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Why does Transport for London charge significantly more for a tube or bus journey if you buy a paper ticket than it does if you use the Oyster Pre-Pay system?
In most cities around the globe, the price of an urban transit ride depends on how you pay for it. In London, for example, the 2007 cash price of a single tube ride was £4, but if you bought a prepaid ‘Oyster Card’, the same journey would cost you only £1.50.
Similarly, the cash price of a single bus ride in London was £2 in 2007, while the same ride with an Oyster Card was only £0.90. Why do travellers pay less than half as much with an Oyster Card?
Because ticket revenues in urban transit systems generally fall short of covering total system costs, operators are constantly on the lookout for ways to boost their receipts. Relative to the alternative of charging the same price to all travellers, a seller can generally generate substantially more revenue by charging high prices to those who are willing to pay them, while offering discounts to those who would be unwilling to buy without them.
The Oyster Card is a simple hurdle that helps segregate buyers in this way. The hurdle buyers must jump in this case is exceedingly simple: they must fill in a form and buy a card in advance, which they can do either online or in person at any tube stop. Transport for London knows that those who are unwilling to clear even this simple hurdle can hardly be very sensitive to price, hence the relatively steep cash fare of £4 per ride. Had Transport for London charged everyone that much, it would have lost most of its travellers. But by offering the Oyster Card option, it keeps the system affordable for its price-sensitive travellers, while collecting a substantial premium from about 20 per cent of its travellers.
(From The Economic Naturalist 2008 ISBN:0753513382)
Why have Apple restricted the iPhone to just one network in the UK?
Apple also limited its iPhone to a single service provider in the United States, and they were shrewd to do so. When it first hit the market in the United States several years ago, the iPhone offered capabilities that no other smart phone could match. Its technological edge is somewhat smaller now, but remains significant.
The upshot is that if a wireless service provider had an exclusive contract to provide iPhone service, it could trumpet that fact to attract new subscribers. That’s a huge advantage, because most of the costs of providing wireless service are fixed—which is to say, independent of the number of customers served. Additional revenue from new subscriptions boosts company profits almost pound for pound.
But why should Apple provide that advantage to an internet service provider free of charge? After all, it is the attractiveness of the iPhone, not anything the service provider does, that attracts new subscribers. Apple thus has considerable bargaining power here. By signing an exclusive service contract with one company, it can insist on a sizable quid-pro-quo. The terms of such contracts are not public information, but I’m guessing that Apple claims a substantial share of the monthly service fees paid by all new iPhone subscribers.
If Apple had instead made the iPhone available to every wireless service provider, no company would have had a uniquely attractive offering with which to attract new customers away from rival providers, and Apple wouldn’t have been able to claim any share of the iPhone subscription fees. That’s why Apple has been signing exclusive contracts.
Why do tube drivers get paid so much more than bus drivers?
An American economist trying to field questions about markets in the UK operates at an obvious handicap. Market outcomes hinge on myriad facts on the ground, and having never lived in the UK, I’ll often be completely ignorant of many of the most relevant ones. But instead of letting that hold me back, I’ll borrow a lesson from the retired American tennis legend Jimmy Connors.
If Connors had a glaring weakness, it was his serve, which was little more than a weak second serve by the standards of today’s men’s game. Connors knew it wasn’t an offensive weapon, so he just rolled it in, hoping that good things would happen once the point got under way. And that strategy worked well enough.
I’ll try a similar one in response to the question of why tube operators earn more than bus drivers. The short answer is that I have no idea. But the general question of why some jobs pay better than others is one that economists have studied extensively. So I’ll make a few general observations about some of the most important sources of wage differentials and invite knowledgeable readers to share their views.
The price of labor, like the price any good or service, is determined by the interplay of supply and demand. On the demand side, the employer’s rule of thumb is to hire an additional worker if that worker will produce at least enough extra revenue to cover his salary. On the supply side, the worker’s central question is whether accepting a particular job at a given wage would be at least as attractive as any other available alternative, including the option of not working at all.
These general observations suggest several possible explanations for wage differentials between seemingly similar jobs. One is that potential employees may regard working conditions as less attractive in one job than the other. In that case, the first job would have to pay more or else no one would choose it. For example, when all other relevant factors are equal, risky jobs tend to pay more than safe ones.
But the higher wage for tube operators is unlikely to be compensation for risk, since driving a bus is actually much more risky. Many studies, for example, document the stress-related health problems that are common among bus drivers whose routes entail heavy urban traffic. If the observed wage differential is rooted in some difference in working conditions, a more promising candidate might be that jobs in dark underground spaces are considered generally less attractive than those that can be performed in broad daylight.
Another possibility is that for every job opening in each category, there are fewer potential candidates qualified to be tube operators than there are to be bus drivers. This explanation also sounds promising, since most people who can drive a car could be trained to drive a bus relatively quickly.
A final possibility I’ll mention is that wages would tend to be higher for tube operators if for some reason they were represented by a stronger union.
I look forward to hearing your thoughts about which, if any, of these possibilities seems most promising.
