Freeman

ARTICLE

In Defense of Grocery Coupons

The Invisible Hand Works

MARCH 01, 2000 by BILL FIELD

Bill Field is a professor of economics at Nicholls State University in Thibodaux, Louisiana.

We’ve all had this aggravating experience: rushing through the grocery store to finish our shopping, hurriedly looking for the shortest line, congratulating ourselves as we get in a line with only one lady in front of us, and then wanting to scream when we see her pull a big batch of grocery coupons out of her handbag. Surely this is an egregious example of waste—of our time and of the store’s and manufacturers’ resources in handling all this paper. Surely government should come to the rescue and promote efficiency by simply outlawing grocery coupons. Wouldn’t such an obviously beneficial action by government create wealth?

Such apparently appealing proposals are the reason why we need principles to guide our thinking. Without some general starting point for reasoning through specific issues, we can be easily taken in by the superficial allure of seemingly obvious solutions.

What is the best guide for economic issues? It is the following simple statement: the invisible hand works. Whenever someone proposes government action to solve a problem, the best immediate reaction is to ask why market forces can’t provide a better solution. Given the overwhelming evidence of the vast superiority of the invisible hand versus the visible hand in dealing with economic problems, the burden of proof should be heavy on the advocate of government action.

Let’s apply our principle to the grocery coupon. A freely functioning invisible-hand process has yielded grocery coupons, and they are likely to continue for the indefinite future. Every entrepreneur, institution, and procedure in the market process is continually subject to the survivor principle: market success depends on producing value greater than the opportunity cost of resources used. In other words, those who survive and prosper necessarily make, on net, a positive contribution to economic wealth—the invisible hand works. Thus, grocery coupons are necessarily wealth-creating.

Clarifying the Obscure

For most economic activity, the validity of this argument is clear. No one doubts that the butcher, the baker, and the candlestick-maker create wealth. The same goes for people who produce cars, movies, and computers. On the other hand, the wealth created by coupons is obscure enough to escape most of us unless we think carefully about the subject.

How does issuing grocery coupons create wealth? Coupons allow sellers to engage in price discrimination—to sell the same product to different people at different prices. Consider a bottle of Heinz ketchup. The marginal cost of producing one additional bottle may be only 50 cents; but given the demand, the profit-maximizing price may be $1.50. At that price only people who prefer Heinz and who are not particularly price-sensitive will buy Heinz. Others will buy the house brand for perhaps $1.00.

Heinz could sell much more ketchup if it lowered its price to $1.20. But it would lose more from lowering the price to those who would have bought at the higher price than it would gain from the additional customers attracted by the price reduction. Thus Heinz seems stuck serving only its dedicated customers, and those who are more price-sensitive seem stuck with the house brand.

Coupons resolve this dilemma. If Heinz issues a 30-cent-per-bottle coupon, price-sensitive individuals will be most likely to go to the trouble (bear the opportunity cost) of searching out the coupons. They will then be able to buy Heinz at a price of $1.20 while others are paying $1.50. Note that Heinz is better off (makes more profit), the price-sensitive customers are better off (they voluntarily searched out the coupons, revealing that they valued Heinz at $1.20 more than the sacrificed time and effort), and devoted Heinz customers are unaffected, buying ketchup at the same price as before. Thus grocery coupons are, on net, wealth-creating.

Checkout Delayed

But haven’t we forgotten something here? What about the delays in the checkout lines? Aren’t the delays an externality imposed on the rest of us? Of course the coupon users and the companies benefit. Otherwise coupons would have disappeared long ago. But isn’t the cost imposed on everyone else ignored in the transaction, resulting in market failure?

The short answer is no. Obviously there is a delay cost imposed on patrons who use no coupons, but the storeowner has every incentive to consider that cost. After all, customers can go elsewhere. The storeowner may respond to this problem by opening additional lines. The appearance of delay may not reflect reality once the adjustment in the number of lines is taken into consideration. So there may actually be no costs imposed on those who don’t use coupons.

But suppose no additional lines are opened or people at least think they’re being delayed by coupon users. Anyone is free to open a store that refuses to accept coupons. Coupon-less customers could then rush to this store, and seemingly everyone would be happy. Unfortunately, it’s not that simple. That stores generally accept coupons indicates that coupons are profitable. They enable stores to broaden their customer base while being compensated by the manufacturer for the handling expenses. A store that refuses coupons would have to charge higher prices to make up for the loss of manufacturers’ payments or of coupon-sensitive customers. As usual, there’s no such thing as a free lunch—if you want to save time by quicker checkout thanks to either more lines or nonacceptance of coupons, you will have to bear the associated cost. The scarcity of stores that refuse coupons reflects the general entrepreneurial judgment that most customers would not be willing to pay enough extra to make such stores profitable.

Thus grocery coupons increase the wealth of the companies that issue them, the consumers who use them, and the stores that handle them, while imposing no cost on nonusers that they could not avoid if they were willing to bear the associated burden. The invisible hand sometimes works in mysterious ways, but it does work.

ASSOCIATED ISSUE

March 2000

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