3 ms·

Economies of scale.

lotsofpulp 9y ago
I don’t understand what economies of scale would have to do with being a middleman merchant. It doesn’t take a lot of capital to open a store, and there aren’t many legal barriers, and the workers don’t need to be trained. If there are only two stores, and no one is opening a third, then that must mean there’s not enough profit to make up for the risk of failing and continual operation of the business.
- wahern 9y ago
  > It doesn’t take a lot of capital to open a store I think you underestimate the cost. AFAIU it takes significant capital to open a store, and there are far fewer people in rural areas both capable and willing. Real estate and labor is still a significant expense. Outside of unionized grocery stores, it's not like store clerks in New York City or San Francisco are making $25/hr. But to even open a small convenience store you need to purchase tens of thousands of dollars in stock, plus have enough reserves to keep your store operating, able to turnover product, for at least 6 months of negative cash flow. This applies even if you're not franchising. Basically, even in a rural area your startup costs are easily in the $100,000 to $200,000 range for a small store--at least for anything bigger than a bait shop. Plenty of people in rural areas could secure that kind of financing using mortgages, but once you factor in risk of failure and opportunity costs, you need a pretty significant pool of potential investors before you can expect one of them to take the plunge, and in rural areas the available pools are just too small. Opportunity cost is a huge deal. Somebody with enough assets to secure a $200,000 loan _and_ who is prepared to lose it all, is probably going to see a significant cut to their earnings compared to what they could be making elsewhere. This is why you see so many immigrants as shop owners--their opportunity costs are effectively lower, by dint of them being first-time players in the local economy, than a native with equivalent assets. Similarly, outside corporations have to answer to shareholders. Even though well-financed corporations could easily open more stores while still making a profit, such capital has more earning potential elsewhere. The upshot of all of this is that 1) rural consumers pay significant rents for living in comparatively uncompetitive markets, and 2) theoretically there's ample opportunity for a philanthropic entrepreneur to improve the quality of life of a rural town by strategically opening small stores with more competitive prices. Indeed, professionals who retire to a small town and open a small store are often effectively doing exactly this. (Similar to how well-heeled spouses in large cities burn money on boutique shops, except compared to the retired couple they have less need to actually be profitable, or care about whether they'll put someone else out of business.)
  - lotsofpulp 9y ago
    A few hundred thousand is expensive, but not so expensive as to create a barrier to entry restricting the supply of stores in the market. My point is that the risk and possibility of return is so low that it's not worth opening a store, and if that is the case then the existing stores are not "overpriced". They're priced exactly where they should be in order for the business to operate.
Obi_Juan_Kenobi 9y ago
Which would imply that they are not, in fact, overpriced.

Economies of scale.

I don’t understand what economies of scale would have to do with being a middleman merchant. It doesn’t take a lot of capital to open a store, and there aren’t many legal barriers, and the workers don’t need to be trained. If there are only two stores, and no one is opening a third, then that must mean there’s not enough profit to make up for the risk of failing and continual operation of the business.

wahern 9y ago
> It doesn’t take a lot of capital to open a store I think you underestimate the cost. AFAIU it takes significant capital to open a store, and there are far fewer people in rural areas both capable and willing. Real estate and labor is still a significant expense. Outside of unionized grocery stores, it's not like store clerks in New York City or San Francisco are making $25/hr. But to even open a small convenience store you need to purchase tens of thousands of dollars in stock, plus have enough reserves to keep your store operating, able to turnover product, for at least 6 months of negative cash flow. This applies even if you're not franchising. Basically, even in a rural area your startup costs are easily in the $100,000 to $200,000 range for a small store--at least for anything bigger than a bait shop. Plenty of people in rural areas could secure that kind of financing using mortgages, but once you factor in risk of failure and opportunity costs, you need a pretty significant pool of potential investors before you can expect one of them to take the plunge, and in rural areas the available pools are just too small. Opportunity cost is a huge deal. Somebody with enough assets to secure a $200,000 loan _and_ who is prepared to lose it all, is probably going to see a significant cut to their earnings compared to what they could be making elsewhere. This is why you see so many immigrants as shop owners--their opportunity costs are effectively lower, by dint of them being first-time players in the local economy, than a native with equivalent assets. Similarly, outside corporations have to answer to shareholders. Even though well-financed corporations could easily open more stores while still making a profit, such capital has more earning potential elsewhere. The upshot of all of this is that 1) rural consumers pay significant rents for living in comparatively uncompetitive markets, and 2) theoretically there's ample opportunity for a philanthropic entrepreneur to improve the quality of life of a rural town by strategically opening small stores with more competitive prices. Indeed, professionals who retire to a small town and open a small store are often effectively doing exactly this. (Similar to how well-heeled spouses in large cities burn money on boutique shops, except compared to the retired couple they have less need to actually be profitable, or care about whether they'll put someone else out of business.)
- lotsofpulp 9y ago
  A few hundred thousand is expensive, but not so expensive as to create a barrier to entry restricting the supply of stores in the market. My point is that the risk and possibility of return is so low that it's not worth opening a store, and if that is the case then the existing stores are not "overpriced". They're priced exactly where they should be in order for the business to operate.

Obi_Juan_Kenobi 9y ago

Which would imply that they are not, in fact, overpriced.