ARI SHAPIRO, HOST:
Last week, as Irma approached, Tesla increased the battery life of its electric cars to help drivers evacuate. As Julia DeWitt from our Planet Money podcast reports, this was a welcome surprise that also raised some questions in the minds of Tesla owners.
JULIA DEWITT, BYLINE: Kevin Lam has a Tesla Model S. That's a less expensive model. And last week...
KEVIN LAM: I got an alert on my phone that an update was ready. So I went to my car, and I applied the update.
DEWITT: One reason his model is cheaper is that the battery doesn't go as far. It's only 60 kilowatt hours. But when he goes to his car, looks at the dash...
LAM: Where, like, the speedometer is and, like, the miles driven and stuff like that, it said 75D on it.
DEWITT: Seventy-five kilowatt hours. Suddenly, with just a software update, his battery was identical to the battery in the more expensive model.
LAM: I was like, oh, cool.
DEWITT: It gave him an extra 30-ish (ph) miles of charge. Alex Tabarrok is an economist at George Mason University.
ALEX TABARROK: So I think Tesla did something which was good, which was in this emergency situation. I just hope that it doesn't backfire on them.
DEWITT: Now that the storm has passed, Tesla owners are wondering, wait; why was that so easy? Why could you just send me an update remotely and make my same car better? What it showed was that it's not like the longer, more expensive battery has fancier hardware. It's actually that the cheaper, shorter-life battery is programmed by Tesla to run worse.
Tabarrok says that there's a basic business principle at work here. Economists call it price discrimination. This is when a company takes the same product and sells it at different prices to different groups of people like a student discount at the movies. A classic example of this is IBM back in the '90s.
TABARROK: IBM famously came out with one of the first laser printers, which a lot of people loved. But it was very expensive.
DEWITT: So IBM was like, how do we offer this to people who can't afford the full price while also making sure richer people will still go for the more expensive one? The answer - make the E version of the printer - that's the cheaper one - slower.
TABARROK: The E version was identical to the faster version except IBM had put a chip in there just to slow it down (laughter), to make it worse, to damage it.
DEWITT: (Laughter) That is so annoying.
TABARROK: Exactly. But now this makes sense.
DEWITT: Tabarrok says, look; yes, it's annoying. But IBM did so much research on the front end, and this is how they break even. And actually, it's better for us, too.
TABARROK: We get more research development expenditures, more incentive to research and development.
DEWITT: So in the case of Tesla batteries, selling more cars with cheaper batteries today means better Tesla electric cars tomorrow. Unfortunately what can be given in one update to your phone can also be taken away just as easily. The update expires on Saturday. Julia DeWitt, NPR News.
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