Thursday, February 16, 2006

Water, Water, Everywhere

A water molecule consists of two hydrogen atoms and an oxygen atom. As such, you would think it satisfies the economic definition of a homogeneous good.

You would be wrong.

There are now hundreds of brands of water in the United States. Many contain lots of things other than water--indeed, many are chemically indistinguishable from flat diet soda. Still, the water industry in the U.S. brought in billions of dollars of revenue last year.

This article in the New York Times details the history of the water industry in America, from its origins in the Perrier craze of the 1970's to today's vitamin-saturated marketplace.

1. Do the consumers in the article consider different brands of water to be of different quality? Do you think they would really be able to tell the difference in a blind taste test?

2. Suppose two companies produce water, and each product tastes identical. Why might each company try to differentiate its product? Is it profitable to do so?

3. When one considers the market for water, how broadly can that market be analyzed? Is the market for all bottled water one market? What about carbonated bottled water? How would an analysis of demand for all types of water differ from an analysis of demand for small bottles of lemon-flavored sparkling water?


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