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I stood looking at the grocery shelf, baffled. In front of me were two
bottles of hot sauce – one larger and one smaller, with the per-ounce
price of each clearly labeled for the shopper. After doing some quick math in
my head, the bigger bottle was about 30% cheaper than the small one. This
wasn't some special sale, but just the normal price. And let me assure the
reader that the other differences were insignificant as well. I'm not talking
about a gallon-sized jug of hot sauce here, but rather simply a larger bottle
that could easily fit into my pantry. Were it a jug
of hot sauce, I could understand someone wanting to purchase the smaller,
quaint bottle which might appear more attractive on the dinner table.
No, dear reader, I have not jumped off the deep end with this
discussion of hot-sauce prices. There is a real economic conundrum to solve
here. What rational person would prefer to pay more for a product when the
same product is staring them in the face for 30% less? According to financial
markets theory, this opportunity shouldn't exist. Yet, whether it's hot sauce
or just about anything at the grocery store, one can save money by purchasing
a slightly larger package. I'm not even talking about huge bulk discount
retailers like Costco, but just your regular grocery store.
The sad truth is this price can be explained simply. For example,
assume that you could buy a $100,000 Treasury note maturing in the next two
years for $60,000. That would be an incredible deal, right? Unless the US
government defaults tomorrow night, that's essentially a free $40K plus
interest, which is incredible. Well, it's only an incredible deal for someone
with $60,000 in their brokerage account or the ability to borrow $60,000.
And that is the sad truth for the average American – not in the
stock market, but the grocery store. The pricing system of our entire society
is based on people living paycheck to paycheck. It is centered around shoppers with near zero dollars in their checking
accounts. Later today, I'm going to the grocery store. If I buy all the
smaller packages, my bill will probably be somewhere in the $100 to $125
range. If I bought the bigger packages, maybe the bill would be closer to
$200, but I would likely be saving $10-$20 in the long run. It's not really a
big deal for me.
Call me a finance geek if you will, but I don't see that as saving $10
to $20. I see it as earning 5% to 10% riskless return on my groceries. (In
fact, it's even less risk than the return on a short-term Treasury.)
Unfortunately, for too many Americans the difference between a $100
grocery bill and a $200 bill is enormous. As a result, we have the exact sort
of curious pricing on the before-mentioned hot sauce – 30% less for
buying just a tiny bit more. There's some irony here. Often the stereotype of
someone making bulk purchases is a person down to his last penny and watching
every cent. In reality, larger purchases are for the better off; buying the
tiny packages is for the poor.
In general, the tinier the packages in a society, the poorer the society.
Recently, I read an article about the popularity of single-use shampoo
packages in India which only cost a few pennies each. Trust me, they're not saving money in the long run buying those
packages. Nonetheless, these packages do make a convenience affordable to
those who can't even dream of being able to buy a whole bottle.
While the grocery-store savings are great for me, it's disheartening
to know that these savings are essentially the result of a
paycheck-to-paycheck society. Either people can't afford to make their ends
meet with their paychecks, or they have completely lost control of their
spending. But then again, there is something virtuous about these prices as
well. In the free market, the price system actually rewards one for earning a
greater income by offering cheaper prices for larger purchases. The same is
true of other pricing as well. With a bigger down payment and more income,
one pays lower interest rates on the mortgage – again, a reward for
doing better. When it comes to government, it's the complete opposite. We are
actually punished for earning greater incomes by paying higher taxes. Funny,
isn't it?
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