Buying in Bulk Is for the Rich

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Published : April 03rd, 2013
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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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Vedran Vuk graduated with a BBA in Economics from Loyola University of New Orleans. Currently, he is pursuing a M.S. in Finance at Johns Hopkins University. He also spent time on a PhD. Economics program. His publications include academic journal articles, book chapter contributions, newspaper columns, and online articles. Prior to Casey Research, he worked in think tanks, government affairs, and corporate governance. Utilizing his experiences with academics, Washington politics, and financial knowledge, Vedran’s analysis often seeks to find the mid-point between these different areas.
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For Treasuries, yes. Anyone remember Savings Bonds?
For large packaging of grocery items, no. A little less variety, but a few extra days of food in the refrigerator for the same cost.

"Either people can't afford to make their ends meet with their paychecks, or they have completely lost control of their spending."
I think I'll go with Occam's Razor on this one.

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For Treasuries, yes. Anyone remember Savings Bonds? For large packaging of grocery items, no. A little less variety, but a few extra days of food in the refrigerator for the same cost. "Either people can't afford to make their ends meet with their paych  Read more
overtheedge - 4/3/2013 at 4:58 PM GMT
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