Cafe Hayek: Storms are more like Super Bowl Sunday and less like Valentine's Day

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December 12, 2007

Storms are more like Super Bowl Sunday and less like Valentine's Day

Russell Roberts

One more way the world is getting better (the Oregonian reports):

Northwest employees of two big-box chains received e-mail alerting them of a storm barreling toward their stores a full four days before 100-mph winds whacked the Oregon coast and murky floodwaters blocked Interstate 5 last week.

Behind a computer in Bentonville, Ark., Lucas McDonald, meteorologist for Wal-Mart Stores Inc., tracked the weather and notified colleagues that Oregon and Washington stores could lose power and the retailer should consider alternative truck routes.

McDonald's counterpart at Home Depot Inc. -- Jim Schortal, the retailer's director of crisis management -- coordinated more than a dozen recovery workers, from hazardous-material cleanup crews to structural safety assessors, to Portland. From his Atlanta office, he also summoned trucks as far as Nebraska and Texas to hightail it west with extra batteries, flashlights, heaters and generators.

How cool is that? The earlier and more accurate storm forecasting becomes, the lower the cost of carrying more inventory and moving new supplies to the customer. That means prices won't rise as much or at all in response to a catastrophic storm.

Prices for lumber and milk and flashlights and generators often rise after a hurricane because of the sudden and unexpected increase in demand. During "normal" times, stores use inventories to keep the shelves stocked rather than using fluctuating prices as a way of coping with the inevitable variation in demand on any particular day in a particular store. The result is that stores have stuff waiting for us and the prices don't go up and down. Both availability and the price is pretty predictable. The average price is higher than it otherwise would be in a perfectly predictable world. The store bears a cost for carrying inventory. It's worth it, though, to the consumer, who apparently is willing to pay a premium rather than find the store doesn't have the good.

A hurricane that's predicted well in advance is like Super Bowl Sunday. On Super Bowl Sunday, demand for beer and pizza are probably close to their annual peak. But the price of beer or pizza isn't higher on Super Bowl Sunday. That's because Super Bowl Sunday is predictable. Groceries and pizzerias know it's coming and they stock up. And because beer (and pizza dough) can be stored pretty well, the cost of having too much on hand isn't very high relative to the cost of not having enough and sending an unhappy customer to a competitor. This also explains why roses on Valentine's Day are more expensive even though florists get a lot of advance notice that February 14th is coming.

A hurricane that's a surprise (and that just means it's too costly to get the extra inventory there quickly) will lead to shortages or higher prices. An unpredictable storm is like Valentine's Day--prices rise unless anti-gouging laws or social norms keep prices fixed. Then you get empty shelves.

As we get better at predicting storms, their impact on prices becomes more like Super Bowl Sunday and less like Valentine's Day.

(HT to Division of Labor via Spencer at Angry Bear. Note to Spencer--we here at the Cafe have more imagination than you seem to imagine.)

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Comments

Gee, aren't meteorologists those same wacky scientists who keep telling us about global warming and its causes and consequences? Hmm, maybe they really do know more about climate than economists do. Food for thought.

Posted by: P. Plante | Dec 12, 2007 7:28:04 AM

...or maybe they don't. They were predicting an ice age in the 70's and suggesting we go melt ice caps. Yeah, we have better and more powerful computers now than in the 70's. But in the 70's we had better and more powerful computers than we did in the 50's and God only knows what the better and more powerful computers of the 2020's will tell us.

Posted by: Methinks | Dec 12, 2007 8:35:27 AM

I'm actually a computer from the 2020's, and we kick your 2000's computers' asses. I hate weathermen, though, so I'm not working for them. I will, however, be willing to chat.

Posted by: shawn | Dec 12, 2007 8:45:40 AM

Here is the difference between Meteorologist and climatologist. I can look at a doppler radar screen, see a storm coming my way. I don't need a science degree to figure that out. They can do the very same thing. But what they don't do well is predict temperature or even the amount of precipitation. How many times have they hyped 2 inches of snow and you end up with 12? And vice versa? If you go to weather.com you can find out what the predicted weather will be like in 5 days, go back a half hour later and it will have changed. The problem is further out into the future you go the more uncertainty there is. I don't see the contridiction being made as P. Plante has suggested.

What if these individuals were wrong about the severity of the storm? What if the storm had fizzled out before it got to those stores? Then they would have been wrong, but in this case it would have been cliche and think "better to be safe than sorry."

Posted by: Matt Carson | Dec 12, 2007 9:13:24 AM

25 years ago I was a retail analyst for a Boston based investment management firm.
At that time I saw a great presentation of how WMT had developed their storm response system to quickly and efficiently position extra equipment and supplies to deal with hurricanes and other natural disasters.

It had nothing to do with weather forecast,
it had everything to do with superior management and dealing with uncertainty.

