Friday, January 06, 2006

The Coffee Question

My good friend Garry, who drinks a lot of coffee, was very intrigued by Tim Harford's Slate article on Starbucks economics. Here's my take on the issue, similar to the comment I left on Garry's blog:

As a non-coffee drinking pseudo-economist, I was interested in this and actually used it as a lesson on price discrimination in my econ class when I first read about it in Harford's book "The Undercover Economist" (a great read, by the way). What the hip Starbucks-bashing coffee drinker should remember is that this practice is not at ALL unique to Starbucks, and is actually extremely common in almost every retail/service industry, and like every other retailer, Starbucks is merely attempting to capture as much of their consumer's willingess to pay as possible.

All that's really happening is that they are charging over their marginal costs for the large coffees - as with most beverages, there is a volume discount (the price per mL is lower in the bigger sizes), but because most of the costs of producing that cup of coffee are fixed (rent, wages, marketing) and independent of the size you buy, the seller has very small marginal costs for producing the larger size, yet can charge a substantial amount more. Fair? You decide. I have no idea about what tastes better, because I can't stand coffee at any size. So either way, I'm sticking with Pepsi.


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