The Price of Everything - Eduardo Porter [7]
Most intriguing of all, there is an undeniable emotional angle to my preferences, which can trump on occasion every other consideration. The best coffee I’ve had in a long time comes from the tiny pie shop on the corner, half a block from my house. It used to sell a superb cappuccino for the unbelievable price of $2.75. I would stop by for a cup as often as I could. Then, a year or two ago, it abruptly raised the price to $3.50. This made me so furious I decided never to drink coffee there again.
I’m not sure what infuriated me so. The friendly barista offered explanations: they were switching to a premium coffee that cost a dollar an ounce; the new cups were bigger; they were using double shots—more than half an ounce of coffee per cup. Maybe I was disappointed at seeing a bargain vanish. Maybe it was a sense of betrayal that the young, laid-back, indie-rock-loving people at the pie shop on the corner could strategize about prices as ruthlessly as Starbucks. I would grumble that rent, wages, and profit make up a bigger share of the price of a cup of coffee than the cost of the coffee that goes into it. Still, my anger made no sense. Their coffee did not cost much more than coffee I bought elsewhere. And it tasted much better. There was something irrational about my boycott. Fortunately, I forgave them. So I’m drinking great coffee again.
BUYING GOODS AND services makes up a large part of modern life. There’s food, clothes, movie tickets, summer vacations, utility bills and mortgage insurance premiums, gas, iTunes downloads, and hair-cuts. The marketplace is where prices acquire their most straightforward definition, determined by a voluntary transaction between a buyer and a seller who expect to benefit from the trade. Yet despite the routine nature of the standard mercantile transaction, consumers’ interactions with prices are fairly complex. This chapter is about this economic interaction, the tango between buyers and sellers as they strive for a deal.
Economists tend to assume people know what they are doing when they open their wallets. They can assess the benefit they will derive from whatever it is they are buying and figure out whether it’s worth their money. It’s hard to overstate the importance of this assumption. It is one of the bedrock principles upon which classical economics was built over the last 250 years. It is often true, and has yielded deep and far-reaching conclusions about human behavior.
But as a general principle, the assumption is misleading in a subtle yet important way. Markets may be the most effective institution known to humanity to determine the value of goods and services to the people who consume them. Still, the price-setting process is by no means a transparent and straightforward interaction between rational, all-knowing calculators of costs and benefits. That’s because market transactions do not necessarily provide people with what they want; they provide people with what they think they want. These two things are not the same. Consumers often have but the most tenuous grasp of why they pay what they do for a given object of their desire. Sometimes they don’t know why the object is desirable at all. Moved by any number of unacknowledged biases, they are easy prey to manipulative devices deployed by those who want to sell them things.