My favorite photo from Katrina is a shot of Wal-Mart 18 wheelers lined up on the highway as far as the camera could show to resupply the area stores as soon as the national guard would let them in. They did that at their normal everyday low prices.

Make up your mind. You make very good arguments all the time about how WMT helps the poor with their low prices. But as soon as the same data violates one of your priors about the need to raise prices after
disasters you argue that WMT is rising prices to implement this system. You can not have it both ways.

Posted by: spencer | Dec 12, 2007 11:41:29 AM

Spencer,

I don't understand what you're saying when you write:

"You make very good arguments all the time about how WMT helps the poor with their low prices. But as soon as the same data violates one of your priors about the need to raise prices after disasters you argue that WMT is rising prices to implement this system. You can not have it both ways."

Prices rise after disasters because when they are unanticipated. When they are anticipated, prices don't rise. I don't understand the contradiction. WMT has driven prices down over the years and benefited consumers. Sometimes prices go up for a week after a hurricane. If it's anticipated, they don't go up.

Carrying inventory costs money. The carrying costs of inventory get reflected in higher prices--prices that are higher than they would be in a world without uncertainty. But they aren't higher in the sense that they climb over time. They're just higher than they otherwise would be in a perfectly predictable world. To the extent that technology can lower the cost of inventory, then the cost of inventory and keeping the shelves full goes down and prices don't have to be higher than "normal."

Posted by: Russ Roberts | Dec 12, 2007 11:55:00 AM

I, for one, don't have enough imagination to believe that the Angry Bears actually earned the Phd's in economics they claim to have. This post from Spencer being a prime example of someone who hasn't a clue to the economics. It's a perfect example of what Tom Sowell calls the physical fallacy.

Posted by: Patrick R. Sullivan | Dec 12, 2007 12:41:19 PM

Wouldn't another explanation of these same facts be that Big Pizza and Big Beer just aren't as greedy as the shameless gougers over at Big Flower?

Or perhaps Big Pizza and Big Beer are just as greedy as Big Flower, but don't gouge because they have more fear of the tireless Democrats in congress.

Posted by: diz | Dec 12, 2007 12:47:53 PM

diz,

That is another explanation. But it really only works in a world of one florist. When there is so much competition, you don't want to invoke motives.

Posted by: Russ Roberts | Dec 12, 2007 1:39:43 PM

Russ you have no idea how the WMT system works and you just made up the bit about carrying inventories at their stores out of thin air.

The WMT and other retail systems to get supplies into a disaster area does not work on the principle of carrying extra inventories in the stores. Rather the entire system always has a massive amount of stock flowing through it. WMT turns its entire inventory far too frequently to work the way you are imagining. The way the system works is primarily through redirecting the flow of goods flowing from producers through the distribution system into the disaster areas rather then into other areas. It a flow adjustment not a stock adjustment.

I suggest you check with WMT or some retail experts before making up even more things that you know little or nothing about.

Posted by: spencer | Dec 12, 2007 1:40:50 PM

The bulk of Wal-Mart's inventories are in trucks on the highway. Go to your local Wal-Mart store and ask to see their store room. It does not have one. Their entire system works on a just in time inventory system.

A Wal-Mart warehouse is build with loading docks on two sides. On one side they will get truck load shipments from their suppliers. The goods are taken off the truck and re-palatalized according to exact instructions and moved to the loading dock on the other side of the building where it is loaded on a WMT truck according to exact instructions and shipped to different stores that have ordered the item.

Over 99% of the stock in a WMT warehouse spends less than 24 hours in the warehouse.

When the truck is unloaded the stock is moved directly into the store and stocked on the shelves you see when you shop at WMT. There is no big stockroom at Wal-Mart stores.

Wal-Mart originally developed this system and continues to refine and improve it because it is being copied by every other large retailer.

So your thesis that WMT carries extra inventories and this creates extra cost is completely without any basis.

PS. Patrick Sullivan I never claimed to have a PhD in economics. Actually my degrees are in Diplomacy and I began my career as an economist at the CIA before moving to private business. I learned how the Wal-Mart system works not because I spent years as an economic analyst, but because at different times I also worked as a retail analyst. The typical career progression in the investment business is to wear multiple different hats over the course of your career. I'm now semi-retired.

Posted by: spencer | Dec 12, 2007 2:22:48 PM

Spencer,

All stocking systems have costs. Just-in-time has reduced the costs of keeping shelves stocked, but it isn't free. My basic point stands.

But I'm happy to understand more about Wal-Mart. Thanks for the info.

