Tumbler Competition - The Rise and Fall (?) of the Yeti

Some time last year I became aware of the phenomenon that is the Yeti brand. The company makes what appear to me to be wildly over-priced coolers and tumblers. They have successfully built a lifestyle around their brand seemingly through social media marketing and word of mouth. Living along the Texas coast, I regularly see their branding on bumper stickers, hats, and of course the coolers themselves.

The prices for their tumblers seem particularly egregious: $40 for a 30 oz. and $30 for a 20 oz. The good thing about them is that they work. Several colleagues told me that they were able to keep drinks cold all day long. I received one as a Christmas gift last year and was quite impressed.

Sometime late last year I began seeing ads for a competing product by a company called RTIC. They claimed that their product was as good as the Yeti, but at half the price. The 30 oz. model could be had for $20 and the 20 oz. for $15. A YouTube video seems to confirm that the RTIC product performs as well as the Yeti.

Today a friend shared a post on Facebook that alerted me to yet another entrant into this market. Nearly-identical Ozark Trail-branded tumblers can be had from Wal-Mart for the low prices of $9.97 (30 oz.) and $7.97 (20 oz.). Currently the prices online are higher ($14.74 and $9.74, respectively) and are sold out.

This is a fascinating case study on the effects of competition and innovation on prices. I have little doubt that Yeti will be able to maintain its high-priced tumblers, at least for awhile, because it has built brand recognition. Certain segments of the population will pay more either because they don't shop around or because they want to have that YETI logo on the bottom edge of the cup.

Those of us who are willing to shop around and aren't concerned about brands are, thanks to competition, able to get the same drink-cooling performance at a much lower price (from a big-box store often vilified for the negative effects it supposedly has on the working class).

It's important to remember that price theory is ultimately about what goes on in our heads, not necessarily the "objective" components of a physical good. Having the YETI logo stamped on the outside of the tumbler might not make it any better in terms of its objective performance, but those who buy YETI for the sake of YETI are certainly, from their own point of view, better off than if they had purchased the other brands' offerings.

It's Still a Unicorn

The latest polemic from biologist David Sloan Wilson is an attempt to “update” the work of Friedrich Hayek on the nature of the state and spontaneous order. In it, Wilson interviews economist Daron Acemoglu on his work on the role of institutions in economics. The title, “Stop Crying About the Size of Government. Start Caring About Who Controls It.” is indicative of the level of discourse provided in the article. I'd wager that nearly all those who are skeptical of government power are pretty much equally concerned about its size, scope, and the identity of those in power.

So with that red herring as the start, let's see what Wilson and Acemoglu have to say. The first interesting claim is about the beginnings of the post office. Acemoglu's research indicates that there is a positive correlation between the establishment of early post offices in the U.S. and the number of patents filed from that region. This is then taken as evidence that where there are more post offices, there is more innovation. The problem here is that patents aren't a very good indicator ofinnovation, especially in the more distant past. Equating the two is akin to the proverbial drunk searching for his car keys under the light of the nearest lamppost.

The crux of Wilson and Acemoglu's argument comes a bit later in the piece:

Some think that human cooperation can develop in a spontaneous way (Hayek comes close to this at times), or because cooperation creates an edge, the forces towards the evolution of a psychology of group cooperation are going to ensure that tribes, villages or even bigger polities can develop a sophisticated order without the state. The famous book by Robert Ellickson, Order without Law, claims that the complex relations between farmers and ranchers in Shasta County, California happens not thanks to the law, but without any reference to the law, instead relying on informal norms that have evolved over time. This may well be true, but is not the general pattern of what happens without law and the state playing the role of conflict resolution and law enforcement in much of the world. In Why Nations Fail, we explain why Somalia is so dysfunctional, linking this to the almost complete absence of conflict resolution from the state. Even small disputes in Somalia can spiral into feuds or even clan warfare because there is no central authority to resolve these conflicts. The one big difference between Somalia and Shasta County is, of course, that in the former there really isn’t the state, whereas everything that happens in Shasta County happens under the shadow of the state. For example, if a group of ranchers decide that these informal social norms aren’t working for them and take up guns and shoot some of the farmers, they know that it will be the US marshals coming after them.

