Bastiat's Bastions

Sometimes I love being an economist – a case in point was the part of today when I read the article I’ll discuss below. (Sometimes not so much love – I graded some exams today).

As I sometimes tell my students, the reason I like thinking like an economist is that it helps me to understand the world around me and occasionally I can predict the future.

Today, I read an article about the “cheap” flat panel televisions and DVDs that were going on sale at Walmart on Friday morning at some god-awful hour of the morning.

When we discuss supply and demand in class, we certainly stress that price adjusts so the quantity demanded equals quantity supplied. A shortage would cause upward pressure on prices, while a surplus would cause downward pressure on price. Equilibrium would occur where the market clears – where there is neither a shortage nor a surplus.

When we discuss this in class, we usually think of this price as the “monetary price” of the good – that is, how much money it takes to acquire the good. However, as I’ll expand upon below, it is really proper to to think of this price as the “full price” of acquiring the good – and this includes non-monetary aspects. But some background first…

In the case of a price ceiling set below this “market-clearing” price, quantity demanded exceeds quantity supplied. So as we typically discuss in class, some other mechanism must ration demand – some other mechanism must decide who gets to consume the good.

When it came to price ceilings, the main possibilities are nepotism, bribery, and germane for this post, queuing. Queuing is simply econ-speak for waiting in line.

To be a bit more explicit, consider an example where the (monetary) market-clearing price of a TV is $500. Now suppose, for whatever reason, the monetary price was set at $400.

At this monetary price, there would be an excess quantity demanded for this good. In fact, a person would be willing to pay a “full price” of $500 for this good. This person would be willing to bribe someone up to $100 for the ability to buy this good. Or offer $100 of their time to wait in line to enjoy the good. (Of course, if they could bribe someone $10 or use $10 of their time to get the TV that would be better than paying $100.)

Now, think about those folks waiting outside of Wal-mart to buy TVs? Are they getting as good as deal as it appears? Not if we consider the opportunity cost of their time. In the end, if we believe people “compete” to get to acquire these goods, it is quite possible that some marginal consumer will have paid the “full price” of $500 – only that they have paid $400 of money and $100 worth of their time.

So here is where I can predict the future.

I swear I didn’t go to Wal-mart this morning, nor have I seen the news stories, but I believe I can predict, generally speaking, the characteristics of people that will be outside of Wal-mart waiting in line for 12 hours for the right to save, say $100, on a TV. Doing some math, it will be the people for whom 12 hours of their time is worth less than $100. While people’s value of their time is not perfectly correlated with their market wages, there surely is a relationship. I’d predict that we will not see a bunch of doctors and lawyers in line (they’d simply pay the $500), instead we will see students, retired persons, other people with no jobs or part-time jobs, or people who really enjoy sitting in lawn chairs in parking lots. (I know what you are thinking, but go to Wal-mart on Saturday night at about midnight).

If there were no purchase limits, we’d expect the people in line to be folks who planned on purchasing many DVDs.

Now, be sure to understand that I’m not suggesting that people don’t get “a deal” – nor that people are irrational – only that this deal was not as good as you’d think if you didn’t factor in the value of the time spent acquiring the TV.

Ceteris paribus, the people with the lowest value of their time get the best deal. Not all consumer surplus necessarily is eroded away, but it is quite plausible that consumer surplus for the marginal consumer will be eroded away. Waiting time will tend to adjust to make this so. Further, the length of time people will wait is directly related to the difference in the monetary price at Wal-mart and the monetary price at other stores.

One last thing to consider. If this “full price” idea is important as I think it is, might there be another component of the “full price” of going to Wal-mart at 5:00 on Friday morning that is non-monetary and not related to the value of time?

Ask the pregnant woman whom the article refers to. I think she’d tell you there is.

What amazes me is that Wal-mart is willing to incur the liability — I wonder if we don’t see some policy changes in the future. During the scary parts of the financial crisis that we saw a few months ago, banks were allowing customers in 5 at a time to make transactions. I heard some stories about similar policies at home improvement stores after the hurricanes. Concert tickets often involve lottery numbers. Might we see such things at Wal-mart?

–CT

This entry was posted on Friday, November 28th, 2008 at 5:53 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.