No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Nine: P31W: Enter the Entrepreneur! 213 not none; there are always substitutes and consumers can abstain from supporting bad producers. Consider “Black Friday” shopping, for example. The day after Thanksgiving is filled with competition for consumer dollars. Further, most of the good deals are also available online, both on Black Friday and Cyber Monday, making this service to consumers available to rural areas as well. Technology is further enabling the sovereign consumer and forcing producers to serve. So, as we discussed in the last chapter, potential competition is almost always there to restrain producer misbehavior. In the exercise of consumer sovereignty, customers can be exceedingly fickle. Today they may want one product, with “Tickle Me Elmo” the must-have toy; tomorrow it may be the newest Wii. This Christmas it may be the iPad, but next year it could be something else. For businesses to serve their customers well, they have to have the products consumers want to buy available, but only those products consumers are likely to buy. I’m sure you’ve gone to the store before to buy something you really wanted only to be disappointed when they were out of your size or didn’t have the product in stock at all. If that store repeatedly doesn’t have what you want, you’ll stop going there altogether. The flip side is it costs the store money to carry infrequently desired goods, but if they pass too much of the cost to you, you’ll find another store to shop in. So businesses have to carefully balance having enough of what you want to gain your business, but not much you don’t want (averaged over all consumers) so costs aren’t too high. The best businesses are, in effect, “middlemen” that bear risk for you, the consumer. A major risk that entrepreneurs bear is they must be prepared for the fickleness of consumers. They may order a stock of 100 million Tickle-Me- Elmo’s, and then for some reason no one wants them this Christmas season. They are stuck with the product and will have to heavily discount the item to get rid of it, likely suffering large losses. They are middlemen in that they take the raw resource inputs (land, labor, and capital) and transform them into something that you as a consumer want. Common conventional wisdom has retailers as middlemen, since they don’t “do anything” to produce the product. Of course we’ve already learned this is false; every stage of production and distribution adds value to us as consumers. So to the extent that there are middlemen, all aspects of production are middlemen since they are in the middle of the raw materials and contribute in some way to get the finished product in your hands. These entrepreneurial middlemen are also risk bearing, because there is no certainty that what they expect you to want will actually come to pass. They carry all the risk for you; if your tastes change they will suffer the loss—not you. Further, they are middlemen that reduce your need to carry inventory for future needs; you can buy “just in time.” There is no need for you to keep your own hardware store on hand, although you may keep a small assortment of nuts, bolts, nails, and wood on hand at your house for small projects. A major risk that entrepreneurs bear is they must be prepared for the fickleness of consumers.