As a general rule, and this is consistent with the Hayek quote you started with, no civilization has flourished economically, and I would also say socially, without a state powerful enough to provide security, property rights protection, dispute resolution and some amount of public goods to its citizens. It is also the case, and this is something we emphasize a lot throughout Why Nations Fail, that most states throughout history and even today serve the interests of the political elite and are part of their economic problems, not their solution. But this is not because the state is unnecessary or evil, but because of who controls it and what capacities it has invested in and developed.

There are several problems here. First, there are plenty of examples of spontaneous development of human cooperation. The mutual aid societies that operated across the U.S. until the mid-20^thcentury, which went extinct thanks to legislation supported by politically powerful medical organizations, are one example. Among otherexamples, the (actual, historical) story of the “wild west” is a clear demonstration that rules of conduct can and do emerge spontaneously to benefit everyone involved. David Friedman lays out theoretical and empirical cases in thisarticle. Peter Leeson has done significant research on theoretical and empirical examples of spontaneously-generated governance structures.

Acemoglu cites Somalia as a counterexample, but the reality is that Somalia isbetter off now economically than it was in 1991 when it became anarchic. The chaos that continues there is largely a result of outside attempts to establish a new government. The bottom line is that there are many differences between Somalia and Shasta County, CA, not just the presence or absence of a state.

The rest of the article is essentially an exercise in the unicorn fallacy, attempting to define the state as something other than a “monopoly of the legitimate use of physical violence”, as sociologist Max Weber defined it nearly 100 years ago. Acemoglu is right that we should be concerned about who is in power. The trouble is, we have been for a very long time and it hasn't fixed the problems Acemoglu and Wilson seem to think it will. 

Hilarity in Economic Education: Externalities

I recently rediscovered this video on the basics of externalities. It's unique in that it's 1) hilarious and 2) includes some important but not often discussed insights about ways in which we can deal with negative externalities.

I've discussed some problems with the standard textbook treatment of negative externalities several times on Farmer Hayek (e.g. here and here), but I haven't yet shared this quote from A.C. Pigou found in the video:

It is not sufficient to contrast the imperfect adjustments of unfettered enterprise with the best adjustment that economists in their studies can imagine, for we cannot expect that any state authority will attain, or even wholeheartedly seek that ideal. Such authorities are liable alike to ignorance, to sectional pressure, and to personal corruption by private interests. A loud-voiced part of their constituents, if organized for votes, may easily outweigh the whole.

Pigou's comment is certainly applicable to many of the debates we are having about modern agriculture's impact on society.

Here's the video!

Video link

GMO Labeling Bootleggers and Baptists

"Bootleggers and Baptists" is a term coined by Clemson economist Bruce Yandle to describe coordination among groups who might seem at first to have very different interests on a given issue. You can find more information in this video or this article.

In this view, the Baptists are the people or groups who explicitly call for a regulation to fix something they don't like. The Bootleggers are the ostensibly unintended beneficiaries of the regulation. Some examples are firms or groups who are "grandfathered in" under a less-strict standard or individuals in possession of a license that increases the costs of entry to potential competitors. Check out the video linked above for a couple of concrete examples.

With that as background, let's move to the case of GMO labeling.

The recent defeat of a bill in the Senate that would prohibit states from creating mandatory labeling requirements for firms gives us a real-world example of the Bootleggers and Baptists phenomenon in the ag sector. In this case, the Baptists are individuals and interest groups calling for GMO labeling requirements.

The bootleggers are companies like Campbell's who support labeling requirements likely knowing that it will increase costs for its competitors. Large firms like Campbell's can more easily bear the costs of regulation than their smaller competitors or potential entrants can. If they simply wanted to tell their customers that their products contained GMOs, they could have started doing so a long, long time ago.

