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ASYMMETRICAL INFORMATION AND HOOKER-NOMICS

Assigning a price to a product is always tricky. But what if the product is illegal and the value subjective? Allison Schrager discusses the matter with a happily self-employed prostitute. “I’ve always wanted my own business,” says Andrea ...

Special to MORE INTELLIGENT LIFE

Andrea, an attractive, petite red-head, with a warm smile and a degree from a top Canadian university, sits across from me, sipping an herbal tea. She has been working as an independent, high-end prostitute for the last four months. I ask her how she decided to set her fee, now at $500 per hour.

How does a supplier determine a price?

Like most independent escorts in the New York metropolitan area, Andrea advertises on the Eros guide, an online listing service. She is in the VIP section, which Eros describes as, “A very special limited list of entertainers”. To be listed as an Eros VIP, Andrea shells out about $200 more per month, on top of the regular monthly fee of $175. (The cost of being listed varies in each city, and VIP add-ons can cost more.) This is her way of signalling that she is a high-end product, offering better quality service.

The going rate for VIP escorts on Eros ranges from $400 to $2,000 per hour, be they women, men or "she-males". A search through the female listings yields an array of escorts who all claim to be well educated and worldly, and appear exceptionally attractive. An escort's fee is determined by the provider or agency; Eros is merely a clearinghouse.

“I only charged $300 when I lived in San Francisco,” Andrea says. Unlike most industries, escorts can charge higher prices when they are in greater supply. This is because price is one of the few metrics sex suppliers can use to convey quality. (In this way it is not unlike the hedge-fund industry.) There are only about 30 VIPs in San Francisco, but nearly 100 in New York, so Andrea can charge more here. The customer demographic is also wealthier, and a higher price deters customers from bargaining, which is considered poor taste.

In any non-competitive industry, setting a price is a supplier's way of communicating value to a customer. When information is imperfect or asymmetrical (ie, when customers don't know enough about a product, or when suppliers are ignorant of their value relative to their competition), prices deviate from their market value and the market becomes riddled with inefficiency. This is why tourists in midtown Manhattan spend too much money on fake antiques, and why my local laundromat will wash and dry my clothing for half the price of rival cleaners across the street.

For a prostitute, the asymmetry is more profound. On the supply side, it is challenging for Andrea to price herself relative to her competition. Despite the publicly available listings of prices, photos and expertise of fellow escorts on Eros, it is impossible to know if these other women provide comparable services. On the demand side customers cannot be certain that the product resembles the advertising. And much of the value is merely hinted at, owing to the illegality of prostitution.

The credit crunch means customers have become more price-sensitive. Andrea now receives more requests for an hour of her time instead of two. One woman on Eros is currently offering "Wall Street adjusted courtesy rates". But given the role price plays in indicating quality, rates will probably remain sticky.

"I could do lots of other jobs, but this what I want to be doing”

Andrea first considered the industry after watching the 1967 film "Belle de jour" with her then husband some years ago. (She is now divorced.) She found herself inspired by Catherine Deneuve's character--a married woman who worked as a prostitute by day--and saw this as a life she might like to lead. Upon exploring her own sexuality, she discovered she had a special gift: “I can be turned on internally," she explains. "I don’t need that hot guy in front of me, it comes from within.”

Employed as a personal assistant, Andrea began looking for more interesting work. She was intrigued by an advertisement on craigslist for “Very personal assistants.” The job, she discovered, entailed a mix of secretarial work and the odd sexual act. For her first time, she let the man set the price: $200. They proceeded to have what Andrea describes as an “amazing” sexual encounter. Afterward she realised that she could ditch the secretarial work and make more money “just doing the fun stuff.”

She tentatively began advertising herself on Eros, and set her fee at $300 an hour. (Friends in the industry recommended the site.) This price was higher than what women charged in the craigslist classifieds (considered the dregs of the industry), yet lower than the going rate on Eros. New to the industry, she felt she was not yet worth a higher rate. She raised her price upon moving to New York last autumn.

In outlining her value, Andrea boasts that she does not merely provide sex, but also a vital service. She prides herself on being in tune with the desires of her clients, and maintains that she enjoys the experience. For her single male customers, she provides needed intimacy. For married ones, she says filling an “emptiness” in their lives can enhance their relationships with their partners.

“I love what I do,” Andrea tells me. “Many of the girls hate it, but I love it. I could do lots of other jobs, but this what I want to be doing.” Andrea concedes that she's still new to the field, but her pleasure seems genuine.

