There is a well-known duopoly model in economics which explores what happens when two ice cream sellers occupy a beach. The two ice cream sellers will tend to congregate at the centre of the beach. If either of them were to move they would give their competitor an advantage in being closer to a larger number of customers. Easier to see, without loss of generality, if you image the beach to be a very thin drawn out expanse of sand.
Taken as a whole, from a customers’ perambulatory point of view, it would be better if the sellers positioned themselves so that the distance between them was twice the distance behind each of them. Then the distance for customers to walk to buy an ice cream would on average be minimised. But business is business and the two ice cream sellers do what they must.
Enter the local council which rules that the ice cream sellers must relocate to the positions which most benefit customers in terms of the distance they must walk. That seems reasonable. On its face. However, there might well be unintended consequences.
When the ice cream sellers are juxtaposed they are more likely to compete on price, on quality and on variety. Far apart, they tend to rely more on their location. Customers might have shorter walks but might pay higher prices, and enjoy less quality and variety. Maybe pistachio is not on the menu. Regulations have unseen consequences, as French economist Frédéric Bastiat pointed out.
Now suppose, whether far apart or juxtaposed, the two ice cream sellers, call them Tom and Jerry, face a growing shortage of customers as their beach loses popularity. Both Tom and jerry blame their plight on global warming. People have been driven to air-conditioned indoors to escape the heat, they declaim.
They decide to merge and, as a merged entity, occupy the centre of the beach. Along comes Gina Cass-Gottlieb and her merry band of ACCC interfering economists. You can’t merge, they say. That would lessen competition.
Hold on, we’ll go out of business if we remain separate, pleads Tom as does Jerry.
Can’t help that. If you merge and form a monopoly the next thing we’ll see is you jacking up your prices.
And it comes about that the beach is left without ice cream sellers. Meddlesome regulators, living in comfort on the taxpayer’s dime, have very little idea of the consequences of their actions. They occupy a suppositional world divorced from the hurly-burly of business life.
Never mind, Tom and Jerry form a different ice-cream company Tom & Jerry Inc. and apply to the council for permission to set up their new business on the beach.
As we speak, they are still after some months completing the required forms and making innumerable undertakings. For example, they have agreed as part of an anti-racism posture to drop vanilla ice cream off their menu of choice and sell only ice creams of coloured hues – melon, strawberry, chocolate and the like.
One day, maybe, those beachgoers brave enough to weather the fierce heat will be able to buy a mouth-wateringly cooling ice cream once again. Though not vanilla.
In the real world Luigi, an immigrant with no sinecure in a aircon-cooled office spots the lack of ice cream supply and fills up a cooler so he can stroll along the beach selling at a little higher cost as customers can be served where they are.
Business is good, customers are happy and all goes on until Tom & Jerry get their license finally. Luigi finds another beach.
I visited Bondi Beach earlier in the year and found that there were no icecream sellers within cooee of the sand. One had to walk past the esplanade to the main street to then have the privilege of paying for a very expensive gelato, or buy a 4-pack of home brand faux-magnums from Woolworths.
Perhaps the story of the ice cream sellers is not so fictional after all.
Here’s a real life example – complete with the ACCC press release.
Excellent post.
What the advocates of ‘fairness’ don’t understand is that the two parties they discuss are not the only participants.
Most small business people see competition as an enermy, rather than a friend that actually expands a market.
Case study in an near CBD suburb of Brisbane was a cluster of “outdoor” shops selling gear and tents to allow the pretentious denizens of the goats cheese circle to pretend that they ascended Everest. You no doubt familiar with the Brands – Kat-man-due etc. They all probably hated the competition who followed the brand leader to the location, and I note that the brand leader has moved away.
However every customer knew that if they wanted this stuff, they were guaranteed to find what they required in at least one of those shops, so gravitated to that location.
Similar to the Myer retail strategy; the high prices did not matter to the consumer as they knew they would find what they wanted in the local Myer store.
Regarding example by RABZ on cash management services.
In the whole debate (?) on use of cash and how to ensure its continuity for all who need to use cash its very clear there is nobody supporting the interests of those who prefer cash e.g. regional and country businesses, people who like their privacy, people who don’t want to be subject to big 4 bank control etc.
Banks earn 10BN+ profit in Oz but apparently 400m/year (their number) is beyond industry capacity. This situation sucks.
Suggest a small fee on RTGS settlements to fund cash provision with multiple players encouraged (e.g. in Singapore people use apps to locate shops that can provide cash).
Ah, I remember this dilemma from MBA days. From my ageing memory I think it was around location theory, particularly where a third vendor then fourth would locate to maximise profits. The analogy in Peter’s story above should be compulsory reading for every pollie and bureaucrat everywhere. Maybe it could become a compulsory unit in a liberal arts degree… not bleeding likely!