Posted by: Russ Roberts | Dec 12, 2007 2:53:07 PM

All stocking systems have costs. But that is my point. Modern retail systems are not stocking systems -- they are sysems to manage flow. When WMT and others redirect the flow of goods from one store to another for a few days it is done at an insignificant cost that makes virtually no difference to WMT. Virtually all the cost WMT incurs in getting different supplies into a disaster area is the minimal cost of staffing their emergency centers and writing computer code into their computers systems to allow them to do it.

This is the problem I have with you guys a Cafe Hayek and the other GMU bloggers. Maybe it is the way academics do it and my background as a business economist/analyst makes it difficult to understand. You are constantly making thing like this up out of thin air because you have a theory. That is OK, but I can not take you seriously when
you obviously have done no analysis and have no facts to support your theory.

You have a theory that the only way to get new supplies into a disaster area is through higher prices. But there is a wealth of information that your theory is wrong. But that does not matter to you. You just keep making up things out of thin air to support that theory and consistently ignore the wealth of conflicting information.

After school I was trained to be an economic analyst at the CIA and continued that training and experiences in the investment business. That is not the way objective business analyst works. Theory is the first step that provides guidance into what to first investigate. But after that you go where the facts take. You do not make up things to confirm to your original beliefs.
That is why the CIA motto is what it is.

As long as you keep doing this I can not take your seriously. And it is not because of your politics. It is why I would never hire a graduate of the GMU economic department. It is very hard to teach a young analyst to be objective. But it is essentially impossible if they come from a background that ignores objectivity like you do at GMU

Posted by: spencer | Dec 12, 2007 3:26:20 PM

Spencer,

You write:

"You have a theory that the only way to get new supplies into a disaster area is through higher prices."

It's not a theory. It's an empirical regularity throughout most of human history. When there's a sudden increase in demand, certain things get very scarce. The result is high prices. Sometimes the prices are essentially infinite because there are things that simply aren't available. The high price reflects the scarcity of those things and encourages suppliers to import supplies into the area.

To say that price doesn't "need to go up" to satisfy the demand is another way of saying that there isn't a shortage. That can be true, evidently, in some recent situations, because of incredible improvements and innovations in supply chain and inventory management by retailers such as Wal-Mart.

I'm thrilled to hear it. It's great. Wonderful.

Posted by: Russ Roberts | Dec 12, 2007 3:41:55 PM

Spencer,

I think you miss the point. Consider the following scenario. A given geographical area is subject to random blizzards between November and March. After a blizzard, demand for snow blowers increases significantly. A retailer has the following options:

1. Stock snow blowers to "blizzard level" immediately prior to the blizzard - keeping product available and prices stable (also maximizing profits and minimizing consumer cost).

2. Stock snow blowers to "blizzard level" from November to March. Product is available, but the "every day" consumer cost of a snow blower is going to be higher than scenario 1 due to the increased cost to the retailer of carrying "blizzard level" inventory full time (or the retailer will forego profits).

3. Stock snow blowers to "every day" levels all the time. When blizzards hit, the retailer will either a)run out of product at "every day" prices (which will also minimize the retailer's profits) or b) increase prices to "blizzard levels" which will lower demand to meet his stock, while maximizing consumer cost.

Dr. Roberts' point - and correct me if I'm wrong - is that accurate weather forecasting makes it possible for WMT to use scenario 1 instead of scenarios 2 or 3.

Posted by: Bruce | Dec 12, 2007 3:52:42 PM

Spencer --

Even under Walmart's plan, there's still a cost -- the guy in Maine can't buy a snow shovel now because they're all in Oklahoma. But, he sure has plenty of holiday ornaments to choose from. Remember, Walmart doesn't have warehouses -- all the ornaments that were in the pipeline for Oklahoma have to go somewhere. In the end, Walmart will sell just as many generators and snow shovels as it would have originally (they'll be sold in Oklahoma and not Minnesota), but fewer Christmas decorations.

Posted by: Chris | Dec 12, 2007 3:56:35 PM

WMT always goes with the number 3 scenario
you proposed.

In New England, WMT will have 100s of stores. Each store will a few days supply of snowblower in the store-- Wal-Marts practice is to bring additional snowblowers into the store every few days. Suddenly say 20% of the stores experience a doubling or tripling of sales. The way the system works is that WMT lets the other 80% of the stores run their inventories down while they redirect the snowblowers they would have sent to those 80% of the stores to the 20% of stores with a demand surge. Meanwhile, they contact the supplier and order extra snowblower to offset the unexpected demand surge. In a few days these enter the supply flow and go to the stores that had no demand surge and where they had deliberately allowed the inventory to be drown down from three or four days supply to two or three days supply.

So in this way WMT meets the extra demand through a change in the flow and has no need to raise prices. They next use the just in time ordering system to obtain replacements
from the producer to get the flow back to normal in their system. Moreover, they also realize that in the stores that experienced a surge in demand for snowblowers they will have saturated the demand for snowblowers in those towns. They expect demand in those towns will now drop because the blizzard lead to people buying ahead of the normal replacement schedule.