Learning the tricks of the trade

Selecting an escort is tricky, given the limited information, daunting range of prices and questionable legality of the enterprise. There are services to aid consumers, such as the Erotic Review, a popular website that offers thorough reviews of the physical and sexual characteristics of escorts (on a scale of one to ten). The VIP section reads like the Penthouse forum (VIP distinction is quite pervasive in the industry).

Yet this information can also be unreliable. David Elms, the original owner of the Erotic Review, was accused of accepting bribes in exchange for posting positive reviews. Yet even when reviews are posted in good faith, experiences with a single escort may vary according to the circumstances. The variability in dollar value for a single escort’s service is a phenomenon known as YMMV (Your Mileage May Vary).
 
Favourable reviews let escorts charge higher fees, but also increase the risk of alerting law enforcement officials. This is because the site makes plain what Eros leaves to euphemism ("escort services" can mean many things.) Andrea has taken several measures to evade legal action. Customers must contact her through her website and provide a real name and phone number. The number must be a main line at a verifiable company, not a personal extension. Self-employed clients need a reference from another escort. Neophytes must seek services elsewhere first. 

As many as 100 visitors come to her website each day, Andrea proudly discloses. (Activity on the site certainly peaks on Fridays at 1pm.) Her site features many alluring photographs, and she wears some clothing in all of them. Nudity signals low quality.

Andrea learned some tricks of the trade from other women in the industry.  Independent providers have a loose sorority, even though they compete with one another. Escorts maintain a website called the National Deadbeat Registry, which features advice such as: “Stay emotionally healthy by being emotionally detached.” Also: “Many clients have issues with women, and therefore do not, or can not, have normal healthy relationships with women. That is why they pay for your time and services. Keep this in mind and remember to not ever get involved, date, or marry your customers.” (So much for nursing "Pretty Woman" fantasies.)

The Deadbeat Registry also names and shames errant hobbyists (men who patronise prostitutes), be they undercover police, insolvent or violent, and highlights those who fail to show up for appointments (a common problem).  Andrea tells me about a hobbyist who always paid with a credit card and later disputed the purchase. He did this to several women; once they learned of their shared foe, they banded together and informed their client’s boss of what was being done on company time with a corporate card.

“I consider myself an entrepreneur”

Without the support of an agency, Andrea must manage some tedious aspects of the business, such as operating her own website and covering the costs of advertising, health care, photos for her website and personal grooming.

Working independently is less stable, as agencies tend to provide a more steady stream of clients. But Andrea considers working for an employer degrading, and is uncomfortable with someone else setting a price for her services and profiting off of her body (agencies often take a 50% cut). She prefers choosing her own clients and deciding on what she is willing to do with them. "I am solely responsible for my own mistakes and successes," she says. Having and respecting boundaries is important.

“I’ve always wanted my own business,” she explains. “I consider myself an entrepreneur.”

Agencies often charge higher fees because they claim to offer customers greater accountability. They are seen as more customer friendly and enjoy the advantages of economies of scale, making the costs of screening clients and marketing escorts lower than those for independent providers. Yet Andrea reckons working for an agency has become more dangerous, as law-enforcement officials are more inclined to crack down on larger networks to expose more customers. At any rate, internet listings have enabled more independent providers in recent years

Slouching towards economic equillibrium

In cases of extreme uncertainty on the part of consumers, such as when shopping for a used car, the convention is to expect a “market for lemons”. Used-car salesmen are widely seen as a sleazy bunch owing to incentives they have to lie about a car's quality. Because buyers presume a good chance of fibbing, most will only pay a low price for a used car. This could deter honest brokers, and ensure that only lemons are indeed on the market. Honest salesmen of quality cars can break this cycle and charge more, but only after building a reputation for good value.

Similarly, some assume that the only kind of women who would sell themselves at any price are of poor quality--ie, lemons. Especially valuable escorts who are exceptionally attractive, appealing and skilled, say (ie, in short supply), can break this perception of low value by charging exorbitant prices. (The high prices are also a factor of the illicit nature of the product.) Fees can reach astronomical heights as a supplier builds a reputation. In this way high-end prostitutes can escape the “market for lemons” perception.

Self-employed service providers always struggle to determine what the market will pay for their work. The aspiration is always to find the price that enables economic equillibrium, where supply equals demand. But when the product is sex (human capital in the purest sense) the problem becomes more personal and the information more scarce. The escort industry has developed unique ways to signal value and to overcome information asymmetries. Time and experience should help Andrea to approach her own personal equilibrium price.

Picture credit: KoAn La Scrivana (via Flickr)

(Allison Schrager is an economist based in New York. She keeps a website with links to past articles.)