Question

1. Answer the following questions from your knowledge in microeconomic theory:

The following quote was taken from a letter printed in Ann Landers’s column:

Dear Ann Landers: I am a hairdresser who wishes to speak my piece. My remarks are for the women who think they are paying too much for a haircut. The reason haircuts are rather costly these days is because so many people are cutting their own hair and others wait three months between haircuts.

A)      Do you think that this hairdresser has identified the correct reason behind the rising prices of haircuts, assuming that hairdressers are in a competitive market?

B)      Explain what must be happening economically that is consistent with the facts described?

Answer 1

A) Do you think that this hairdresser has identified the correct reason behind the rising prices of haircuts, assuming that hairdressers are in a competitive market?

I think she hasn't identified the correct reason. My reasons are as follows:

1. Hair dressers charge slightly more for women's haircuts than for men's haircuts because women expect a different service than a man expects. Women expect a haircut often paired with a chemical service such as permanent color. They expect a shampoo and often a style using hot tools. All of these services take different skills and are all wrapped up in the pricing structure.

2. Women expect much more intricate cuts, even with short hair. For example, an a-line bob as made famous by Vidal Sassoon will take significantly more skill to get right than a Princeton cut with buzzers. Even a short pixie cut will be more intricate than a man's haircut. Women with short hair expect not just a particular cut, but internal texture and play and the hair to lay a particular way. A good hair cutter will discuss these things with clients in consultation and then create a style to match the client's features and lifestyle. It costs.

3. Another hidden cost is the price of products on the "back bar". The back bar is the stock of shampoos and conditioners the stylist uses to wash your hair out. More hair requires more product which costs the salon more money. With women typically having more hair and longer hair than men, it is easy to see why the added cost of time and products to the stylist leads them to charge women more.

4.Consider the fact that men and women can be charged differently for haircuts. Now let’s assume these haircuts are the same duration and cost the salon the same resources. Then the supply curve for both males and females are identical. But what about the demand curves?

In anticipation of our future result, let us assume that females are willing to pay more for haircuts in general. In our model, we say the market demand for female haircuts is larger at any price.

However, we know the market price in a competitive market is intersection of the supply and demand curves. Then there will automatically be a price for women that is higher than the price for men, by the laws of market pricing.

Now this is an extremely simple model. It applies to a certain type of haircut, one that costs the salon the same in both cases. It also doesn’t use realistic demand or supply curves. For instance, even if the haircut is always guaranteed to be the same quality, it can still be that cheaper haircuts are in less demand, contrary to our graph.

However, as a model, it predicts that as long as the demand curves are different, the prices will be different. And this is a universal truth no matter the real shape of the curves or details.

But all I’m doing is suggesting that the mere fact that males and females can be charged differently will inevitably lead to different prices for both, by market principles.

This works in other markets as well. It can explain the existence of senior and student discounts, happy hour, matinee movie pricing, and more. In all cases, the simple fact that different market participants can be charged differently inevitably leads to different prices for each.

B) Explain what must be happening economically that is consistent with the facts described?

1. While your general assumption around the time it takes for men and women to get a haircut is a contributing factor, there's also the fact that women tend to have a higher willingness to pay for haircuts -- the job is perceived to be more complex, and as such they're willing to pay more for better quality.

2. Many men hold the mindset that they could get their hair cut at any chain and the difference in quality would be minor or irrelevant. This corresponds to a lower willingness to pay, as well as a higher degree of price competition between major salons -- ultimately driving down prices for haircuts for men.

3. I have seen some salons start to charge both genders variable prices for certain services based on hair length -- particularly when it relates to variable supply costs (e.g., color, highlights).

4.