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Naked Ladies on $100 Bills
January 28, 2013 Price System

Well, sometimes I need a title to induce you to read the posts. Economists spend a gloriously large amount of their time explaining to people that theories that leave “cash on the table” are not likely candidates to explain interesting economic phenomenon. In other words, if your explanation for an interesting puzzle leaves an opportunity for someone to easily profit, there is probably a better explanation. The reason for the title of the post is that we often tell people that if you are walking down a busy city street and happen upon a $100 bill, it is probably not worth your time to pick it up (you may insert a Ben Bernanke joke here if you want, but I do not intend to).

Why?

Because if it really were a $100 bill, someone already would have picked it up already! Of course what gives students the most trouble with this thought is that for it to be true, someone had to pick it up, so why not you? We won’t answer that but I suspect readers can hit that softball.

A corollary to this idea is that identifying large profit opportunities is often a good way to think about why folks are successful or why patterns emerge in economies. But I have myself a little perplexed given what I just said above. Consider Big Box stores. One reason economists (I suppose classically liberally oriented ones moreso than others) believe that “Big Box” stores and national chain stores are blowing the doors off of old mom and pops is because it is relatively cheaper for them to deal with the increasing taxes, regulations and other burdens that are imposed on all companies today that were not there 100 years ago. For example, consider food safety inspections. Who is better able to pay for and handle them? A small mom and pop farm operation or a major agribusiness who can not only afford to build their own testing facilities but can also hire hoards of lawyers to help them. They can do this because there are economies of scale in these activities. The cost of defending themselves is the same (largely) whether they are selling 1,000 heads of cabbage or 1,000,000 heads of cabbage. We see the same thing in haircutting (Supercuts everywhere, striped barber poles a thing of the past), oil changes (Jiffy Lubes for example) and many other areas.

I used to be satisfied with this explanation for why Walmart pervades and why I can’t find an old Italian guy to cut my hair anymore. But if you think about the title of the post, doesn’t this strike you as incomplete at best? Wouldn’t such an answer seem to be leaving cash on the table?

Why?

Because if there are massive amounts of costs to save by spreading administrative, legal and other expenses over a wide berth of product sales, then how come an entrepreneurial legal or administrative firm has not emerged to help small businesses compete with the megachains? Or have they? To support the latter, think of ADP payroll processing. Maybe they do help small businesses, but they also serve the megachains too, and for lower costs than the mom and pops, again because of scale economies. But maybe they haven’t? And surely there are some functions that would be useful to mom and pops which are not issues for the major chain stores and which also give the mom and pops a competitive disadvantage. For example, imagine you run a chain of motels locally versus cross state-lines. Wouldn’t the larger firm face higher average costs? Why? Because they need lawyers in several states and not just one; accountants in several states and not just one; expertise in the labor rules, product rules, sales and income and payroll and UI tax rules in multiple states and a host of other regulatory matters that vary by state. So if you operate your motels only locally within a particular state, isn’t it conceivable that you can sell rooms more cheaply than megachain Motels?

There is no right answer of course, but the example is here put forth to help us think more critically about views we hold, why we hold them and to understand where their weaknesses are. Plus it’s fun to toss around ideas for why we see the outcomes we see. There may not, for example, be any such conundrum. It may be the case that people like branding because it sends them valuable information that small mom and pops can never send regarding quality and their ability to last a long time. It may be that people are bland and like the “blah” that the major chains deliver to them. Or something else entirely.

"3" Comments
  1. Don’t get me started about barbers, who are licensed and inspected by the Commonwealth of Pennsylvania, to make sure the customers of barbers do not get the Sweeney Todd treatment, and sweep up the hair before the inspector arrives to measure the square footage of the emporium, and to check out the magazines. I get my hair done by an associate of my wife’s hairdresser, who does a good job on my hairs.

    That said, economies of scale help sometimes, and sometimes they do not. Companies, associations of free people, figure out the problem, on the average, far better than do government officials with taxing power.

  2. As an example of why an individual business might be up against it versus a big box store, consider tires. A tire can be purchased for very close to the same price from Dudley’s Tire Shop down the street or Walmart across town. But if there’s a problem with that tire halfway to the Kentucky Derby the driver can pull into the Walmart in Peoria and get warranty service without a problem. Dudley doesn’t have a branch in Peoria.

  3. Good thought piece WC.

    I know this is beside the point, but what if there were not a $100 bill there with a naked lady on it, or a platinum coin the size of a quarter with a $1 trillion denomination on it, and, being a frugal Wintercow, picked it up.

    Of course, any trillion dollar coin would have a naked lady on both sides.

    Would you keep it hidden until the Antiques Road Show came to Rochester? Would you take it a broker, and ask him to open an account? Would you first hire a team of bodyguards, buy a new phone, and then call home with the good news? Would you call Jerrold Nadler?

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