Certain shops in London, a cup of "fair trade" coffee costs 25 cents more than an ordinary cup. But investigations reveal that, though the Guatemalan farmers supplying the coffee are paid almost double the market price, the quantity of beans used in a cup of coffee is so small that this extra cost works out at only 2.5 cents a cup. So 90 per cent of the higher price of fair trade coffee ends up in someone else's pocket.
There's no way the difference in price is adequately explained by the differing costs of producing the various styles or sizes.
For instance, I'll bet the higher price of free-range eggs isn't justified by their higher cost of production, just as the extra leg room and better meals don't account for the much higher price of business class air fares.
These cases are from an interesting new book, The Undercover Economist, by Tim Harford.
You see this frequently with overpriced "healthy food". Here's the rationale:
The beginning of wisdom is to understand that profit-oriented businesses want to charge "as much as the market will bear"...
The trick is that each of us has our own maximum price we're willing to pay for a particular item. So the ideal way for a business to maximise its profit would be to charge each of its customers a price geared to his or her maximum willingness to pay.
What's a lot easier and more common is for firms to set differing prices for different groups of customers. In the simplest version of this, they set a low price aimed at people with a low willingness to pay and a high price aimed at those with a high willingness to pay.
The trouble is, they can't just advertise two prices for the same item: $1 for cheapskates, $2.95 for spendthrifts. So they have to find a plausible excuse for charging two or more prices.
Hartford says no-frills products in supermarkets have unattractive labels not to save on printing costs but to discourage purchases by people prepared to pay more for the big-name products.
I'm not suggesting to go out and buy homebrand corn-flakes (because they taste like shit). But to be so blatantly shafted by companies in this manner, it's simply an insult to your intelligence.
P.S. I'm currently considering replacing my Helly Hensen inner fleece - the cheap part of a ski jacket - for $190. The entire jacket (shell and fleece) cost me about $180 in Canada. In Oz it costs over $400.