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.