“We’re trying to reach to people who have never had home delivery before,” he continues.
“Right. So basically you’re saying that everybody else who already has a subscription is getting f***ed on this one?”
“Yeah…uh, I guess so.”
“Alright, well I can handle that.”
The above is a classic conversation from the movie Boiler Room, a film about a young man who works his way up in a less than ideal brokerage firm. Boiler Room is a move everyone should see, if not for the laughs along the way, but for this single conversation between a newspaper salesman and the main character, Seth Davis.
Marginal Cost Consumption
The prevailing lesson to be learned here is that not everyone can be a marginal cost consumer all the time. For Seth Davis to receive a discount on home delivery of the Daily News, everyone else who also subscribes pays a higher price.
The Daily News can offer a lower price because it overprints each issue. A newspaper sold to Davis is purely profit at any price, since the paper would otherwise be thrown away.
There are several personal finance-related products or actions that exemplify the idea of marginal cost consumption:
- Couponing – You need not look much further than couponing to find people who really believe that everyone can be a marginal cost consumer. When the television show Extreme Couponing first aired, people took to the internet to join the coupon craze. (See the summer 2011 jump in “coupon” search volume.) It wasn’t much longer that major retailers started calling back coupons, and food producers reduced the value of single coupons. When everyone gets the discount, coupons go out the window. The last thing any business wants to do is turn ordinary customers into discounted customers.
- Bread stores – Same thing. Bread stores sell overproduced product at huge discounts. Spoiled food is lost money. Generating revenues of any amount is again pure profit as the product is otherwise thrown away.
- Netflix – Somehow people are still of the belief that Netflix can and will displace cable, making access to television far less expensive. Netflix was originally welcomed by content producers because it provided a means to sell content to people who would not pay full price. Today, television content producers and cable companies want more and more money because Netflix is cutting into their cable subscribers. Netflix can certainly grow further by attracting new people to the service, but the price will have to go up for all members. Cannibalizing high margin cable customers for low-margin Netflix members isn’t a good trade-off for cable companies.
- Medical Goods and Services – The rest of the world enjoys marginal cost consumption in medical technology on the backs of American patients. Socialized health care operations around the world become marginal consumers of already researched pharmaceuticals and medical technologies. If a pill required $2 in research per pill but only cost $.10 to produce the physical form, a country’s medical system can easily offer to pay only $.15 per pill to enjoy the benefits of marginal cost consumption. Americans, who do not live in a system where costs are negotiated, pay not only for the research required to produce their medications, but also the research required to pay for the medications of everyone around the world. Insurance companies have little reason not to approve any drug at any cost. Each new dollar that passes through health insurance companies to medical companies is a few more pennies of profit. To date, we still hear how the US has the highest health care costs because we do not have a socialistic system. The US doesn’t need socialized medicine in the full form to reduce costs, it just needs the ability to negotiate so that other world citizens also bear a proportionate percentage of research costs.
- Community Colleges – Community colleges are the best thing going for individuals. As a community college student, you are a marginal cost consumer who benefits from the subsidies of state and local governments. If everyone were to attend a community college for the first two years of a four-year education, tuition prices would necessarily explode. Granted, community colleges certainly save money from a lack of research. However, smaller class sizes and other benefits are quite costly. There’s nothing inherently less expensive about a community college that would make it fractions of the cost of other universities. Many community colleges take advantage of low-cost real estate in odd corners of a city for lower operational costs. There’s only so much cheap real estate, and state and federal subsidies.
- Index funds – Index funds cater to the marginal cost consumer who wants low fees in exchange for less active participation in the markets. The belief is that index funds benefit from a so-called Efficient Market Hypothesis. However, if EVERYONE were to stick their capital in index funds, the markets would be horribly inefficient. Since the S&P500 seems to be the preferred index, imagine the distortions that would arise if funds were invested only in 500 companies of the more than 5000 publicly-traded firms. You can’t have an efficient market unless others work to actively make markets more efficient.
Marginal Cost Production
Just as not everyone can be a marginal cost consumer, not everyone can be a marginal cost producer. I never had an interest in continuing into marginal cost production (this article is already too long!) before I read an article about blaming the economy over at LifeAndMyFinances. You can thank Derrick for not allowing this article to end here!
Here’s a few examples where an individual can enjoy the status as a marginal cost producer:
- College – Even if everyone in the United States were to have a college degree, there is no way to say that employment would fall in the aggregate. Certainly, people will degrees do enjoy a lower unemployment rate, and one individual can make the leap from one side to another, but if everyone were to have a degree there’s simply no way that the aggregate unemployment level would fall to that of the unemployment level for people with college degrees.
- Blogging – For whatever reason, blogging seems to be the new killer way to make money. I have my own conflicts with that; it’s very difficult to make money when you can’t possibly be a marginal cost producer. I, for one, would continue to write posts that no one reads whether or not I were to be rewarded with a single dime. If your model is for-profit, and someone is willing to operate without profit, it makes it difficult to carve out a business model.
- Preparing for interviews – If everyone were to use my interview tips, every tip would lose all value. You can prepare for an interview all you want, and bust your chops as much as you’d like, but you are part of the new normal – the 100%!
The simple fact of personal finance is that any savings you accumulate is most likely to come from marginal cost consumption, and income from marginal cost production. There is nothing that inherently makes one choice less expensive than the next, and to say that EVERYONE can do this, that, or the other to save money is patently false. Hence, marginal.
Likewise, to say that EVERYONE can do this, that, or the other to make money is equally false, though for whatever reason, almost always accepted as truth.