Friday, July 21, 2017

Economic Lessons: Shopping for Eyeglasses

Out of Pocket vs. Third Party Payments

I recently had to buy new glasses, because the hinge on my old pair broke. I was paying out of pocket. The initial quoted price was just above $400. I kind of balked because that was way more expensive than what I expected. Then the sales person said that the “anti-reflective coating” made up about $150 of that figure. I said “No thanks” to a feature of dubious value.

I think this is the kind of shopping people would do if they paid more out-of-pocket for routine, predictable healthcare expenses. Some people think that if patients have to pay in cash instead of paying though a third party, they will skimp on important medicine and injure their health. I think this is nonsense. A healthcare market of first-party payments doesn’t imply skimping on vaccines and routine screenings. It just means we say "No" to the anti-glare coating. Maybe it means we double up in our hospital rooms instead of getting our own suite (at least whenever someone isn’t contagious or ultra-sensitive to disturbances). Or maybe it means we shop around for the best MRI price (David Goldhill describes doing exactly this in his book Catastrophic Care).

“Affordability” is a red herring. If you can’t afford the glasses with the anti-glare coating, then you also can’t afford the insurance premiums that will pay in full for the glasses with the anti-glare coating. Likewise, if you can’t afford routine check-ups or monthly birth control, then you can’t afford an insurance policy that will pay for those things. Obviously, your insurance premiums are calculated to cover such expenses, so mandating that insurance cover more things doesn't make those things more affordable. If anything it does the opposite. You get gold-plated hospital stays instead of austere-yet-functional hospital visits. Making healthcare more affordable to people with low incomes requires explicit transfers (government programs and/or private charity), not insurance coverage mandates. 

What follows is a completely unrelated point, so don't stop here just because something about the above section put you off. The next piece could be a completely separate blog post.

Price Discrimination

"Price discrimination" simply means charging different prices for the same product because some customers are willing to pay more. Alternatively, you can think of it as meaning sellers offering discounts to capture some of the potential customers who won't pay the listed price. These are economically equivalent descriptions, but for some reason people balk at the first one. They always imagine that they are the ones paying more, and the seller is trying to squeeze them. But half they time you are the person being offered a discount because you wouldn't pay full price.

Price discrimination exists because some sellers have very high fixed costs. An optometrist's office has to operate a building. They need to maintain an inventory of glasses and frames, many of which will  never be sold because they are the display model. They need to buy equipment for performing eye exams, pay someone to man the front desk, etc. These costs will exist even on a bad day or bad week, when they have few customers. The average price of the eyeglasses must cover these costs. (Or the average price of eyeglasses + eye exam, or whatever bundle is being sold, must cover these costs.) Say I divide my total monthly expenses (including machinery, utilities, labor, rent, return on capital to the business owner) by the number of customer's serviced for a given year and it comes to $400 per customer. I'd better be collecting at least that much from each customer, or I'll be going out of business. 

But wait. Maybe it's very cheap to service one additional customer. Maybe the frames and lenses only really cost $20 or so, and perhaps nobody's busy right now so servicing an extra customer is practically free from a "cost of labor" standpoint. Maybe if you add up the costs of servicing one additional customer, it only comes to $50 or so. If you could offer a random passer-by "Eye exam plus glasses for $100?" you should do so. Your business would profit to the tune of $50 from such a deal. Unless everyone else gets wise to this special deal and starts asking for it, in which case your revenue will only be $100 per customer when you really need $400. (Perhaps you can't drum up enough additional volume to make this deal worth extending to everyone. The community serviced by an optometrist's office is limited, and people only need new prescriptions every few years or so.) 

So you have to be clever about it. You have to say things like, "Well, the price for the frames, plus lenses, is $425." (customer winces) "Of course, that includes the anti-reflective coating, which is $150 of that total." (recalculates price, customer accedes.) This is precisely the negotiation I had with the salesperson. I strongly suspected that the anti-reflective coating is a low production-cost add-on, but a useful bargaining chip if one wants to price-discriminate. They can still nab the marginal customer (like me) who might balk at the full $425 and go buy my glasses elsewhere. I have my prescription, anyway, so I can simply buy glasses online if I need to. 

My suspicion that this was some kind of price discrimination was confirmed later when I went to pick up my glasses. I had said "No" to the anti-glare coating, but they added it free of charge because it would  have taken them longer to fill my order without the coating! So for whoever manufactured my lenses, adding the coating is actually their default. They have to special-order the lenses without the coating. It's probably cheaper to produce lenses with the coating. But it is a very useful way to price discriminate. If the true cost of production were and additional $150 for the coating, they would have probably found some way to get the money out of me, or asked me if waiting was acceptable. 

This reminded me of a story about a Hewlett Packard high-speed laser printer, which was more expensive than the "normal speed" model. The normal-speed model was actually identical to the high-speed printer, except that it had an extra chip that slowed it down. It was cheaper to just build the high-speed printer. The low-speed version was created simply to be able to offer a lower price to more price-sensitive customers and to keep up the facade that there was a difference in quality. This story is told in one of Tim Harford's books (The Logic of Life or The Undercover Economist, though I can't remember which one). 

A favorite write/economist of mine, David Friedman, also once used the example of selling eyeglasses as an illustration of price discrimination. It was from one of his class lecture recordings, several of which I've listened to. They are available at his website. It began: "I'm selling you a pair of eyeglasses. I say, 'That'll be $40.' You don't wince. 'For each lens.' Still no wincing. 'Plus $80 for the frame.' What have I just done?" What follows is a discussion of price discrimination. Sellers who have very high fixed costs have an incentive to figure out how price sensitive their customers are, so they can offer discounts to customers who they would otherwise lose.

Customer Service

Eight years ago, when I last bought eyeglasses, I learned an important lesson about customer service. I bought a pair of eyeglasses from the optometrist who did my eye exam, and I bought another pair from Interestingly, in both cases there was a mistake in the prescription. The optometrist immediately recognized the error, and re-ordered me a pair of glasses. Of course I didn't have to pay a second time for their error. In the case of, the glasses I got were obviously the wrong prescription. I don't know if I had entered it incorrectly on their website or if the error was theirs, but they were completely unwilling to own any portion of the mistake. In order to correct my prescription, they asked that I send back the pair they had sent me, which I did. Then they asked for a $16 fee. Then, later, they said they wouldn't process the re-order until I sent an additional $26. I just rolled my eyes and paid it, but vowed never to buy anything from them ever again.

The pair I had purchased from the optometrist was more expensive in sheer dollar terms than the pair I had purchased from But the optometrist was selling me more than just the glasses. They were selling a promise to make good on the order. offers a stripped-down, bare-bones product with minimal customer service and (apparently) no promise to actually make good on an order. The optometrist's office, having sunk a lot of expenses into building and maintaining a brick-and-mortar business, knows that it needs to keep its customers happy or lose a future revenue stream. All things considered, the pair of glasses I bought on line was probably slightly cheaper than the pair I bought from the optometrist, but it certainly left a bad taste in my mouth. There's no deep economic lesson here, other than "you get what you pay for." It was a pain to navigate 39dollarglasses's almost non-existent customer service, and it gave me the feeling of having been robbed. It was probably worth the extra cash to have the optometrist settle the deal and smooth out any mistakes in the order, having that built into the price of the glasses. 

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