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Book Review Break – Undercover Economist by Tim Harford

Online marketing information can change quickly This article is 8 years and 5 days old, and the facts and opinions contained in it may be out of date.

Undercover Economist by Tim Harford

Subtitle: Exposing Why The Rich Are Rich, The Poor Are Poor – and Why You Can Never Buy a Decent Used Car

Here’s the Scoop: I’ve had a fascination with economics lately – it’s pretty tough to get through an econ book in a short time, and I’ve been reading this one through several trips. Some areas are very dry, but others are completely fascinating to me. This book was recommended reading by the authors of Freakonomics, one of my personal favorite books along with Armchair Economics. This book does a nice job of using narrative examples to illustrate some core principals of economics. There are some areas that are rather dull, but economics is a TOUGH subject to make interesting unless you can SEE how it applies to you. At the point that you do see how it affects you, it becomes exciting – The book does a nice job of giving examples, and helps you to see more examples of how economics principals affect your daily life.

Interpreted Thesis: Economics is all around us, and understanding the principles of economics allows you to be a better consumer, voter, and businessperson. The book provides insights to use the investigative tools of economics to your advantage in everyday life.

Topics:

  • -Economics
  • -Pricing

  • -Markets
  • -Information

  • -Globalization
  • -Poverty and world economic growth

    Chapters:
    Who Pays for Your Coffee?
    What Supermarkets Don’t Want You to Know
    Perfect Markets and the “World of Truth”
    Crosstown Traffic
    The Inside Story
    Rational Insanity
    The Men Who Knew the Value of Nothing
    Why Poor Countries are Poor
    Beer, Fries, and Globalization
    How China Grew Rich
    Key Terminology:
    Bargaining strength comes through scarcity.
    Scarcity defined on wikipedia
    Selective pricing
    Externality charges
    Spectrum auction
    Increasing returns – theory related to diminishing returns

    Quotes from dog-eared pages:

    The best-price targeters pair their efforts to improve profits with apparently virtuous behavior. … It’s good business to offer discounts to elderly and to students (translation: charge higher prices to people likely to have jobs) Who but a cynic – or an economist – could object to such commendable behavior?

    The most surprising examples of all come from the world of computers. For instance, IBM’s “LaserWriter E,” a low-end laser printer, turned out to be exactly the piece of equipment as their high end “LaserWriter” – except that there was an additional chip in the cheaper version to slow it down. The most effective way for IBM to price-target their printers was to design and mass-produce a single printer, then sell it at two prices. But of course to get anyone to buy the expensive printer they had to slow down the cheap one. It seems wasteful, but presumably it was cheaper for IBM to do this than design and manufacturer two completely different printers. Intel, the chip manufacturer, played a similar game by selling two very similar processing chips at different prices.

    …the group price-targeting strategy is inefficient because it takes seats away from customers who are willing to pay more, and gives them to customers who are willing to pay less. Yet airlines and railroads still use it, because the alternative of individual price-targeting isn’t feasible.

    …you can’t get more efficient than a perfectly competitive market

    Why are taxes inefficient? Because they destroy the information carried by prices in perfectly competitive, efficient markets: price no longer equals cost, so cost no longer equals value.

    Externality charges give people both the information to make the right choices, and the incentives to do so.

    On the information contained in a soft drink advertisement…

    The only information that potential customers can glean from such an advertisement is that it was expensive to make, and that therefore the Coca-Cola company plans to stick around with the same commitment to high-quality products that it always had.

    “Someone who knows the price of everything, and the value of nothing” – Oscar Wilde’s definition of a cynic, now commonly applied to economists.

    It is always useful for the game theorists to draw on experience as well as pure theory, because if the game becomes to complex for the players to understand, then the theory becomes nearly useless for practical purposes since it tells us nothing about what they will actually do.

    In the spectrum auction, the problem is similar: each bidder has his own forecasts and technology plans, but each knows that other bidders will probably have different insights. The optimal strategy would take advantage of any information revealed by other players’ bids – but this is not easy.

    We learned back in chapters 1 and 2 that firms will charge the maximum they possibly can, under any circumstance. We also know that their ability to do this is limited by their scarcity power.

    We still don’t have a good word to describe what is missing in Cameroon, indeed, in poor countries across the world. But we are starting to understand what it is. Some people call it “social capital,” or maybe “trust.” Others call it “the rule of law,” or “institutions.” But these are just labels. The problem is that Cameroon, like other poor countries, is a topsy-turvy world in which it’s in most people’s interest to take action that directly or indirectly damages everyone else. The incentives to create wealth in any way at all are turned on their heads…

    Economist David Friedman observes, for instance, that there are two ways to produce automobiles: they can build them in Detroit, or they can grow them in Iowa.

    Chapter 3 showed that the world of truth created by markets produces good outcomes not just because it provides incentives, but because it generates information about the costs and benefits of all kinds of goods and services through the price system.

    We know that a market system limits the scarcity power of firms; most firms face competition, and sectors of the economy that are not very competitive tend to attract new competition over time. The competition and free entry of new firms, by limiting scarcity power pushes powerfully toward efficient production, new ideas, and consumer choice.

    Countries that are rich or rapidly growing have embraced the basic lessons of economics we have learned in this book: fight scarcity power and corruption; correct externalities; try to maximize information; get the incentives right; engage with other countries; and most of all, embrace markets, which do most of these jobs at the same time.

    In the end, economics is about people – something that economists have done a very bad job at explaining. And economic growth is about better life for individuals – more choice, less fear, less toil and hardship.

    Application to search

    Scarcity is one of the big principles behind why so many SEO’s are currently successful. There is a huge demand for SEO services that will plateau over time.

    There were several applications to search marketing and online business including the use of selective pricing. It was interesting to read the many examples of group price targeting practices, but how vehemently opposed to individual price targeting consumers have become (a technique amazon.com used via cookies for some time). One of the examples in this section was how organic foods are often used as a price determination strategy to investigate where the to end of the marketplace is located (IE: how much people would be willing to pay for foods by using “organic” as the premium).

    There ARE actually instances (described in detail in the book) where price targeting can be a good thing. Understanding price-targeting strategies can be very important to the success of any business. Pricing is optional, and for this reason it reveals information – and information is valuable both when doing competitive intelligence, and to becoming and informed consumer.

    There are examples of the auction models based on economic principles being used by successful companies all over the web. Understanding user behavior and how to provide incentive through a viable revenue model is one of the critical foundations to a successful business online.

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    • http://www.seomoz.org Rebecca

      Freakonomics was my favorite read of the summer, so maybe I’ll pick up this book as well. Thanks for the quick rundown!

    • http://www.stuntdubl.com Stuntdubl SEO

      Hey Rebecca – I enjoyed “Armchair Economics” a bit more to be honest: http://www.stuntdubl.com/2006/01/02/armchair-economics/

      It’s along the same lines as freakonomics, and seemed to have some better narrative to make it more “edutainment” style.

      Not saying I wouldn’t recommend this one – but overall the other is probably a bit better in my opinion.

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