Bryan Caplan has vacated the guest-blogger perch over at the Economist’s Free
Exchange blog, but he did leave his readers with an interesting puzzle
in microeconomics, lifted from his
own blog:
Why are there so many framing stores? It seems like there is a place that
puts your artwork into frames on practically every street corner. According
to yellowpages.com, there are fourteen framing stores in Fairfax, compared
to only eight Pizza Huts.
What’s the puzzle? We normally see lots of small stores in markets for frequently-purchased
low-price goods. Think 7-11. On the other hand, we normally see a few large
stores dominate retail in markets for infrequently-purchased high-price goods.
Think Best Buy.
The economic logic is simple. Retail has economies of scale, but for petty
purchases, these are outweighed by transportation costs. Convenience stores
cost more, but they’re usually a lot closer. This is especially true for low-price
items. It is probably worth 30 minutes of your time to save 50% on a $100
purchase, but not worth 30 minutes of your time to save 50% on a $4 purchase.
Where does framing fit in? I doubt most people frame more than two or three
items per year. No one gets home at 7 PM and says "My God, we forgot
about our framing! Luckily we can just run down to our corner framing store."
Furthermore, framing is expensive. A custom frame usually runs around $100-$200.
Both of these reasons lead us to expect the opposite of the market structure
that we see.
I think I can answer this one – altough, as in all such cases, the answer
comes ex post, as a rationalization, and I’m not at all sure I would
have predicted this outcome ex ante. For instance, it seems to me to
be a simple contingent fact that there aren’t any strong brands in the framing
space. Maybe in an alternate world someone would have managed to create such
a thing, with profound consequences for the framing industry.
In any case, there’s a huge difference between buying a frame and buying a
television. Frame stores are a low-volume, high-margin business which put a
huge premium on customer service. Television stores, by contrast, are a commoditized,
low-margin businesses with relatively low levels of customer service.
Imagine, if you would, that a big frame store opened up a few miles away from
you. Would you go there, rather than to your friendly local frame shop? There
are a few good reasons why you wouldn’t. Firstly, and most importantly, frames
are custom made, which means that it’s effectively impossible to make price
comparisons. The big store might turn out to be cheaper – or, on the other
hand, it might not. There’s no real way of telling, short of taking the same
piece in to both places, and getting a competitive quote.
Secondly, although frames are indeed expensive, they often have only a fraction
of the value of the artwork they contain. What’s more, the customer has to hand
over his beloved artwork to the frame store for the duration of the job. In
such a context, trustworthiness becomes vastly more important than price. In
general, you’ll get better customer service if you’re dealing with the owner
of the store than if you’re dealing with a spotty teenager on an hourly wage,
who may or may not treat your art with the care and attention it deserves.
What’s more, most people are at least a little insecure in their framing expertise,
and welcome informed and intelligent help from an experienced framer. If such
help comes from the owner of the frame store, they feel that they’re getting
valuable advice for free. On the other hand, if they’re being helped by the
aforementioned spotty teenager, they might not value the advice as highly –
even if the spotty teenager actually has a better eye. It’s the difference between
getting advice on what to drink at a restaurant from a dedicated sommelier,
rather than simply asking the server what he would recommend.
Finally, there’s the whole question of loyalty. People like to have a relationship
with a framer who knows them and has framed many pieces for them. If they do,
they’re likely to recommend that framer to their friends. But such a relationship
is almost impossible to build in the context of a big store, where employees
naturally come and go.