The Importance Of Location

One thing about most discussions of the free market is that they never mention location. It is enough that firms exist; it is presumed that if they offer a good product and a good price consumers will come to them. However, the business world treats this very differently. Great attention is paid to location (there’s even a show named after it) and business people are well aware that a couple of yards can make or break a business. Location changes the way we view competition, instead of focusing on whether or not there is a national monopoly, we should realise that almost all firms are to some extent monopolies in their area.

I noticed something while walking through my local city, Galway. Almost all the activity is focused on the main street, appropriately named Shop Street. On a Saturday it is absolutely thronged while even the next street over is relatively empty. This is a common feature of all towns and cities; there is always a main area for shopping. As there are so many people passing through, naturally the rents are the highest with presumably a similar effect on prices. Then why do people shop there? If a shop on the main street charges a high price, why would anyone shop there when they could get a lower price two streets over? Any discussion of competition in the free market would say they wouldn’t, yet I clearly observed the expensive shops full of customers while the cheaper shops were much quieter.

How do we square this circle? Why would anyone pay 20% more just to save themselves the effort of a two minute walk? We don’t value our time that much. It can hardly be said the distance is too arduous, only the lazy could claim that. I’ve done it many times myself, I’ve seen a good book and bought it on the spot without ever checking the two other bookshops in Galway, either of which could offer it at a better price.

I think the answer may be the convenience factor and inertia. We are limited in our time and effort, we do not want to be constantly searching everywhere for the best deal (we are more likely for larger amounts, but this too has its limits). More importantly I believe is our mental block. We can only base our decisions on what surrounds us at the moment. Out of sight is to some extent, out of mind. If we do not see the shop, it is harder to think of it and there is a mental block preventing us from going there, rather than a physical one. It is more convenient to just buy the item here. People cannot consider the whole world, so they narrow the focus. So I cannot consider every bookshop in the country, so I narrow the focus to the point where I only focus on this street. I’ll be honest, I lack enough knowledge of psychology to fully explain what I mean and use the right terms, but I am definitely on to something, I know that much.

Likewise, we live in the present and have difficulty making decisions about the future. Many times I have held and book and wondered whether I should buy it and concluded “Well, I’m here now, I might as well.” Again, I’m not sure of psychology behind this, but there is something here (anyone who does know anything about psychology please comment below). It seems we have to have things in the here-and-now to enjoy them, leaving them for later often ruins it. So instead of being good rational consumers like the textbooks want us to be, we buy on impulse without considering the alternatives. This is why one of the most important decisions a new business makes is its location. A poor location can ruin a business even if it offers good value.

In this sense almost all shops are local monopolies of some sort (monopolistic competition is another term). If I own the only pizzeria on this street, then I have a local monopoly. If my nearest rival is three streets down the road I can charge a slightly higher price and still get more business due to the inertia of my customers. Of course, I cannot charge an absurdly high price, just one above the one that would exist if there was perfect competition. My family always does the grocery shopping at the nearest supermarket out of pure convenience. It may take an extra 20 minutes to get to the other supermarkets which may be better value, but we stick with the closest one (plus we choose one place and made it a regular habit).

This is even a bigger problem in rural areas, where competition is not streets away but towns. If I have the only bookshop in town, I have a local monopoly and can charge higher prices. People use towns as the framing for their purchases and are more likely to stay in their local town even though it would not be that difficult to travel to a neighbouring town. Small towns are not physical islands, but sometimes people mentally consider them as such. There is nothing stopping someone travelling to the next town, city, county, province or the other side of the country to get a lower price, yet people don’t. (This is the source of my greatest disagreement with free marketers, they focus on how the market should behave, I focus on how it actually does). Some people may narrow their focus to county level or their part of the county, but for small differences, people usually go with town differences.

My second brainwave came while waiting for a train. Next time you’re in a train station do the same thing and you’ll probably notice it as well. What I did was go over to a small newsagent and bought a bar of chocolate (I know, I know, big insights in small actions). Halfway there I stopped and realised that the prices would be higher than elsewhere, yet I still bought it. In some cases this is because they have an actual monopoly and you can’t leave and go elsewhere, but for trains you can. I could have left the train station and bought a cheaper bar of chocolate. But I didn’t. Even though it would hardly have taken five minutes, out of sight was out of mind and so I didn’t consider it. I realised that I do this all the time, that there are many examples of me paying more for reasons other than not wanting to walk a short distance. It’s not quite laziness but more like inertia. This goes against every free market argument that competition always drives the price down. Here there is competition, yet the price stays high (within reason). This is because the market is fragmented and people narrow their focus down to just the one shop.

This has important meaning. Usually when discussing the free market, a defender will say that monopoly cannot exist or that no firm can charge a high price because it will be undercut by its rivals. However, this makes the mistake of assuming there is only one national market. Instead it would be more accurate to consider a multitude of tiny local markets where high prices can be charged with competition intervening and driving the business bankrupt. This is way high street shops charge high prices and stay in business and why their side street competition doesn’t undercut them despite offering lower prices.