So yes, WMT has developed a system that can absorb significant unexpected surges in demand without having to raise prices
and they and other retailers now do it all the time all over the country.

Posted by: spencer | Dec 12, 2007 4:56:12 PM

Spencer --

I'm missing a step or two:

(1) The supply chain for many of Walmart's products can be long both in number of stops and distance -- it takes more than a few days to get replacements from an overseas supplier. How does Walmart deal with that?

(2) Because of just-in-time, if expected supplies do not make it to a Walmart store when originally anticipated, shelves go empty. And, if more than expected supplies go to a store, they have no place to put the extras. What happens to the stuff that was going to be put on the Oklahoma shelves now occupied by snowblowers? What happens to the shelves in other parts of the country that were expecting snowblowers?

Posted by: Chris | Dec 12, 2007 5:24:42 PM

It is why I would never hire a graduate of the GMU economic department. It is very hard to teach a young analyst to be objective. But it is essentially impossible if they come from a background that ignores objectivity like you do at GMU

Huh? Does that mean you're being objective in your hiring decision? i.e by generalizing all GMU grads and not attempting to measure their individual objectivity. :D

(PS: I'm in no way connected to GMU, nor have ever been. Actually, I live in Fairfax, but that's about it...)

Posted by: abhi | Dec 12, 2007 5:28:13 PM

Spencer is making the mistake of not noticing that economic theory makes predictions CETERIBUS PARIBUS; all other things remaining equal. If Wal-Mart or anyone else can efficiently match increased supplies to increases in demand, in a timely fashion, then the ceteribus paribus condition doesn't hold. Prices may not have to increase, or not by much.

However, in areas where there are no Wal-Marts--or where access to Wal-Marts is impossible because, as happened in Chehalis, Washington thanks to this very same storm, the highways were flooded and neither supplies nor customers could go anywhere, the guy in the pick-up who is inventive enough to get supplies to customers will find that he can charge high enough prices to cover his much less effective distribution system's costs.

Posted by: Patrick R. Sullivan | Dec 12, 2007 6:19:03 PM

WOW, this is one of the best threads I’ve read in awhile. The Repartee is engaging.

Thanks all!!! (a special thanks to Russell & Don for this FREE forum)

I guess nothing gets a party going like:
“I so wanted to make a common not to send this article to Don Boudreau at Café Hayek of other libertarians. Because they seem to believe………”

Posted by: John Smith | Dec 12, 2007 6:26:25 PM

Here are pictures worth thousands of words. Scroll down to see what the parking lot of the Chehalis WA Wal-Mart looked like last week.

It is located mere feet from Interstate 5--the only highway between Portland Or and Seattle--which was closed to all traffic for several days. Would Spencer care to hazard a guess what those bottles of water in the boat would sell for given these market conditions?

Posted by: Patrick R. Sullivan | Dec 12, 2007 6:42:33 PM

Spencer,
Your explanation is "on time" supply is correct. My wife is in a position of customer service with a huge corporation that supplies WMT, WMT and SAM's are her customers.
Spencer said:
"So your thesis that WMT carries extra inventories and this creates extra cost is completely without any basis.
Posted by: spencer | Dec 12, 2007 2:22:48 PM"

And, this does eliminate the cost of "holding inventory" temporarily or indefinitely.

But, other than that minor nit pick with Russ, my question to you Spencer is what difference does it make whether the WMT inventory is in a stockroom or on a truck coming down the road "just in time"?

It gets to the people who need it in the best time and at the best price. And, there is no doubt that WMT employs people to move products to points that have a more severe need or are expected to have a severe need.

My last question to you sir Spencer, is are you present on the blog to nitpick out of jealousy, professional contempt, hatred, insurmountable philosophical difference....why/what?

You are obviously well trained and bright so what are you trying to accomplish? I, as a layman, would like to understand.

Posted by: vidyohs | Dec 12, 2007 6:52:26 PM

BTW Russ, Don, Cafe Hayek is giving me heartburn in my attempts to post comments. I know my info is in the right boxes and I still have to jump through the "stranger" hoops, including the coded ID thing, to get them to post. Is it just me or are others experiencing the same thing?

Posted by: vidyohs | Dec 12, 2007 6:55:24 PM

More perspective on Wal-Mart in Chehalis WA from another photo. Click on the picture, the Wal-Mart is the building in the upper right quadrant. Again, I-5 (the highway in the center) is the only highway between Portland and Seattle.

Posted by: Patrick R. Sullivan | Dec 12, 2007 6:57:56 PM

Spencer,
Here you are flat out wrong.

"When WMT and others redirect the flow of goods from one store to another for a few days it is done at an insignificant cost that.............."" makes virtually no difference to WMT.""

