01 Aug 2009

How Can Destroying Products Be Good for Consumers?

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I’m still at Mises U, so that’s why the posting has been so sparse. On the bright side, I had a pretty good “Mises Circle” talk that I will link to when it goes up on the LRC podcast. There also may be some new karaoke YouTubes floating around to incriminate me in the near future.

In the meantime, let me share one interesting tidbit for the econ geeks amongst you readers. In the lecture concerning Mises vs. Rothbard on consumer sovereignty, I realized something that made the whole issue seem obviously “Point, match, Murray.”

Specifically, Mises had conceded that in principle, even on the free market a monopolist (facing an inelastic demand curve at the point of the original equilibrium) would find it profitable to restrict output. This would be a violation of the general rule that entrepreneurs act as mandataries of the consumers. Here would be a case where the market economy perversely led a capitalist to act contrary to the wishes of consumers, because he deliberately destroys units of a good–and that can’t possibly be the right outcome as far as the consumers are concerned.

Rothbard has a bunch of responses, but here’s something I had never thought of before. (Maybe it’s in Rothbard and I just missed it; I haven’t gone back to check.) We normally think of implausible cases where a private agricultural company manages to corner the world market on tobacco or coffee, and then burns some of the harvest in a given year in order to raise the price. (It has to be a private concern doing it, otherwise the issue has no bearing on the free market possibly hurting consumers.)

The discussion makes it sound as if it’s a rare, almost hypothetical scenario, but actually it happens all the time! For example, in high school I worked in the dairy department at a large grocery store. We would always keep a sharp eye out for expired product in the cooler or on the shelves.

Now let’s say there are a few quarts of skim milk that are getting close to the expiration date. We can try putting them in the very front of the case–and that’s why you should always look a few units deep into the cooler before buying anything perishable from the grocery store–but sometimes you end up with expired units. So you have to throw them out. (Or maybe we gave them to a soup kitchen or something; I can’t remember. I think we just threw them out.)

This was a conscious decision on our manager’s part. It would have been possible to put on a sale to move every last unit of product off the shelves before the expiration date. But in the grand scheme, it made more sense to keep the price at the normal level, knowing there would be a chance of losing some product every other week due to expiration.

Of course, the manager would try to order inventory to minimize this wastage, but on the other hand she wouldn’t want to run out of nonfat strawberry yogurt every other week, either. So it was a tradeoff when ordering more inventory; the more cases she ordered, the more units we would likely throw out, but the fewer she ordered, the more potential sales we would miss out on if demand were unexpectedly high. (And also customers would get mad if we were consistently out of stock on various items.)

So is this a violation of consumer sovereignty, the fact that we consciously adopted a strategy that would yield, on average, a lot of food being tossed out, month after month? Not at all. If someone insisted that always adjust spot prices to unload every last unit, it would change the manager’s ordering behavior and (I think) would clearly make the customers worse off. After all, rival grocery stores were always free to adopt such a policy. I can’t think of any obvious externalities or other stumbling blocks, so it seems there is a prima facie case that the systematic destruction of food by our grocery store was economically efficient.

The argument generalizes once you see it in the above light. For example, movie theaters routinely “withhold supply” off the market, in order to charge a higher price. Airlines do the same thing. Wouldn’t it be awful, in fact, if airline and movie prices always adjusted to make sure every last seat were always filled?

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