walkitout (walkitout) wrote,
walkitout
walkitout

Qualifiers Matter: Planet Money Misunderstands the Law of One Price

I apologize for this, but I cannot find the transcript for this episode. I was sort of annoyed that I actually had to listen to the whole thing.

http://www.npr.org/sections/money/2015/06/03/411777635/episode-629-buy-low-sell-prime

This is a Planet Money episode/podcast about retail arbitrage. Specifically, it is about people who go to big box stores such as Target and Toys R Us, buy stuff retail, and then warehouse it for later sale through Amazon as 3rd party sellers/FBA at a sufficiently higher price to justify the activity (cover costs of driving around, storing, shipping, fees to Amazon, their time vs. whatever other job they could get, etc.). Planet Money mentions that this appears to be a violation of the Law of One Price. Here is the wikipedia entry on that idea from Econ:

https://en.wikipedia.org/wiki/Law_of_one_price

They discuss _why_ someone might pay $45 for a Big Box of Wipes from Toys R Us, vs. driving to the store and buying it for less than $20. Here, in case you didn't pay attention or didn't look at the wikipedia page, are the relevant qualifiers:

"Assume different prices for a single identical good in two locations, no transport costs and no economic barriers between both locations."

Okay, so right there. "No transport costs" meas that it costs _someone_ gas/time to move the Big Box of Wipes to the desired location (the address the buyer on Amazon supplies, presumably). Let's assume that the person buying the $45 Big Box of Wipes on Amazon either lives in an very urban area (lots of bodegas where you can buy tiny packages of wipes for $20) or a very rural area (where it will take at least 3 hours to drive to the nearest Toys R Us, and the nearest C store is an hour away and again, either carries no wipes, or only very tiny packages, or ones which have a fragrance or wtf which is objectionable) or on a military base (an APO, FPO, etc. address) in a country which sells small packages of wipes for an astronomical price, if at all, and which ordinary shipping of a Big Box of Wipes would be > $20.

And now we are done! The Big Box of Wipes is actually a screaming deal in all these locations! Did Planet Money enumerate any of these? No, they assume that people buying shit for pets and babies are relatively price insensitive because They Just Need the Gosh Darned Wipes. Which, I will admit, is possible. And as long as we are exploring that territory, let us contemplate the prototypical Prime customer of long standing: above median income, two full time jobs, hiring some amount of help around the house (typically cleaning and some child care). I didn't know this before I was hiring child care on a regular basis that some times, the child care actually isn't there to care for the kiddo, but actually to do things that desperately need to be done and which you cannot do because the kiddo is sick or objecting to going grocery shopping or whatever. Given the choice between paying someone to care for the kid while you go to the store or sending the person to the store with a list, it's almost a coin flip what's gonna happen on any given occasion (unless there is live flame shooting out of the baby's orifices in which case, def sending the help to the store).

Let me tell you a little secret: it is almost always cheaper, and it is _always_ more likely to get you precisely what you wanted rather than whatever the person doing the shopping saw first, if you have _Amazon_ employees pick stuff out and ship it to you, versus sending someone to the store to do your shopping. Even if you pay $45 for a package of wipes (which I do not believe I have ever done, altho I certainly overpay for my fragrance free shampoo and conditioner, and am happy to do so because it takes way too many phone calls to find it on the shelf at any actual store, never mind driving there and finding out they are out of stock).

So. No violation of the Law of One Price. Most people paying $45 for a Big Box of Wipes which they "should" have paid $20 for are actually getting a huge price break, because they didn't send the doctor/lawyer/dentist/engineer parent who would really rather go for a bike ride on a special run an hour each way to Costco to buy more wipes, never mind the health care savings down the road when the manager/accountant/administrator is in good shape because they got enough exercise and thus doesn't have to spend a bunch of money on water pills, statins and a personal trainer to get _back_ into decent shape.
Tags: economics
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