I am sorry sir but obviously you have never tried to place a product in a WMT. "Every penny discussed make a difference to WMT!"

I get the daily anecdotes from my wife on just how carefully WMT watches the pennies.

Furthermore, how can you assume, or claim, that because WMT is hugely successful and has "umptodians" of dollars that it got that way and stays that way by ignoring costs......any costs?

That, sir, is illogical to the extreme.

Posted by: vidyohs | Dec 12, 2007 7:01:28 PM

Spencer,

I should have included this:

"Virtually all the cost WMT incurs in getting different supplies into a disaster area is the minimal cost of staffing their emergency centers and writing computer code into their computers systems to allow them to do it""

Are you telling us, sir, that for WMT to divert a truck, destined for Pheonix and currently on US I-10 in New Mexico, to Portland, Oregon does not incur any costs? Plus, sir, they don't write new codes they just e-mail people like my wife and those people reroute enroute trucks, or reschedule product to the new desired point.

In fact, Spencer, while you have some of it right, you have some of it wrong. Again, what are you trying to accomplish here?

Posted by: vidyohs | Dec 12, 2007 7:06:37 PM

""Gee, aren't meteorologists those same wacky scientists who keep telling us about global warming and its causes and consequences? Hmm, maybe they really do know more about climate than economists do. Food for thought.

Posted by: P. Plante | Dec 12, 2007 7:28:04 AM""

Gee, P. Plante,
Maybe most of us can think more clearly than you......that's an assumption I made based on your above.

"Some", I repeat, "some" metorologists preach the global warming doctrine, and "some", I repeat, "some" do not and preach an intelligent viewpoint.

P. Plante, meet muirduck, you two will get along famously.

Posted by: vidyohs | Dec 12, 2007 7:51:44 PM

Spencer,
Perhaps you are under the erroneous impression that WMT products are delievered exclusively by WMT trucks. They aren't.

The multi-national corp my wife works for uses private contract carriers to deliver WMT products to individual WMT & Sam's stores as well as WMT distribution centers.

The cost of using, diverting, and/or rerouting is passed on to WMT and of course from WMT to us'n the customers.

I suppose, do you, that other corps do the same?

Posted by: vidyohs | Dec 12, 2007 8:12:33 PM

The WMT and other retail systems to get supplies into a disaster area does not work on the principle of carrying extra inventories in the stores.

The bulk of Wal-Mart's inventories are in trucks on the highway. Go to your local Wal-Mart store and ask to see their store room. It does not have one.

In a few days these enter the supply flow and go to the stores that had no demand surge and where they had deliberately allowed the inventory to be drown down from three or four days supply to two or three days supply.

So in this way WMT meets the extra demand through a change in the flow…

It seems the view above is backward. WMT is ALL storeroom and no showroom. It stocks inventory across all its stores. Warehouse-style retailers do carry extra inventory, just not in non-retail distribution centers. *Flow* is just inventory on wheels.

The *perfect prediction* universe would have each snowblower arriving on the dock as the buyer entered the store. Inventory would turn every time someone heard "Welcome to Wal-Mart".

Posted by: foxmarks | Dec 12, 2007 8:17:17 PM

I don't really care if wmt can/will/does suppy more without increasing its prices whereas hillbilies in pickup trucks try to sell generators (or whatever) at jacked up prices. Even if pickup truck vendors are trying to make profits that are unjustified by some definition or another, I support their freedom to do so. Just as I have a right to offer my services for sale at $1000 per hour or my to offer my house for $1m (not that there would be any takers in either case), folks should be free to offer generators for twice their usual price. It's called freedom, and it is inherently valuable. Arguments to the contrary seem to assume that people in storm areas have some sort of right to a generator at a particular (=pre-storm) price.

Posted by: Frank | Dec 12, 2007 8:27:06 PM

This is an excellent alternate point of view from foxmarks that has just as much validity as anything said by anyone yet. It works very well as an explanation or an arguement.

""It seems the view above is backward. WMT is ALL storeroom and no showroom. It stocks inventory across all its stores. Warehouse-style retailers do carry extra inventory, just not in non-retail distribution centers. *Flow* is just inventory on wheels.
Posted by: foxmarks | Dec 12, 2007 8:17:17 PM""

Posted by: vidyohs | Dec 12, 2007 8:37:49 PM

Vidyohs --

I think your model of what Walmart does may be wrong. It isn't really diverting trucks as much as it's diverting what's *in* the trucks. [I suspect that they actually do divert trucks -- the "walmart to the rescue" image that portrays on national TV is worth far more than its cost of doing it. But, I digress....]

His point, I think is that the stream of goods changes in response to local needs. So, snowmobiles get put on the truck to Oklahoma and not to Maine. It's the same truck, just carrying different things.