The Bootleggers and Baptists framework can be used to understand the particular features of a lot of regulations. What examples can you think of?

Potpourri

David Widmar at Agricultural Economic Insights has some interesting maps showing the run-up in ag land values from 2004-2014. Check it out!

The folks at the Pro Market Blog (a new blog associated with the Stigler Center at U Chicago) use survey data to show Americans' concerns about the influence campaign donors have on candidates. Trump and Sanders are seen as the most removed from these concerns.

Here's a short podcast interview with Bill Easterly (NYU) who works in international development. Easterly is famous for his skepticism of the benefits of foreign aid.

Don Boudreaux, in his characteristic style, criticizes Krugman for his support of trade protectionism. (here and here)

James Pethokoukis blogs about Deirdre McCloskey's work on economic history and what made the west prosperous.

Relatively Good Regulation - GMO Edition

In previous posts on food labeling I've discussed food labels and the information they provide as well as possible reasons why a private GMO label hasn't already appeared. In this post, I'll discuss the reasons commodity groups are in favor of federal GMO labeling legislation.

Senator Pat Roberts (R-Kansas) recently introduced legislation that would establish federal guidelines for GMO labeling. The law would preempt state mandates for GMO food labels and start an educational campaign for the public on the safety of GMO foods.

The question isn't whether farmers, food companies, and retailers believe the guidelines are good for them financially but whether these guidelines are better than the relevant alternative. I'd wager that food companies would, in an ideal world, prefer to label their food in a manner that maximizes their profit.

Since that world doesn't exist, and there's a credible threat that interest groups in some states will successfully pass legislation mandating GMO labels, federal preemption of such laws is preferable. For producer groups, federal preemption makes it less likely that potential discounts on conventionally-produced food will be passed on to them. Additionally, the cost of educating consumers will not be borne by food companies, retailers, and farmers but by taxpayers.

As I argued in a previous post, the tremendous cost of educating the public on the safety of GMO foods is one possible reason why we haven't seen widespread efforts by food companies or third parties to create a GMO labeling scheme.  Another possible reason is the presence of substitute labels. Many consumers who are concerned about the safety of GMO food might be content buying food labeled "organic."

The more I think about it, though, the more I'm convinced that the main reason we haven't seen a third-party, private effort to create a GMO label is that the public generally trusts only the federal government to ensure food safety. It's true we have all sorts of private labels informing consumers of the characteristics of the food they buy, but safety is a separate issue in most people's minds.

The new legislation introduced is likely to be a net benefit to farmers, food companies, and retailers. They'll be shielded from the risk of more onerous regulation at the state level and won't have to bear the cost of educating the public about GMO safety. This makes the bill, from their points of view, relatively good regulation.

The Costs of Coordination

Sometimes the most mundane subjects can be great illustrations of basic economic concepts. Earlier this week, Alex Tabarrok (George Mason U) blogged about the benefits of coordinating leisure time. I emphasize the word "benefits" because Tabarrok completely leaves out the costs.

He starts off by citing a paper in Sociological Science whose authors find that both unemployed and employed people experience more positive emotions and and fewer negative emotions on weekends. They claim that this is evidence that time is a network good and that everyone benefits by coordinating leisure time.

Tabarrok then complains that his employer's spring break is different from his children's. He says that not only would he and his family benefit from greater coordination of spring break time, but that his employer would as well. After all, this would amount to a free benefit to employees. He ends by advocating a national holiday that would, presumably, benefit everyone. The irony here is that George Mason U is a public school and could quite easily coordinate with the local primary and secondary schools.

