29 May, 2008

Do People Want Independent Stores?

Apparently, while most stores in Harvard Square are still independent, they are undergoing various hardships due to rising rent costs and recession. Everyone I've met who lives in Harvard Square claims that they love the independent stores that give the area its unique character. Everyone I've met who used to live in Harvard Square tells me about the glory days when there were no chain stores at all and every barista in the Square knew your order by heart.

Yet everyone also assumes that chain stores, if allowed to run free, would take over almost instantaneously. But doesn't this mean that people will choose the chain store over the independent? And if this is the case, then aren't people actually better off with the chains?

Chain stores have a few advantages. First, they can provide start-up capital to franchises and spread the risk of failure across many stores. A local entrepreneur launching a sandwich shop must bear all the losses if the store fails, but Chipotle can afford for 10% of their stores to fail because 90% will succeed. Second, chains have lower costs than independents because of economies of scale. They can buy in bulk and streamline their supply chain. Finally, people like chain stores because they offer consistency across locations. You'll get the same meal in every T.G.I. Friday's, but trying the local place involves some risk.

The only "true" advantage here is the second--economies of scale allow chains to provide the same good for less money--while the other advantages arise because chains solve certain market imperfections.

The fact that independents must bear losses points to incomplete insurance markets. Ideally, the financial backers of independents would be able to buy insurance on the potential failure of the store. Likely they cannot because of moral hazard problems--if they know they'll be fine if the store fails, they won't try as hard to make it succeed.

Chain stores' advantage in consistency is due to the fact the consumers don't have full information about the stores they could potentially patronize. If this information can be provided (as it is by, say, Yelp) then this advantage of chains more or less disappears. But providing this information is costly.

Chains do have real advantages over locally-owned stores. They provide goods that people want for a lower cost. But there seems to be a Prisoner's Dilemma here. It is in everyone's best interest to choose the chain over the independent (I exaggerate), but when all of the independents have disappeared, everyone bemoans the state of the world. This is because we ultimately prefer a world filled with independents to a world filled with chains, but given the choice between any given independent and any given chain, too many people choose the chain.

What can policy do? One approach would be to work on solving the market failures above. Provide better credit for independent store owners, better information about store quality, etc. Another approach would be to ban chains. I'm not sure which approach is more desirable, but it's something to think about.

1 comment:

Eremita said...
This comment has been removed by the author.