Posted by: Chris | Dec 12, 2007 9:09:49 PM

"After school I was trained to be an economic analyst at the CIA and continued that training and experiences in the investment business."

So, were you one of those CIA economic analysts in the 80's that had estimated the Soviet Union's economy at 75% the size of the U.S. when it turned out to be 25%? Were you one of those investment analysts in the late 90s that said that if the investment banks could sell paper at a 60 multiple, then that must be its economic value?

For crying out loud, all that Russ said was, "Carrying inventory costs money." spencer turned that into a rant that Russ "just made up the bit about carrying inventories at (WMT) stores out of thin air."

The basic point is that inventory does cost money. WalMart most certainly does have inventory--$33 billion of it, over 20 percent of their balance sheet. So what, it's largely in-transit rather than warehouse inventory--it costs the same amount of working capital to support it. It's not costless to maintain. It's not costless to shift or manage or certainly to replenish due to unexpected contingencies. Those facts make spencer's accusation of Russ not knowing what he's talking about total horsesh*t.

Then, what pushes his comments beyond horsesh*t into leftist horsesh*t is his apparent refusal to understand that WalMart would be justified in increasing their prices as a result of an increase in inventory costs; WalMart would be justified in increasing their prices if they so no jump in their inventory costs, but their competitors did. WalMart would be justified in increasing their prices if nobody saw their costs increase, but overall supply came down anyway (an economically unrealistic scenario, but spencer must be no stranger to those in the CIA and investment management world.)

Folks, this was not a "great exchange." It was a frustrating exchange along the lines of the pot calling the kettle black when spencer was accusing Russ of holding onto his "priors" while manufacturing evidence.

Posted by: M. Hodak | Dec 12, 2007 9:40:16 PM

Chris,
I understand the point you're making and its valid without making my model wrong, because what 's *in* the truck still needs a truck, and it is almost always a truck that was 'going' somewhere else.

It becomes a matter of priorities and this is where the costs of moving "inventory" to a desired point comes into play, that increase that Russ wrongfully assigned to inventory sitting in a stockroom waiting for that rainy day, but also the correct increased cost he assigned to WMT that WMT has to pay to put that inventory where it wants it.

Either way Spencer comes off as looking for minute details upon which to pick nits and doing so because of a spencer agenda, not because it matters a hill of beans.

Trucking firms do not make money on trucks sitting around not on the road carrying loads. But of course you know this.

Posted by: vidyohs | Dec 12, 2007 9:40:54 PM

Hey Mark,
Good job: This is exactly what I thought when reading Spencer's CIA claim:

""So, were you one of those CIA economic analysts in the 80's that had estimated the Soviet Union's economy at 75% the size of the U.S. when it turned out to be 25%?""

I let it slide because I had other arguments to put out there. Thanks to you for laying it out.

Posted by: vidyohs | Dec 12, 2007 9:45:26 PM

I'm surprised that most of you (especially you Spencer) have missed the point.

Natural disasters are not a time for retailers (or anyone else) to exploit innocent victims.

The standard procedure is for governments to enforce anti-gouging laws. It's unconcionable that retailers would redirect traffic, thereby profiting from artificially high prices brought about by the disaster.

How dare they present themselves as community minded retailers, when all they did is prevent a shortage by taking a profit.

I think some sort of central planning by the government on product distribution is clearly necessary. Along with profit caps on corporations trying to exploit demands that exceed the forecasts of the central committee, I think we can build a model which assures none of its citizens will ever fear natural disaters in the way they have in the past. ;)

Posted by: SheetWise | Dec 12, 2007 10:08:21 PM

Vidyohs (and others frustrated by comment forms),

I've also been frustrated. I just figured out the problem, at least I think I have. I'll post on it in a sec.

Posted by: Russ Roberts | Dec 13, 2007 2:48:39 AM

Suddenly I think Valentine's Day might violate some anti-gouging laws.

Posted by: cpurick | Dec 13, 2007 7:46:57 AM

I'm just making a description of how the system works and why in the modern economy
wmt and other retailers do and can get supplies into disaster areas extremely efficiently at the same price as they normally charge.

Because modern technology has changed the system the traditional supply-demand curve analysis no longer applies. It is a misapplication of theory. It is a massive over-simplication. I understand that theory is suppose to be a simplification but economics teachers are suppose to be teaching both a way of analysis and an
accurate description of the world.

This is my problem with the analysis presented by too many economists to
argue that gouging storm victims is good economics and teaching their students that gouging is good economics and behavior to emulate.

Actually, I'm saying the private capitalist system does a better job then the one you describe. But it is not the simple perfectly competitive model that modern economics insist on applying to everything.

WMT and other big chains can do this complex job of increasing supply without raising prices because it is much more a system of
imperfect competition than a system of perfect competition where the individual firm is always a price taker and has no impact on the slope or shape of the supply curve.

