Sometimes Bad Service is Good Business

I hate bad service. So when I see it, I assume it's a market failure. In a recent audio podcast from the new Freakonomics Radio, economist Steve Levitt set me straight:

I've hypothesized that it has to do with the income level of the customers, and that wealthier customers are less willing to tolerate incredibly bad service. I saw this when I spent a year visiting at Stanford University and I lived in Palo Alto. The share of rich people in Palo Alto is almost unparalleled.

[...]

I think the business can decide, do they want to pay more and have good workers? Or do they just want to coast along, do they just want to provide the minimum amount of service, and get by? It costs money to provide good service; businesses adapt to that.

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