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The Undercover Economist

By Tim Harford

[pounds sterling]17.99 Little Brown

ISBN 0-316-732-93-1

Regular readers of the Financial Times will already be familiar with Tim Harford's writings. He is the author of a tongue-in-cheek 'Agony Aunt' advice column, 'Dear Economist', in which readers' purported personal problems are solved with advice that draws upon the principles behind economic theories.

What makes Harford such a popular commentator is his ability to convey complex theories in easy to comprehend terms. That ability belies the author's previous jobs; he has worked as an economist at the International Finance Corporation (the private-sector investment arm of the World Bank); as a scenario-expert for Royal Dutch Shell and as an academic at Oxford University.

"The economists' way of thinking about the world isn't guaranteed to produce the right answers," Harford avers in explaining his work, "but it gives insights about the world which apply far more generally than any industry analyst's accounting."

Harford looks in some depth at Starbucks in the first chapter of this book, 'Who pays for your coffee?'. But Harford's interest is not so much in Starbuck's business model or the growth of the coffee shop chains that now populate the world's major cities from Atlanta to Amsterdam and Johannesburg to Jakarta. Nor is he particularly interested in the marketing techniques used by these chains, nor yet in the culinary merits or otherwise of the various brands that are part of this fast growing market.


Rather, Harford suggests that all the coffee shop chains rely on location as their one significant asset, and an economic theory that Harford calls the 'power of scarcity'--a close relative of the theory of 'supply and demand' that underpins the entire free market system. The 'power of scarcity' theory is applied by the coffee shop chains in just about any prime-shopping district, railway station and international airport--and even in some unlikely locations such as hospitals.

Location and price targeting

Harford believes that the coffee shop phenomenon relies less on marketing and more on the less prosaic ability to secure locations that have sufficient numbers of potential customers passing by. As Harford explains, "if there's a profitable deal to be done between somebody who has something unique and someone that has something that can be replaced, then the profits will go to the owner of the unique resource". We can...

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