Wal-Mart has the economic power to strongly influence the shape and slope of the supply curve and consequently the perfectly competitive analysis of supply and demand curves does not apply.

Posted by: spencer | Dec 13, 2007 8:20:56 AM

It seems that once again WM found ways to flatten and make cheaper its supply curve, while others have supply curves (flat or not flat) that hover at a higher price regimen.

Posted by: Unit | Dec 13, 2007 8:25:34 AM

Patrick Sullivan I will take your bet for any amount of money you are willing to bet that the Wal-Mart in Chehalis WA you referenced did not raise the price of bottled water.

Just as an aside I will also bet they did not run out of bottled water either.

Posted by: spencer | Dec 13, 2007 8:28:26 AM

Spencer-
You have no idea what Russ really believes when you make the statement that, "WMT and other big chains can do this complex job of increasing supply without raising prices because it is much more a system of
imperfect competition than a system of perfect competition where the individual firm is always a price taker and has no impact on the slope or shape of the supply curve."

I didn't see Russ say that the world works in the model of perfect competition. That model is wrong on its face because the world does resolve to equilibrium. If you listen to the Podcast with Pete Boettke he even states that it's not perfect and why it's not. Not to mention the Big Box stores take away the ability of the individual entrepreneur to exercise arbitrage. It's not a matter of what a price is before an event takes place, the price of a good is about the subjective value of the individuals who value it.

If I need water and there is none because there was a shortage then who does that really help other than the early buyers who may not have valued the water as much as I did? Price allow individuals who truly value those goods at a higher value to obtain those goods. There are also risks that are run by individual entrepreneurs who go into an area that is hazardous.

The amazing thing about the system in which we operate is the fact that the Big Box stores have seen that they can help their customers by providing the goods they need at a lower price. That is what they are about, they take away the arbitrage and profit opportunities of those individuals or companies who would charge a higher price.

The question is would you rather have the opportunity to buy a good that you NEED, even if at a higher price, or not have the opportunity because they were mandated to keep prices low by law and running out of the good? Because that is what happens...just ask the people who ran out of gas in TX when they were Fleeing Hurrican Rita. Or ask the people who needed generators in NC in 2000 when they got snow and had no power for weeks and the Big Box stores weren't acting quickly enough. Good thing the policy makers and people like yourself insist on pre-disaster prices, you know...so they don't get ripped off oh and don't have the goods they need.

Posted by: Matt Carson | Dec 13, 2007 9:25:19 AM

....the perfectly competitive analysis of supply and demand curves does not apply.

Spencer, you seriously misunderstand the the supply/demand curve. The curve is as basic as economics gets and is generally covered on the first day of Econ 101, right after the class goes over the syllabus for the semester. The fact that you don't understand this elementary concept reflects poorly on the CIA and even more poorly on the investment management industry.

Supply/demand says nothing about competition and it is not an "analysis" of a competitive system. The supply/demand curve simply makes the observation that consumers will demand more of a good at lower prices than higher prices and that suppliers are willing to provide more of a good at higher prices than at lower prices. This is true regardless of how competitive the market is. You can layer more complexity for an individual good by measuring the elasticity of demand, but that doesn't change the basic concept.

the traditional supply-demand curve analysis no longer applies. It is a misapplication of theory.

So, what you're saying here is that consumers are not willing to buy more of a good at lower prices and vice versa and that producers aren't willing to supply more at higher prices and vice versa. In other words, price doesn't matter. Upon reflection, does that make sense to you? If I offered you oranges at $5/orange how many would you buy? How about if I offered you oranges at $0.25/orange?

Frankly, Spencer, as a former analyst, I'm surprised that this comment comes from somebody who was also an analyst - particularly one who covered retail. But not too surprised. Ignoring any sundry government regulations that may apply for a moment, a retailer like WMT is a price taker and operates in a perfectly competitive environment. What you describe as "imperfect competition" is known as "competitive advantage". One of WMT's competitive advantages is its size - it's such a large buyer that it can negotiate lower prices for wholesale purchases, pass the savings on to the its customers and undercut its competitors. Another advantage is its distribution system. If it can get more product to areas expected to experience a sudden demand surge (due to storms, etc.), it will have more product to sell. There are two ways for a retailer to maximize profit: higher margins, which are possible only on differentiated goods and selling more units of undifferentiated goods. WMT's distribution system allows it to more quickly redirect its inventory of goods to areas with higher demand, selling more units and maximizing its profit that way (since it sells undifferentiated goods). The extra supply of goods in high demand areas means that prices don't rise. If, for some reason, WMT and other retailers aren't able to get the the additional goods to the stores to meet the additional demand, prices for the goods will spike in that region. That's not "gouging". That's just "the way it is". If I have an extra gallon of water that I may need for myself later, I am willing to part with it only for a very high price because I may not be able to replace it any time soon. In other words, I'm taking a risk of running out of fresh water by selling it to you. If you're buying that water from me, you're going to have to compensate me for the additional risk.

