I like to think I love saving money, but I’ve made many penny-wise, pound-foolish choices. I remember telling my mother, “Watch the pennies, and the dollars will take care of themselves.” I had read it in an old Blondie strip. Mom wasn’t impressed; she replied, “But don’t step over nickels to pick up pennies.” It took me a long time to think straight about it, and I probably still don’t. I have a weakness for “free” calories at conference receptions, no matter how empty, when I should probably pay to load up on protein. No one is above error. The fact remains, though: if I can “save” $250 by comparison shopping for a plumber but it costs me the opportunity to do $251 worth of work, I’ve chosen poorly.
Should you drive around looking for gas that’s two or three cents per gallon cheaper? Probably not: first, your time is valuable. Second, you’re burning gas to get from one place to another. Suppose you save sixty cents on gas by saving three cents a gallon, but you had to burn sixty cents worth of gas to get the savings. Never mind the value of your time–it’s a wash even if you just look at the cost of the gas you burn and the benefit of the money you save.
Trips to the gas station yield important insights into why prices might differ for the “same” good in different locations. A can of Sprite in downtown New York differs importantly from a can of Sprite in rural Iowa. Most of the value comes from its location.
There might be liturgical and ritual value in bargain-hunting, though. Maybe it is a useful exercise in affirming the kind of person you are (frugal, penny-pinching). I saw something on social media saying it’s customary in the Midwest to explain that you got a great deal when someone compliments you on something. It might be like taking communion at church, doing a morning Bible study, or going to the driving range. “Bargain hunting” also brings a bit of a thrill and can be fun for its own sake. Paying retail, however, is a way of outsourcing your analysis and thought processes to people specializing in curation.
When should you pay retail? Pay careful attention to the costs of looking for a better deal. Consider tickets to a sporting event or a concert. I’ve paid retail (plus “convenience charges”) to buy tickets to a minor league hockey game when, in previous years, I would have just scoured the parking lot looking for people with an extra ticket or two to unload. Needing four seats, wanting to sit close to friends, and having a busy day such that we didn’t arrive until after the puck dropped, it was much easier to bite the bullet and pay retail.
So, who pays retail? Schmucks, maybe–but also people with high search costs. It hurts a bit when I know I could have gotten a better deal with a little more work, but I can at least console myself by saying I had better things to do.
For more information on how entrepreneurs Sol Price and Sam Walton changed the face of retail, see “The Vital Two: Retail Innovation by Sol Price and Sam Walton” by Art Carden, Charles Courtemanche, and Reginald Harris, available without charge from Essays in Economic and Business History.
Art Carden is Professor of Economics & Medical Properties Trust Fellow at Samford University, and he is by his own admission as Koched up as they come: he has an award named for Charles G. Koch in his office, he does a lot of work for and is affiliated with an array of Koch-related organizations, and he has applied for and received money from the Charles Koch Foundation to host on-campus events.
READER COMMENTS
TMC
Mar 29 2024 at 10:28am
I’m known as ‘frugal’ to my friends. It is hard at times to consider opportunity costs. Like most of economics, it isn’t always intuitive.
Jon Murphy
Mar 29 2024 at 10:51am
Good stuff.
There are two gas stations near campus on a divided state highway. One side is going out of town and one side is going into town. The station on the inbound side has gas routinely 10-15 cents/gal more expensive than the outbound. Yet both sides tend to be fairly full of customers. I ask my Principles level students to evaluate why this might be: why do some people pay the extra premium and not cross the street? Why is the price differential perpetual? Has the Law of One Price been violated?
There are lots of good reasons, but a big one students point out (which I did not think of until they mentioned it. Local knowledge at work) is that the outbound one is relatively difficult to get to: unless you’re coming from one side-street, you have to go though a very busy and slow traffic intersection. If you are inbound, you have to make a U-turn at the light to get the cheaper gas and then repeat the process to get back inbound. If you are outbound, you have to go through the light. This process can add a significant amount of time. When you figure even a somewhat big gas tank like mine the price differential will only save about $1.50 (assuming filling up from empty), it doesn’t seem worth it.
One student, who also works at the outbound one, pointed out that the outbound one tends to be very large trucks and semis (where the price differential can really add up) and the inbound one tends to be smaller vehicles (where the differential is much lower). More local knowledge at work.
Thus: some people pay a premium because the relatively high cost of time. Others take the discount because a relatively low cost of time.
David Seltzer
Mar 29 2024 at 12:08pm
Art, Good stuff. I remember when attorneys were prohibited by state bars from advertising fees and services in newspapers. The Supreme Court held that the disciplinary ruling violated the First Amendment and that Arizona could not restrain the information contained in the attorneys’ advertisement. Cost of search was lowered and as more attorneys advertised, competition lowered fees. It seems the principles of opportunity cost and subjective valuation are the determining factors in making consumer decisions. Given the internet, information asymmetries are nearly nonexistent such that law of one price obtains, per Jon Murphy. Otherwise, arbitrage would quickly re-establish equilibrium prices.
john hare
Mar 29 2024 at 6:59pm
I’m well known locally for being careful with my money. But I am also careful with my time. Thanks for the article.
Dylan
Mar 29 2024 at 9:45pm
Good piece. I particularly appreciate the 4th paragraph though that walks through how penny pinching can have value that isn’t readily apparent in the standard cost benefit analysis you did above.
I’ve noticed a similar behavior in myself with not wanting to “waste” things. Someone years ago pointed out a device that was being sold that helped you get the last bit of toothpaste out of the tube and was mocking it on standard economic reasoning like this, the cost of the little plastic piece almost certainly was greater than the cost of the toothpaste you would save even over many tubes of toothpaste. At the time, I agreed with the reasoning… But years later I realized the author might have been looking at it the wrong way. For me, there is no question that I’m going to get every last drop of toothpaste out of the tube… Not because of the pennies cost of that little bit more, but because the idea of throwing something out that has value left bothers me on a more fundamental level. Personally, I use a rolling pin and a clip on my tubes, but I can see a little plastic device as being with it for the time savings.
MarkW
Mar 30 2024 at 6:44am
Bargain hunting is partly a form of ‘altruistic punishment’ — where refusing to pay inflated prices, even when personally inconvenienced — forces businesses to face greater competitive pressures than they would otherwise. Gas for you and me is as cheap as it is in part because many drivers will irrationally drive farther to save a few cents a gallon.
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