Everyday Economics

“Information gaps are what create opportunities for profit in otherwise competitive markets”

As I was walking through the Sydney airport recently, I passed one of the many shops scattered around the terminal when I noticed that they were having a sale on Tim Tams. If you have never had a Tim Tam before, it’s a chocolate wafer common in Australia, and I would highly recommend trying it out should you find yourself in that part of the world (Also – you can bite off the ends and use it as a straw with full cream milk, which almost makes it worth the flight time).

The store was having a sale, offering 4 packages for $20. Now, I had absolutely no interest in purchasing chocolates, but as someone who had spent the previous 4 months shopping on a budget in Australia, I was curious to compare airport prices to my local grocer (No surprise, the airport prices were higher).

And so I went on my merry way, thinking about chocolate and airport mark-ups, when not 50 feet away I found myself next to another store, which to my surprise, was also having a sale on Tim Tams, and offered the exciting prospect of “Buy 3, get 1 Free!” for $25.

I must say that I found myself somewhat taken aback. The average person may not be an economist, but it seems simple enough to realize that for the same 4 packages of Tim Tams, you could pay either $20 or $25. This would seem to be a straightforward choice… why would anyone purchase the same thing for more?

With certain products, you might argue that the price carries social status or some other intangible benefit, but somehow I don’t think that this is the case when it comes to store-bought chocolate wafers.

The only reasonable explanation, therefore, seems to be that customers simply aren’t aware. They go to the store, see the Tim Tams, and don’t think twice about whether it’s worthwhile to check out any of the other nearby stores for a better deal. And in their defense, this is probably a rational decision. The probability that another store is having a sale which provides the chocolates at a lower price may not be very high. Moreover, the time spent searching likely isn’t worth the potential savings. And although getting the best bargain can sometimes be a matter of principle, I personally don’t find $5 sufficiently convincing to warrant a steadfast consistency to that principle.

This seemingly trivial example of purchasing chocolate wafers illustrates a much larger economic concept: the role of information gaps in shaping consumer behavior and market dynamics.

On the surface, this is not a particularly earth-shattering realization. Sure, we realize that there are often better options out there, and we can’t utilize them if we don’t know they exist. And sure, we could technically find that information if we made the effort, but that’s time-consuming and may not end up being worthwhile. Regardless, sticking with what we know is typically going to be the easier option anyway (a topic that a future blog post will aim to tackle).

And so, we walk into the store and purchase the first Tim Tams that we see.

But the important thing here isn’t the Tim Tams, or whether you end up over or underpaying – it’s realizing the role that information (or lack thereof) plays in our decision-making.

Information gaps are what create opportunities for profit in otherwise competitive markets.

The store selling Tim Tams for the extra $5 isn’t being dumb or irrational, as traditional economic theory and perfect competition would suggest. They simply realize that people aren’t going to know all the options all of the time, and so they’re happy to take slight advantage of this and overcharge. Moreover, I’d be willing to bet that they make a tidier profit from their Tim Tam business than the store charging $20.

The takeaway here is not that we need perfect information all the time. As we stated earlier, information has a cost, and that benefit is often not worth the cost associated with gathering that information. But we should always be aware of what information we may be missing, and in what instances it may behoove us to incur that cost and spend a little bit of extra effort to review our options.

For example, when was the last time that you reviewed your car insurance and considered switching? Or your network provider? Have you recently considered refinancing your student loans or mortgage to better match your current income and economic situation? When was the last time that you really dug into your investment plan and made sure that it aligns with your retirement goals? If you own a business, when was the last time you renegotiated with your suppliers or checked if there were any hungry new competitors who could offer you a lower price?

All good questions. All unpleasant to dig into, because who wants to deal with the hassle? But the reality is that information matters, and its availability can lead to far more critical outcomes than getting the best deal on Tim Tams at the Sydney airport.