If the benefits are so clear, why hasn't this national holiday materialized? The simplest answer is that there are also costs of coordinating in this way. A national holiday would likely mean very high ticket prices at Disneyland and extremely long lines at the rides at Six Flags. Anyone who has ever tried to fly, go to a beach, or head to a nearby amusement park during the two weeks of spring break in mid-March has known the boredom and frustration of sitting in traffic, paying high ticket fees, and waiting in very long lines.

Contrary to Tabarrok's calls for a national holiday, it could be the case that many of us could benefit from less-coordinated holidays. There are, in many areas of the country, plenty of fine days in April and May for visiting popular attractions yet most of us have the same 2 or 3 weeks off in March. The fact that many schools are moving to a non-standard "year-round" school year in which there are several week-long breaks dotted throughout the year is an indication that the costs of coordinating leisure time may be quite high in our present system.

In any discussion of the benefits of some new social arrangement, don't forget to include the costs!

Don Boudreaux's Review of Phishing for Phools

I'm a regular reader of Don Boudreaux's (George Mason U) blog Cafe Hayek so I was glad to see his review of George Akerlof's (Georgetown U) and Robert Shiller's (Yale U) recent book "Phishing for Phools." Boudreaux's review is very good and I recommend you read the whole thing. If you're not a Barron's subscriber, you should be able to bypass the gate by searching "Boudreaux ivory tower economics" in Google News.

The review begins with a short synopsis of the book. Akerlof and Shiller argue that most people, as consumers and investors, suffer from weaknesses and informational problems that lead them to buying things they don't really want or need. Entrepreneurs who take advantage of these problems are "phishermen" and those who fall prey are "phools."

As you might expect, food is a popular topic in the book. The folks at Cinnabon are said to create a product so irresistible, yet full of empty calories, that passersby are helpless to resist. Another example are "Sunkist" oranges. According to Akerlof and Shiller, this advertising "trick" causes consumers to buy too many oranges.

It's certainly true that these products are tempting and likely deliberately so. The questions are 1) whether these temptations amount to a moral problem and 2) what is to be done. Assuming that there is a moral problem, it's difficult to know what should be done. As I've discussed previously here on the FH blog, it's not enough to criticize real-world market results relative to perfect theoretical policies drawn out on a black board. We have to compare said market results relative to policies that operate in the real world.

Here's Boudreaux's analysis of Akerlof and Shiller's solution:

Suppose it’s true, however, that modern markets are chock-full of devious phishermen preying successfully upon helpless phools who buy too many oranges in the belief that each has been “kist” by the sun. What’s to be done? The authors offer no specific proposals. Yet they clearly imply that more government regulation is a key part of the solution. At one point, for example, they advocate “more generous funding” for the Securities and Exchange Commission; at another, they speak approvingly of greater regulation of slot machines.

Solutions via government are based on a glaring fallacy: that people deficient in choosing for themselves in the marketplace will automatically shed those deficiencies once the government authorizes them to choose for others. Ironically, while citing slot machines, the authors make no mention of a related scam: government-run lotteries. The lotteries are perhaps the most obvious example of how those who are supposed to protect us from phishing scams themselves eagerly phish for phools.

Nothing, indeed, could be more phoolish than for ordinary men and women to submit to elites who are as confident as professors Akerlof and Shiller that they know best how other people should behave. Such elitism poses a far worse danger to society than entrepreneurs offering aromatic pastries for sale.

Even if people are terrible at making choices in their own best interests, a fundamental truth is that they own their lives. Self-respecting people want to be free to consult those with greater knowledge. But they would much prefer to risk undermining their own well-being through their own choices than to be saddled, bridled, and steered by self-appointed experts.

Off-Topic - The Stagnation of the American Middle Class

Don Boudreaux (GMU Econ) recently gave a talk at the Economics Club meeting at my alma mater.

Since Boudreaux is such a dynamic speaker and so well informed on this topic, I thought I'd share it with FH readers even though it isn't one of the typical topics we cover.

I'd suggest starting at 3:10 and adjusting the speed (using the gear button at the bottom right) to 1.25 since it's a rather long talk.