A simple presentation of the Alchian-Allen theorem is that if you take two goods with different prices and you add a fixed cost to each of them, then the “more expensive” good becomes relatively less expensive. Here is a simple illustration:
Suppose we have two types of booze: White Lightning Bourbon, which costs $8.00 per fifth, and Makers’ Mark Bourbon, which cost $32.00 per fifth. The relative price of the good stuff is 4 times the cost of the bad stuff. In other words, each bottle of Makers’ you consume requires that you give up the chance to consume 4 bottles of the moonshine. In this world, it would not be implausible to see that the owners of Makers’ Mark would support a fixed, per bottle liquor tax on all hard liquor, nor would it be implausible for them to support all other types of interventions that add costs to all bottles of booze. For example, suppose a new rule was passed requiring costly FDA inspection of the facilities of all booze makers – and that this inspection cost $8.00 per bottle of liquor. Or suppose that all liquor companies needed to pay for licenses that amounted to $16 per bottle of liquor sold. What would happen in the liquor market?
Well, if we add the $8.00 per bottle inspection and the $16 per bottle license fee, then the effective price of a White Lightning fifth would be $32 and the price of Makers’ would be $56. Both are more expensive – so you might expect (rightly) that the consumption of bourbon would fall overall. However, for customers thinking about what bourbon to purchase, notice how the relative price of Makers has fallen substantially. Now, when I purchase a fifth of Makers, I am only giving up the chance to drink 1.75 fifths of the moonshine. So I am much more likely to purchase Makers over White Lightning today than I was in the past.
This illustrates another reason why big corporations are often in favor of certain types of taxes and regulations. Given their large scale and size, they are better able to handle the burden of these regulations (i.e. they can spread these fixed costs over a larger range of output) and it puts their more expensive products in a better competitive position. This should help you understand another reason why “big box” stores are increasingly prevalent and national chains are displacing mom and pops. No doubt part of that trend reflects the tastes of the median American, but no doubt another serious part of the trend is that major corporations are better able to handle the regulatory, legal and fiscal costs of big government than their formerly smaller and more nimble competitors. Consider the story of what one person must do in order to open up a low-cost barber shop in a poor area in California (the rest of this is from RW Grant’s Incredible Bread Machine).
You might suppose that all you need to do is to practice on some friends and family, buy a pair of $50 clippers, a chair, a few combs and antiseptics and find some willing customers and just have at it. If you were good and served your neighbors well, you would grow and prosper – as would your customers. You might even open up a bigger shop and hire a few people to help you. But here is what you must do in the state of California (and other states) in this “free market paradise of America.”
But this was all for a guy opening the shop up on his own. What would have to happen for this entrepreneur to become the “engine of job creation” that he is so often celebrated for being? Suppose he wished to hire an assistant.
The paperwork and administrative aspect of all this represents a severe burden even to people with a good amount of schooling. How would this affect someone with poor schooling or only passing familiarity with bookkeeping? The burden would be overwhelming. But then there is even more beyond this! Most states impose and enforce minimum price schedules. But a poverty area shop forced to charge inflated rates would go out of business faster than it could fill out a Workers’ Comp form.