Why is fruit and veg cheaper at the grocers than at the supermarket?
Dear Robert Franks
I thoroughly enjoyed your book ‘The Naturalist Economist’: it covered a lot of ground very convincingly, sometimes intriguingly, and always entertainingly.
There were one or two points I wanted to make, however.
Japanese houses are smaller than American houses because Japan has less building space: simple as that! At a cultural level, however, this means that where an American who wants to be alone will take himself off to another room, perhaps, a Japanese who want an equal degree of privacy will make it known, whereupon he or she withdraws into his or her own space, and anyone else present averts his/her eyes and attention. I learned that from a book on space, its uses and its decoration, back in the 1960s; unfortunately, it seems to have become lost in a house move.
I don’t believe that attractive people are more intelligent than unattractive people: I’ve known some pretty unappealing geniuses in my time! However, if credence can be placed in this theory, perhaps the following may give some idea of the reason:
Are you familiar with the short film ‘The Eye of the Storm’? It treats of a junior school teacher in a mid-Western town in the early 1970s who, having no black people anywhere in the vicinity, wanted to demonstrate to her pupils the reasons for the race riots that preceded and surrounded (and indeed followed) the assassination of Martin Luther King Jnr. She divided her class into blue-eyed children and brown-eyed children, and set up a two-week experiment. In the first week the blue-eyed children were treated like little gods: praised, let into class first, given treats and allowed home a few minutes early, while the brown-eyed children were criticised, dismissed from her attention, held behind and given minor punishments for so-say infractions of rules. The brown-eyed children lost confidence, lost ability, and felt thoroughly wretched. (I don’t know how she managed to persevere with this: I couldn’t have.)
In the second week, their positions were reversed – exactly.
The point was not just that the children felt the pain of exclusion and belittlement, but that, being belittled and criticised damaged their abilities as well as their self-esteem. They were called stupid, so they began to perform ‘stupidly’. Equally, I read ‘Teaching Your Baby to Read’ (long before I had children of my own!). The writers worked with brain-damaged children and decided, just by way of extra mental stimulation for them, to try to teach them to read. They were so hugely successful, they said, that they wondered why ‘normal’ children didn’t perform as well; and came to the conclusion that nobody took the time or effort to teach them.
Same thing twice over. If you put in a little time and trouble, and lots of praise, even brain-damaged people can do really well; if you can’t be bothered because they aren’t cutesy enough for you, then their abilities and self-esteem suffer, and the world loses the best that they could give.
Still, as I say, I’ve known a number of extremely unattractive geniuses, who succeeded in spades despite not being take-able-home-to-Mum-and-Dad!
I just can’t believe the comparisons you drew between blondes and brunettes, so shall continue to pass it off as one of your little jokes – as I hope it was!
Lastly, there’s a great deal in your book about logic and what people ought to do, and the sensible way forward, and rather too little about the unpredictable, the fact that people don’t act in accordance with logic, to the bafflement of all around them. One would think you’d never heard of Freud, never mind Jung with his more highly (deeply?) developed work with the personal and collective unconscious. If we manage to take a logical course of action and see it through, it’s usually because it concerns an issue that doesn’t ‘speak to our soul’, doesn’t actually move us very much at all. I think this has to be taken into account when considering any aspect of life, but most of all relationships. It’s all very well, for example, marrying someone sound and sensible who’ll be a good provider, good company, and a good parent to our children (not that, given the unpredictability of people, even that can be taken for granted!) – until we find the one person who knocks our socks off, bowls us head-over-heels, and forms deep bonds with us that we had thought impossible. I’m not advocating quickie divorces, therefore: anything but! But I do think it behoves us to think very, very carefully before we commit to a relationship that may be knocked sideways by feelings we never expected to have, feelings we never imagined could exist.
Interesting world, isn’t it?
Thank you again for your remarkable, and remarkably entertaining, book.
With every blessing,
Val Gaize
Which principle of Economics is applicable for the following questions in Chapter 7 - Decoding Marketplace Signals of ”The Economic Naturalist” book:
Why do stock analysts seldom recommend selling a particular company’s stock?
Why do producers sometimes put the phrase “As Seen on TV” in print ads and on some product packages?
Why do lawyers spend more on cars and clothing than college professors with the same income?
Why is there so much mathematical forrmalism in Economics?
Why do humanities professors, who should be more adept than most in their use of language, often write so unclearly?
Why do “almost new” used cars sell for so much less than brand-new ones?
Why are Australian films so successful?
Why does the rookie of the year in baseball often have a less successful second season?
Why do Managers tend to overestimate the efficacy of balme and underestimate the efficacy of praise?
Why do stores post signs in their windows saying that guide dogs are permitted inside?
Thanks
Why is there a light in your fridge but not your freezer?
Why do some producers put the phrase “As seen on TV” in print ads and on product packages?
Are global imbalances inefficient?
How do stores get away with charging more for small bottles of water than larger ones?
Why are whales, but not chickens, in danger of extinction?