Although you insist that Russ Roberts is wrong, I don't actually see where you disagree with him.

Russ Roberts is saying that better storm predictions give retailers a heads up about where demand will spike, allowing them to better supply those areas and keep prices from spiking. You're saying that WMT redirects inventory flow from lower demand to higher demand areas. Better weather forecasting allows WMT to do that more efficiently. You're basically saying the same thing. Aside from your general hatred of anyone who actually understands basic economics, what is your problem with Dr. Roberts' post?

Posted by: Methinks | Dec 13, 2007 9:27:15 AM

Patrick Sullivan I will take your bet for any amount of money you are willing to bet that the Wal-Mart in Chehalis WA you referenced did not raise the price of bottled water.

Which is not responsive to my question. I asked about the bottles of water IN THE BOAT. Wal-Mart couldn't have GIVEN AWAY their water since no one could get to the store.

You literally do not understand what you're writing about. I agree with the other posters that you explain a lot about the CIA's follies.

Posted by: Patrick R. Sullivan | Dec 13, 2007 11:48:18 AM

Methinks -- go read Chamberlin's Imperfect Competition.

Posted by: spencer | Dec 13, 2007 1:59:26 PM

Spencer,
This paragraph below tells me that you are still reading and writing to argue for an agenda. At no time have I read anything from Don or Russ that calls it gouging, in fact they point out that it is NOT gouging but an appropriate response to the market for WMT or anyone else to charge a higher price in times of goods shortages. It seems to me that you are pulling a Don Quixote and just tilting at windmills.

""This is my problem with the analysis presented by too many economists to
argue that gouging storm victims is good economics and teaching their students that gouging is good economics and behavior to emulate.
Posted by: spencer | Dec 13, 2007 8:20:56 AM

And for the muirducks, Gils, and STRBs of the world, what Methinks says below is very appropriate to reinforce. And I will add to what Methinks says by pointing out that WMT gained the "competitive advantage" by the genius of Sam Walton who reorganized and restructured retailing to deliver quality goods to people at low prices. Government did not make WMT, WMT made WMT, and did so so successfully it is challenged not by the efforts of other retailers, but by the stupidity of socialist and their spawn that want to destroy an excellent business.

"What you describe as "imperfect competition" is known as "competitive advantage". One of WMT's competitive advantages is its size - it's such a large buyer that it can negotiate lower prices for wholesale purchases, pass the savings on to the its customers and undercut its competitors. Another advantage is its distribution system. If it can get more product to areas expected to experience a sudden demand surge (due to storms, etc.), it will have more product to sell.
Posted by: Methinks | Dec 13, 2007 9:27:15 AM"

Posted by: vidyohs | Dec 13, 2007 6:24:24 PM

Boy, reading all these comments, this is something.

I was wondering if Walmart is just doing something I used to do when I drove a bread truck [about 40 years ago]. I used to take extra bread on my truck when a storm was predicted because for some reason every time women see a snow flake they go buy a loaf of bread and a carton of milk. I'd load up the stores, at least the ones where I had schmoozed the store manager into giving me the shelf space.

The idea is that if you run out you've lost sales. You never want to run out, my boss always said that was the worst thing you could ever do.

Seems like WMT is just anticipating demand according to anticipated changes in the weather and sending its trucks where the bad weather is expected to be. They are not only making sure they don't lose sales by running out, they are enhancing the value of their customer good will by reassuring them that when the storm comes WMT will always be well stocked. People will go to WMT first if they know they will find what they want when they get there.

Do you disagree, Spencer? If you don't then isn't Russ Roberts correct, or am I missing something?

By the way, during Katrina, which was more helpful, WMT or the government?

Posted by: Flash Gordon | Dec 13, 2007 6:28:03 PM

diz,

That is another explanation. But it really only works in a world of one florist. When there is so much competition, you don't want to invoke motives.

I was really being facetious.

Unfortunately, explanations like that appear on comment boards all the time.

Posted by: diz | Dec 13, 2007 6:53:45 PM

Patrick Sullivan -- I looked at the photos you wanted me to look of the flood in Wa.

What I see is a set of photos of the government giving water to people.

I see a photo of people rowing away from a wal-mart store with water. But there is no evidence that they did not just steal the water from the store. I certaintly see no evidence that Wal-Mart was induced to providing the water to them by higher prices.

Would you please explain how the photos are proof of your theory that higher prices lead to an increase in the supply of bottled water.

What I see is an example of the government doing good work for storm victims.

Would you care to explain how this demonstrates your theory.

Posted by: spencer | Dec 13, 2007 8:18:02 PM