” (56), so people often find ways to pirate, copy, or alter their own hardware to get past copyright failsafes. Companies often go to great lengths to protect their media, including restricting the use of media to certain regions. Consumers often decry this as being miserly and a hassle. However, the same tactics of restricting products and changing prices based on region are encouraged in medical fields, in which companies are asked to provide discounts to particular regions because of the widespread poverty there. For instance, HIV/AIDS treatment is discounted in poorer regions, and this is encouraged. In this way, price targeting can seem ethical and efficient in certain scenarios.
Chapters 1-2 Analysis
In the first two chapters of The Undercover Economist, Harford utilizes real-world examples that readers will relate to (like the coffee shop) to delve into economic models they might be unfamiliar with, like David Ricardo’s theories. This strategy helps him explain economic concepts like resource allocation, rent dynamics, and the complexities of market forces to the layperson. Harford will continue to use common, lived experiences to explain the fundamentals of economics in the rest of the book, which will highlight his point that economic principles that people might not even be aware of nevertheless shape their lives.
Harford’s writing style, too, makes his discussion of economic concepts relatable and vivid, so his ideas are accessible even to readers who might not have a background in economics. For instance, he uses metaphors and analogies, such as the comparison of land resources to coffee shop locations, which help readers see that economic theories impact their daily lives and purchasing decisions. He also utilizes irony and satire as part of his conversational, even humorous tone, particularly when discussing the self-incrimination strategy used by businesses to target customers who are “price sensitive” or “price blind.” He invents imaginary, exaggerated scenarios in which the different motivations of each party are laid bare to the observer, allowing economic principles to be analyzed without the comfortable illusion of deniability and corporate doublespeak. For example, he emphasizes the ugly packaging of cheaper products at grocery stores to vividly describe one of the methods of price targeting, and he also gives examples of the differences in advertising between products at budget grocery stores as opposed to more premium grocery stores like Whole Foods.
Harford also establishes himself as an authority on the subject by drawing on historical examples, like David Ricardo’s work, while connecting these concepts to contemporary issues, such as the global economic implications of oil production or the challenges of price discrimination in the digital era. Through more contemporary examples like pharmaceutical pricing and the hypothetical scenarios involving AIDS medication, the book engages in social and ethical commentary, questioning the ethical implications of profit-driven decisions in industries critical to public welfare. Despite discussing profit-driven motives, the chapters end on an optimistic note, suggesting that private greed can serve the public interest through efficient and fair strategies. Harford maintains a critical inquiry into economic systems without wholly dismissing the potential for positive outcomes.
Chapter 1, which is titled “Who Pays for Your Coffee?,” engages with the pervasive theme of scarcity, emphasizing how individuals and businesses navigate limited resources such as time, money, and products. Consumers, facing time constraints and location-specific scarcity, make decisions that extend beyond monetary considerations, which reflects the nuanced interplay of factors in decision-making. To illustrate this point in a relatable way, Harford uses the example of the true price of a cup of coffee as opposed to the premium that most coffee shops charge for a coffee. The key idea he discusses in this chapter is the economic principle that the value of an object is not determined solely by its production costs—rather, factors like location and consumer perception of the object’s value affect the scarcity of the product, which in turn affects its price.
This chapter also introduces one of the main themes of the book, which is The Role of Incentives in Shaping Behavior. When Harford is discussing the elements that influence the pricing of a cup of coffee, he mentions that coffee shops factor in the high rent of prime locations into the price of the coffee they sell. Since they can maximize their profits in busy areas, they are incentivized to set up their shops there. In turn, this affects consumer behavior since people are willing to pay more for the convenience of having a coffee shop nearby. Through this example, Harford demonstrates that the incentive to maximize profits guides business decisions and also shapes consumer behavior.
In Chapter 2, titled “What Supermarkets Don’t Want You to Know,” Harford explains the concepts of price targeting and self-selection, showcasing how businesses tailor their strategies to attract specific customer segments. Self-selection, observed in product design or menu options, becomes a mechanism for customers to identify with certain groups, revealing their preferences and willingness to pay for goods and services. Companies capitalize on that information to maximize their profits. Harford’s tone while conveying this information is one of letting his readers in on a secret, which also highlights his idea that information is power. Supermarkets and other stores have power over their consumers’ choices when consumers don’t fully understand the ideas behind tactics like product placement, sale pricing, and promotion of house brands. However, Harford lets readers in on these secrets, thereby putting economic power in the hands of the consumers.
Chapter 2 also introduces the theme of The Complexity of Global Trade. Harford continues with the example of the cup of coffee that he introduced in Chapter 1, but he reveals that the coffee beans that go into making the cappuccino at the local coffee shop are likely sourced from another country. He uses the example of Costa Coffee’s fair-trade pricing to demonstrate how customers’ ethical concerns about the production of goods can be used by the market to get them to self-incriminate as either “price blind” or “price savvy,” once again revealing a secret that stores don’t want customers to know. Harford points out that guaranteeing a fair living wage for coffee farmers costs the companies very little, though they charge a lot for goods marketed with the “fair trade” label. This example illustrates the complexity of global trade and prompts reflections on the ethical aspects of international commerce.
Together, these chapters serve as an informative introduction into the complex world of economics, weaving together economic principles and real-world context. The exploration of scarcity, pricing strategies, and the intersection of economic theory with ethical considerations contributes to a comprehensive understanding of economic dynamics.