Filed under Economics

20 responses to “The Importance Of Location

  1. Having had quite a few reversals of fortune in life, I’ve noticed that my own behavior has varied widely based on how much money I’ve had at the time. I can say for a fact that there have been many stretches of my life when I would not have bought the chocolate bar at the train station. It’s funny that you mention it, but I’ve been highly aware of the inflated prices of snack foods in places like that. Then, I have had periods where money was so tight that I actually have gone to the grocery store with a calculator and tried to figure out the largest amount of calories I could get for a dollar.

    When I compare my sister’s behavior to mine, I see something very different. She is an executive and is almost always pressed for time and earns many times what I do. I am sometimes shocked at the degree to which she spends money. For instance, if we are at a store and I’ll say something like, “Do you think we’ll need two bags of mulch or maybe one is enough?” She’ll always say, “Get two. I don’t want to have to come back.” I’d never say that. For her, convenience overwhelms price by a huge margin.

    There have been some interesting studies going on about these sorts of behaviors. I remember one that determined that people do seek to maximize pleasure so much as they seek to minimize regret. In the case of buying the book on impulse, that might come into play. I’m sort of the opposite of you since I will usually not buy something in that situation.

    Also, from time to time, I’ll collect the receipts from my grocery shopping so I can adjust my buying behavior. It’s not feasible to really comparison shop each item each time, but I find that different stores will be higher on a regular basis on certain items and lower on others. When I lived in New York, my regular routine took me to three grocery stores seeking the lower prices. Now that I’ve moved and I have to drive to grocery stores that are located in totally different directions, I no longer do that. I go to the store that has all the items I need even though I think the prices are a little high. The less expensive store is much larger, the lines are longer, the parking lot is not laid out well so I always feel I’m risking an accident, it’s filled with large families and they don’t have some fancy items I like while they stock a lot of junk food I don’t eat. Aisle upon aisle of children screaming for their mother to buy soda and potato chips. I have a headache just thinking about it.

    There was another study, I think I read about it in the New Republic:
    I don’t like a lot of things about that particular article, especially the assumptions and the attitudes behind much of it, but the studies themselves are interesting. I see a little too much of desperately trying to find something in the behavior of the poor for why they have too little money when I really believe we need to ask why the rich have so much. The title implies that with more self-control the poor could escape poverty. Obviously those people have never tried to figure out how to get the most calories out of a dollar. The notion that the poor can lift themselves out of poverty solely by changing their behavior is a dangerous neo-liberal myth.

  2. You point out one of the serious flaws in market economics. Often there is no market, as in the health care debate where Republicans had “faith in the market” there is no market. If you end up in hospital, how much comparison shopping can you do? Similarly, if there aren’t 2-3 competing companies in close proximity, there is no market as you point out. and often when there are that many businesses, you end up with price synchronization where all of the competitors charge about the same price which is not necessarily the lowest possible (e.g. gas stations). The textbooks say that companies lower prices to try to get market share but if the others match those prices, that strategy equals a “race to the bottom.” Instead, we see, for example, in gas prices in the U.S. artificial shortages (temporarily closed refineries, etc.) drive prices significantly up and then retailers “negotiate” how far to come back down when the shortage is ended. Interestingly enough, the prices never come back down to where they were pre-“crisis” which they should if business were competing on price. Businesses avoid competing on price like the plague (they teach this in business school) so why are economists basing an entire approach to price setting on such a scheme?

    • History of Capitalism

      Yes, health care is completely and totally above market mechanisms, and it shows itself in the dismal state of American health care. Even their precious Hayek admitted that Health Care had to be socialized.

      • Socializing medicine will make the problems worse….history is a great educator, in case you forgot.

        • Well national healthcare works well in Britain and Scandinavia and is very popular. You may have Communism in mind, but contrary to what some think, there is a broader choice than just 0 and 100% state control of the economy.

          • On the contrary….NHS does not work well in Britain and there is no political will to correct the govt failures in healthcare in Britain….The waiting times to get services through the NHS are very long…Patients DO NOT have freedom to go see their doctors as they wish.

            When politics, administrators, lawyers and insurance companies come between the customer (patient) and the provider of a service (doctor), it becomes more costly to access such service.

            We also need to understand that health care is not a “right”….because it imposes obligations on another person to provide such service. We would like it to be that everyone can afford decent healthcare…but the only way to reduce costs and make more advanced care available to the masses is to get govt our of it. From hospitals, to insurance, to equipment, to approving drugs used, etc.

            Why is it that almost the cost of everything that govt has a heavy hand in “making it accessible for the common man” keeps going up and up. The activity of govt through regualtions, laws, rules, and funding…distorts the market…from housing, to health care, to higher education tuition.

            We need to look at the lessons of history. Socialized medicine is not sustainable. It certainly is unconstitutional in the US.

            • Seeing as the NHS is simultaneously cheaper, more efficient and more equitable that the American system, I would be greatly interested in seeing some sources to back up your claims.

              “When politics, administrators, lawyers and insurance companies come between the customer (patient) and the provider of a service (doctor), it becomes more costly to access such service.”
              Which is why a universal system is so efficient.

              “We also need to understand that health care is not a “right”….because it imposes obligations on another person to provide such service.”
              That is not a refutation as all rights come with obligations. Your right to speech comes with the obligation that I respect it.

