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Freakonomics, Pricing Strategy, and a Call Girl

Steve Levitt, co-author of "Freakonomics," says companies don't often listen to him on pricing. But a certain individual did.

When he's not teaching economics classes at the University of Chicago, penning "Freakonomics" books, or doing articles or podcasts on quirks of applied microeconomics, Steve Levitt occasionally takes gigs consulting for companies. He humbly told the audience at Wednesday's World Business Forum that it's not always his most fruitful endeavor: "When I'm business consulting, I do nothing but fail," he says. "But I do have one success story where I actually made a difference."

He explained that some time ago he was conducting an empirical study of street prostitutes in the city of Chicago, and, through a connection at a company he was consulting with, met a high-end call girl who had read "Freakonomics," and who was willing to help him with his study by providing data. He explained:

This woman was not your typical prostitute. She had a college degree; she had been a computer programmer. She had worked for one of the biggest companies in the country making $80 grand a year; she had worked on the Star Wars Missile Defense system. She had just decided that being a prostitute would be a better job than trying to claw her way up the corporate ladder. So she used her programming skills and she built a webpage, and she couldn't be happier.

Within two or three months of the, well, career change, Levitt said the woman was making more than $200,000 a year, working 15 hours a week. The two talked data over brunch and then Levitt decided to bring up business strategy with her. "The set of questions I asked her was the same set of questions I'd assembled for CEOs for learning about their business," he said. "I have to say I was so impressed with her answers; her answers were so much better than the answers some of the CEOs were giving me."

But he managed to trip her up when his line of questioning turned to money. "Pricing strategy is the hardest thing for almost every business," Levitt said. She hemmed and hawed and said she didn't know what to charge initially, so she looked online, and found that other people in her field charged around $300 an hour, so she charged $300.

"That drives economists crazy! The only thing we're really good at is setting prices!" Levitt joked.

So he decided to try to help her figure out the right price for her time. He says he recalled she told him she had a dedicated phone line for client calls, so he asked her what she felt when that phone rang.

"She thought about it a little bit and said, 'You know, I'm almost indifferent when the phone rings. I don't really care when it rings. Sometimes, I don't even pick it up,'" Levitt said.

Levitt recalled his reaction: "My God! You've got a local monopolist! You've got a downward-sloping demand curve, and if you could sell one more unit at the price you'd sold your last unit at, of course you should want to! If you're indifferent, you can't be possibly be charging a high-enough price!"

She looked at him befuddled, and, as Levitt tells it, they said their goodbyes.

Fast forward some months. Levitt decided that since he was conducting the empirical study of prostitution, he should add a lecture to his University of Chicago economics class about that research. He invited the woman to speak to his class. She politely declined--until he offered to pay her usual hourly rate for her time. She obliged.

As Levitt tells it, the lecture went wonderfully--some students claimed it was their favorite lecture of their undergraduate career, which might be a separate lesson for some econ professors--until the woman took a question on pricing strategy from a student toward the very end of her talk. She told the student her hourly wage was $400.

"I become furious, because I know her wage is $300 an hour, and I've agreed to pay $300 an hour for her to come speak to the class!" Levitt said.

The next student asked her how she decided to charge that amount, as Levitt tells it. She decided to rib Levitt a bit more, with some choice wording.

"She turned to me with this big beaming smile and said, 'Well you know, the very first time that I was with Professor Levitt, he convinced me my services were far more valuable [than I was charging], so I decided to charge $400. It was the best business decision I've ever made,'" Levitt explained.

Levitt got a tremendous laugh from the audience, which, I imagine, was worth a great deal more than the extra cash he ended up paying for doling out unsolicited pricing advice. Then again, I'm no freakonomist.

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Last updated: Oct 3, 2013

CHRISTINE LAGORIO-CHAFKIN | Staff Writer | Senior Writer

Christine Lagorio-Chafkin is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is a senior writer at Inc.




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