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Only Schmucks–and People With High Search Costs–Pay Retail

by Index Investing News
March 29, 2024
in Economy
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“Only schmucks pay retail.” wise aphorism

I like to think I love saving money, but I’ve made many penny-wise, pound-foolish choices. I remember telling my mother, “Watch the pennies, and the dollars will take care of themselves.” I had read it in an old Blondie strip. Mom wasn’t impressed; she replied, “But don’t step over nickels to pick up pennies.” It took me a long time to think straight about it, and I probably still don’t. I have a weakness for “free” calories at conference receptions, no matter how empty, when I should probably pay to load up on protein. No one is above error. The fact remains, though: if I can “save” $250 by comparison shopping for a plumber but it costs me the opportunity to do $251 worth of work, I’ve chosen poorly.

Should you drive around looking for gas that’s two or three cents per gallon cheaper? Probably not: first, your time is valuable. Second, you’re burning gas to get from one place to another. Suppose you save sixty cents on gas by saving three cents a gallon, but you had to burn sixty cents worth of gas to get the savings. Never mind the value of your time–it’s a wash even if you just look at the cost of the gas you burn and the benefit of the money you save.

Trips to the gas station yield important insights into why prices might differ for the “same” good in different locations. A can of Sprite in downtown New York differs importantly from a can of Sprite in rural Iowa. Most of the value comes from its location.

There might be liturgical and ritual value in bargain-hunting, though. Maybe it is a useful exercise in affirming the kind of person you are (frugal, penny-pinching). I saw something on social media saying it’s customary in the Midwest to explain that you got a great deal when someone compliments you on something.  It might be like taking communion at church, doing a morning Bible study, or going to the driving range. “Bargain hunting” also brings a bit of a thrill and can be fun for its own sake. Paying retail, however, is a way of outsourcing your analysis and thought processes to people specializing in curation.

When should you pay retail? Pay careful attention to the costs of looking for a better deal. Consider tickets to a sporting event or a concert. I’ve paid retail (plus “convenience charges”) to buy tickets to a minor league hockey game when, in previous years, I would have just scoured the parking lot looking for people with an extra ticket or two to unload. Needing four seats, wanting to sit close to friends, and having a busy day such that we didn’t arrive until after the puck dropped, it was much easier to bite the bullet and pay retail.

So, who pays retail? Schmucks, maybe–but also people with high search costs. It hurts a bit when I know I could have gotten a better deal with a little more work, but I can at least console myself by saying I had better things to do.

 


For more information on how entrepreneurs Sol Price and Sam Walton changed the face of retail, see “The Vital Two: Retail Innovation by Sol Price and Sam Walton” by Art Carden, Charles Courtemanche, and Reginald Harris, available without charge from Essays in Economic and Business History.


 

Art Carden is Professor of Economics & Medical Properties Trust Fellow at Samford University, and he is by his own admission as Koched up as they come: he has an award named for Charles G. Koch in his office, he does a lot of work for and is affiliated with an array of Koch-related organizations, and he has applied for and received money from the Charles Koch Foundation to host on-campus events.



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