              You state that the government makes things more expensive without giving a single piece of supporting evidence. Hence that which is claimed without evidence can be dismissed without evidence.

              “It certainly is unconstitutional in the US.”
              Not necessarily. There is no excess prohibition against state healthcare, rather there is only an omission of permission so to speak. However, this is because the idea of state hospitals was unimaginable in those days (as was insurance and for profit hospitals). The Constitution was drafted before many features of modern life existed or were even thought of, so it is not scripture on modern society.

              • History of Capitalism

                Healthcare in the United States is absolutely dismal, you get billed grotesque amounts of money, wait times are huge, doctors burn out and are buried in paper work. In short, it is an embarrassment. Health insurance companies are parasites who never pay out and are practically above the law in terms of being forced to provide service while they are enshrined in the law in terms of our having to pay into them because our government is super corrupt and the medical insurance industry so “persuasive.” The hospitals themselves tend to be disorganized, the doctors don’t pay any attention to patients, they are rife with infection, they bill gratuitously, they attempt to give you treatments you don’t need and they feed you food similar to what you would get in jail, because hospitals are not beholden to market mechanisms and thus can hold their patients hostage for profit. Health care is vastly superior, life expediencies are significantly longer and costs are far lower with socialized health care, not to mention that doctors are treated far better, it’s the reason that people from US med school run away to be doctors in Canada and that we are having general probationer shortages in the US: to escape the monstrous amount of paperwork inflicted by the parasitic insurance industry. The reason so much money is pumped into “research” and propaganda discrediting socialized healthcare in the US is because there is so much money in the status quo. The higher prices and lower quality is what makes the room for the super rich to walk away with their pockets lined.

                In short, Right, learn even some basic fucking facts before you start spouting misinformed, condescending drivel. And I don’t give a shit if my rant isn’t well proofread.

                • History of Capitalism

                  *general practitioner, damn you spell correct

                • Again…you too are ignorant of what rights are.

                  But I will say this. Doctors and patients are not free to engage with each other. Doctors treat their patients as determined by insurance companies coverage. Litigation hangs over almost every decision made by doctors and hospitals hence the high cost of care.

                  Defensive medicine is “bad medicine”, resulting in excessive tests, investigations, narcotic/opioid abuse/dependence among many patients, abuse of antibiotic and the creation of super bugs.

                  Mandatory computerized/electronic health records have also created another level of cost upon institutions and professionals that you have not addresses in you profanity ending rant.

                  The status quo in US medicine is bad and will only get worse (not better) through more govt control….we will be having this same discussion decades from now. You all are so confused.


              • Federally mandated healthcare is unconstitutional. The states should have the power to do that….not by directives from D.C.

                Again… you misunderstand the concept of a right. A ‘right’ requires nothing from anyone except, NON-INTERFERENCE. The right to health care, housing, education, food, etc…requires that someone MUST provide it for me, by taking something from someone else to give me such a service….These ideals are “wishes”, not “rights”!

  3. History of Capitalism

    Another astute observation. I’ve been under the impression for some time that local monopolies, rent-seeking behavior, and many other activities that economists tend to write off, are the actuality that we face on a day-to-day basis.

    • How are going to get more competition in medicine to reduce local monopolies and cheaper medicines? Less govt regulation and taxation of the industry…If you were in medicine you would know that to stay competitive, group practices and clinics are merging to reduce costs (overheads) to fulfill govt requirements and stay viable.

      Competition is good, but not against the State.

  4. There’s an interesting phenomena in Sao Paulo, a city of 15 million, 20 million if you include the 5 satellite cities which seamlessly connect to it: certain areas/streets become hubs for particular products. Literally, there is a street lined on both sides with nothing but shops that sell, say, doors. In the next suburb another street will be swamped with just light fitting shops. It makes for interesting shopping. Say we need new wheels, well there’s a street for that. In fact, for something like car wheels there are a few, but you will go to your nearest hub. Near where i used to live in SP it was the toilet area. i kid you not. A street 200 meters long lined with nothing but shops (large and small) selling every kind of low-end to the highest of high-end toilets… even those Japanese robot toilets!

    • That’s really interesting. It sounds strange but it would make it a lot more convenient and solve the problem of incomplete information. I heard about something similar that apparently happened in England during the Industrial Revolution, except it was an appliance per town rather than street.

      • It does make it easier. SP is a terrible city to get around. Traffic is atrocious so there are some real benefits to having all the shops in one locale. Given their proximity its almost a case of perfect market information. Five meters in any direction and you can compare prices of the exact same product.

  5. I find this quite interesting.
    In Nairobi the difference in cost is so evident as you cross one street to the next. To argue for a free market in such a scenario would be missing the whole point as you say. It is how the market works that should be looked at. And it reminds me of why I have to pay so much more for a cup of coffee at the airport than I would normally pay in town centre or elsewhere.

  6. They don’t mention much at all in classical economics textbooks do they! Makes you wonder how on earth the economies manage to actually operate sometimes

  7. Pingback: Tuesday’s child is fair of links | Fraser Sherman's Blog

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s