She Is Not Inferior!

Tyler Cowen points out that prostitutes can lose customers by lowering their price. But suggesting that the prostitute's services are a Giffen good doesn't quite follow. My understanding of Giffen goods is that the good must be an inferior good, i.e. a good that has many close substitutes where the substitutes have higher cost but also higher desirability. Looking at what prostitutes supply, the obvious substitute goods are spouse, girlfriend, mistress, and self satisfaction, the last being the inferior good. The prostitutes services don't fit into the set of Giffen goods. So what is it?

When I first started doing IT and management prostitution consulting, I had difficulty closing deals. I no longer remember where I heard about it, but somewhere I heard that a consultant may want to increase his rates if he isn't getting work. I tried it. I went out and started negotiations with a rate more than twice what I had been asking. My consulting practice flourished.

Professional services have an interesting little feature (bug) that we often don't think about, what exactly is the good being negotiated? How does the purchaser know? Price becomes the signal indicating what the good is. When I was asking too little, my customers concluded that I was perhaps junior level and only useful for the tedious and mundane tasks. When I jacked up my rates my customers concluded that I was more senior and suited for more high level work.

Prostitution and IT consulting are similar things, both are professional services that signal what good is being offered by their rates. When the lady drops her rates from $250 to $20, the customer is wondering if she has contracted an STD, she is falling in love with him and complicating the arrangement, or what is going on, he is no longer sure of which good he is getting.

Prostitutes, whether selling sex or business management services, just don't fall neatly into any single class of economic good. When I started thinking through this problem I was wondering by what means I could classify prostitutes as Veblen goods, now I don't think they fit. In fact, I'm wondering if Veblen goods are a null set. That is Veblen goods are goods that have been mis-interpreted as a single good when in fact they are several different goods. I would propose that "prostitution goods" are goods where the consumer cannot be sure what specific good he is getting, and price serves as a signal for which specific good he is getting. Or is there another term for this that I'm either not recalling or aware of?

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The actor Clark Gable

The actor Clark Gable frequently hired prostitutes even though women threw themselves at his feet. When asked why he paid women for sex when he could so easily get it for free, Gable responded, "I don't pay them for sex. I pay them to leave afterwards." Perhaps the prostitute who lowers her price for a favored customer causes the customer to worry that she is forming an emotional attachment that will prove dangerous to him. One hires a prostitute (so I hear) not to have sex, but sex without attachments.

You ask if Veblen goods

You ask if Veblen goods might be a null set. I think the better question is whether true Giffen goods are a null set.

That may be, but that's fodder for another post.

Maybe I’ll blog on this.

Looking forward to it!

And following my own advice we'll have to charge 3x our old rate for any trackback link. :cool:

I'm not sure your

I'm not sure your distinction holds. It is a trivial extension of ol' Mr. Veblen's notions that the "conspicuous consumption" goods he was talking about were serving two purposes, one of actual function, one of class-membership signalling, and that their weird behaviours were a result of the change from one to the other purpose dominating the transaction. If one is going to put Veblen's name to something, it should be the glued-together whole; trying to separate out the inseparable is simply a quibble.

Viewed this way, I think the prostitute or consultant is exactly what Veblen meant, even if it is perhaps not what later coiners of the term "Veblen good" meant. When the signalling component of the good begins to dominate over the actual service, there is a weird phase-change in the price-demand curve.

You're right that a Giffen

You're right that a Giffen good must be an inferior good. In addition, it must be a good that constitutes a relatively large portion of the consumer's expenditures, or else the income effect from the change in price won't be enough to swamp the substitution effect, which is necessary for the quantity to move in the same direction as price. But I'm guessing that prostitution services don't constitute that large a portion of the consumer's income. At least, I hope they don't!

You ask if Veblen goods might be a null set. I think the better question is whether true Giffen goods are a null set. I have reasons for thinking that even the paradigmatic example (potatoes in Ireland during the Irish Potato Famine) is wrong. Maybe I'll blog on this.

"Looking at what prostitutes

"Looking at what prostitutes supply, the obvious substitute goods are spouse, girlfriend, mistress, and self satisfaction"

And *other* prostitutes. That's the part you're missing. Hookers don't lower their prices en masse.

Hearing one woman quote you a $30 Lewinsky and then another ask for $300, wouldn't you think that the latter *must* have a superior service?

Grant (rates are examples

Grant

(rates are examples only, and probably aren't close to reality!)
A $500/hr IT consultant is expected to report to a corporate officer and be able to handle corporate financials, head up several large teams, etc. Program director at minimum!

A $200/hr IT consultant is a senior technical person or senior project manager, and is expected to mentor others, lead a team, do architecture, and some serious engineering.

A $50/hr IT consultant is a very junior technician, is basically expected to connect the cables from the new desktop unit to the monitor, install an occasional software package, and reset passwords. If he's a programmer he'll be given simple functions to code.

These are three very different goods. If a senior software engineer is only asking for $50/hr then the purchaser must be left wondering if he is really a senior anything!

Likewise, there is a very big difference in the level of 'service' between the streetwalker in the low rent district and the high society 'escort'. Completely different goods and completely different rates.

The thing is, if we make the distinction, then the demand curves look like the expected demand curves. If that is what Veblen meant, then so much the better.

Joe, that is exactly where I

Joe, that is exactly where I was headed.

Not meaning to split hairs,

Not meaning to split hairs, but a Veblen "good" really should be considered a different good when priced at $10 than when priced at $20. Introductory Economics classes very quickly start defining goods by the services provided. In the case of a Veblen good, the same thing is perceived as providing a different service if the price is $20 than if the price is $10, either because of the assumption of basic quality, or perceived exclusivity, or whatever.

Some who could hire a Senior level person for $50/hr would do so.