Here in the UK, the supermarket chain Waitrose used to have an intriguing service model. After finishing their purchases, buyers could pick up a complimentary newspaper and order a coffee on their way out. The coffee machine in my local supermarket is back in use, but newspapers are no longer free. I thought of that when reading Tyler Cowen’s recent lament that US book and music retailer Borders is not around anymore. To which reader Carthaginian replied, “Browsing books while listening to live Haydn I think was truly one of the most transcendent retail experiences, I know that will never happen again in my lifetime.”
But why won’t we see such indulgences again? Looking back, I wonder what motivated the premium service strategy to begin with. Two plausible scenarios emerge. Perhaps, listening to live music while shopping or being treated to free coffee is indeed an experience that customers are willing to pay for. Or, it may be that entrants into an industry offer a premium service to garner attention, only to phase out said service once brand preferences have been established. In the latter case, little more is to be said. Music lovers should attend a concert after having browsed the book stacks. And coffee addicts may have to seek out the coffee shop next door. If correct, demand is simply too scarce for both activities to profitably take place in the same venue.
Presented with the historical counterfactual, I am not entirely convinced that this latter reading of the situation is correct. Preferences did shift dramatically, granted, but if one kind of premium service model became outdated, another one should have replaced it. Why is a 19th-century marvel, the live string quartet, one of the most “transcendent retail experiences” that the 21st century has to offer? Why is all that capacity to generate personalized sounds, smells, tastes, and visuals on the spot not gainfully employed? Today’s technology could enable retail experiences within tropical rainforests or futuristic art galleries. The fact that we do not always see it has much to do with economists’ favoured concept: competition.
My personal conviction, barring my enchantment with the first welfare theorem, has long been that market power is possibly quality-enhancing along the dimensions where fixed costs are important. Experiences, whether centred on smell, sound, or visuals, are no exception. The provision of these experiences, however valued by consumers, must be cross-subsidized, which entails higher mark-ups on a business’s core products. And critically, these higher prices may turn consumers, if given the option, into visitors: both happy to consume the experience—and buy next door where prices are lower. It is perhaps not incidental that free newspapers vanished the moment online grocery deliveries became widespread. Similarly, traditional brick-and-mortar bookstores started closing the moment that online competition could undercut them in prices. And it is not just the live string quartet that went with it, but more broadly the knowledgeable advice which nowadays makes buying tech or outdoor equipment a greater hassle. The proposition is clear: as market power vanishes, so do the freely provided non-excludable accompanying services.
Equipped with this intuition there is one institution which I anticipate defying these headwinds: the shopping mall. By carefully curating the range of sellers present within its premises, the mall increases the amount of market power that sellers can exercise over consumers. By design, consumers cannot leave one store in the hope of finding lower prices next door. Consequently, mark-ups are higher than on the high street where competition remains fiercer in the absence of collusion. The shopping experience, meanwhile, may feel grander and more magnificent. Consistent with this observation, industry insiders predict that shopping malls will evolve into playgrounds for augmented reality and AI. I would not object, if 19-th century indulgences also became a part of it. Regardless of the era, whether 19th or 21st-century, the economic proposition remains that if shopping is to feel special or even transcendent, it is through the exercise of market power that providing such an experience becomes the more profitable proposition for retailers.
