The Undercover Economist (Book Resume)

What makes markets work? What makes something valuable? What is the basis for
bargaining power? Why do poor countries struggle to develop? What is the impact of
trade on the environment? Using the basic principles of economics, the author analyses
various problems of day-to-day life. Daily life is full of puzzles. But many of us do not
even realize them. This book helps us to understand these puzzles and what lies behind
The importance of scarcity
When a deal is being done between somebody who has something unique and someone
who has something which can be replaced, the profits are likely to be cornered by the
person with the unique resource. When relative scarcity shifts, the bargaining power of
the people involved in the deal, also shifts. Some things are scarce because of natural
factors. Others are scarce because of man made factors – legislation, regulation or foul
play. For any company, grabbing or developing unique resources is really the only way
of generating profits on a sustainable basis in the long run. These resources could be
physical or intangible assets or some unique competencies.
In the real world, people and organizations try to create scarcity by erecting barriers to
entry in many ways. The purpose of a trade union is to prevent workers from competing
with each other for jobs, thereby driving down wages and worsening working conditions.
Professional bodies like doctors, actuaries, accountants and lawyers try to maintain high
wages through long qualification periods. Some professional bodies give their approval
to only a certain number of candidates per year. The CFA (USA) and CA (India)
certification are good examples.
Price Discrimination
We learn in Economics that price discrimination is a good strategy to increase profits in
imperfect markets. There are different ways of doing this. The first is to evaluate
customers as individuals and charge according to how much each is willing to pay. This
approach requires skill and effort. Where technology allows, as indeed the Internet does,
firms with scarcity power can use highly sophisticated methods to target customers.
The group target strategy is to offer different prices to members of distinct groups. This
strategy seems more popular as people in groups who pay more are usually people who
can afford more. People who can afford more are usually people who care less about
price. But this is only a coincidence. Companies are targeting the people who are willing
to pay more, not those who can afford to do so.
The cleverest way to get better prices is to persuade customers into confessing that
they are not sensitive to price. To achieve this, the company might offer products in
different versions – size, features, location, etc.
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