Friday, January 02, 2009

Is the Value of Everything Measurable?

A common complaint about Wal-Mart, Best Buy, Home Depot, and other "big box" retailers is that they drive smaller retailers out of business. When this happens, it is opined, something "intangible" or of immeasurable value is lost. Among the things lost may be involvement by the business in the community, personalized, polite, or friendly service, and the sense of satisfaction that comes from supporting a small business. While it's true that small businesses often provide intangible benefits such as these, many would argue that since their value can't be measured in terms of dollars they are typically under-valued by most consumers and are therefore unable to stand against the onslaught of low prices from big box retailers. Interestingly enough, the value of such intangibles can be measured in dollars, although perhaps not directly.

Economically speaking, the value of any item or service can only be measured subjectively, in terms of what an individual is willing to give up in order to attain the item or service. For instance, if a buyer is willing to give a seller $15 for a particular item, this shows that the buyer values the item more than whatever else he could have bought for $15. Thinking in terms of money, therefore, provides a convenient way of measuring subjective value, but it's not always obvious. Consumers may be willing to give up other things that they don't immediately associate with money in order to attain some item or some intangible "good" such as personalized customer service. They may, for instance, be willing to drive further, accept a more limited selection, or have to arrange their schedule to visit a store during business hours. All of these things represent a cost, and no matter how you slice it they always impact our ability to exchange productivity (earnings, i.e. money) for goods and services.

So what bearing does this have on the overwhelming success of big box retailers and the demise of mom-and-pop boutiques? Well, it simply means that in many cases the majority of consumers place less value on such intangibles as customer service or a sense of community than they do on the other things they could buy with the money they saved by going to a big box retailer. Smaller stores that are unable to compete with the larger retailers on prices will often find themselves out of business. This will undoubtedly mean short-term hardship for those business owners and their families, and it may mean the loss of shopping options for those consumers who place more value on intangibles.

There is no more "democratic" system than the free market. Consumers vote with their dollars every moment of every day, rather than just once every few years. And unlike political elections, the businesses elected by consumers that fail to meet the electorate's demands will be thrown out of office in short order as consumers withhold their votes/dollars. Any attempt to "level the playing field" in favor of small businesses flies in the face of majority rule and simply substitutes the preferences of a relative few for those of the vast majority.

But also unlike a political election, those of us who wish to vote for small businesses by exchanging a little more of our productivity for things the majority under-values are free to do so. We need not be relegated to big box retail stores if we don't want to be. So long as the market remains free, those options will remain available to us.

Thursday, January 01, 2009

What Can a Tampon Teach us About Markets?

I was watching television with some friends recently, and during a commercial for some new model of panty liner a friend asked if anyone else was "disturbed by the amount of research being put into creating new feminine hygiene products. After all, how many different types of tampons and panty liners does the world really need?"

Like most things other people say, it got me thinking. Why IS there so much research going into feminine hygiene products, or indeed any other personal care product? Walk down the personal care aisle of any grocery store, and you'll see an amazing variety of products in every category. Whether it's toothbrushes, hair gel, antiperspirant, shampoo, facial cleanser, or hand lotion, consumers have a plethora of choices.

I think the primary reason for this vast array of variety is regulation, or rather, the lack thereof. These industries are incredibly vibrant because they're largely unregulated. Unlike heavily regulated industries there are very few barriers to entry for a small company that wants to make toothbrushes, toothpaste, or mouthwash. Putting a new brand of hair gel or conditioner on the shelf doesn't require expending resources meeting cumbersome safety rules. The products are safe because consumers wouldn't buy them if they weren't. There's incredible variety because it's simpler for smaller companies to compete. The playing field is level because no one company is hampered any more or less than another by the heavy hand of government. Greater competition means more innovation and research as companies search for ways to stay ahead of their competitors. This is why there are so many different brands and styles of panty liners on grocery store shelves.

Of course, this condition is not at all unique to personal care products. In any un- (or at least less-) regulated industry there will always be more research, greater innovation, higher quality, and lower prices. Witness the computer hardware industry, for instance, or the television industry. These are almost entirely unregulated, and so they are incredibly vibrant. Computer hardware gets faster, better, and cheaper every day, and televisions get larger, cheaper, and have better picture quality all the time. There is no reason the same would not be true of any industry that currently suffers from government oversight. Whether it's health care, education, banking, or otherwise, freeing resources for innovation by reducing government regulation will always result in better, safer, less expensive products and services.