Economic Wisdom to Apply in Your Twenties

Chapter 8

Chapter 1 In your twenties, decipher those economic phenomena that challenge your thinking
Beauty is a scarce resource.According to economics, resources are scarce relative to human needs.In particular, resources that are innately decisive, such as beautiful women, are even scarcer.Rare things are more expensive, and the market follows the law of resource allocation, so it is not surprising that such scarce resources as beauty are charged high prices.

Section 1 The Mystery of Merchant Preference Adjacency

Happy people who frequent McDonald's or KFC are not difficult to find such a phenomenon. McDonald's and KFC are usually located on the same street, or are located on the opposite side or adjacent to the same street less than 100 meters apart.More careful friends will also find that not only the layout of McDonald's and KFC is like this, but also the layout of most similar types of shopping malls and supermarkets. On the side, 15 stores of the three major home appliance chains of Gome, Suning and Dazhong have been stationed.

You must be wondering, McDonald's and KFC, Suning and Gome, aren't these the most competitive "mortal enemies" in the industry?From a general point of view, gathering together means greater competition. Why don't these merchants avoid their "rivals" and instead compete for the market in the same business district where the smell of gunpowder is stronger?Will such a site selection lead to a decline in the profit of the business?Will it cause a waste of resources?

Let the economist solve the mystery for you.

In economics, we call the location selection of McDonald's and KFC "aggregate operation", and what "aggregate operation" wants to achieve is "aggregate effect".

Assume that there are two merchants A and B in the market, they provide consumers with the same goods and services, and the two have complementary advantages; assume that the behavior goals of both merchants A and B are to seek maximize their own interests.If both A and B choose decentralized operation, their respective profits will be 3 units. If A chooses to aggregate with other supermarkets and B chooses decentralized operation, their respective profits will be 5 units and 1 unit respectively.The total utility is still 6 units.

We often say that we have to "shop around" when buying things, and we always hope to see a few more before making a decision.Just imagine, if the two stores are distributed in the south and north of the city, it is obviously not as good as they are adjacent to each other, which is more attractive to consumers.The flow of people is the most valuable resource for a storefront, and brands get together just to attract people, that is to say, only when merchants get together to create a lively atmosphere, customers will come to join in the fun.

The effect of gathering "popularity" pursued by aggregation management can be called "Matthew Effect" in economics.Robert Morton, a researcher on the history of science in the United States, summarized the "Matthew Effect" as: once any individual, group or region achieves success and progress in a certain aspect (such as money, reputation, status, etc.), it will have a cumulative advantage , there will be more opportunities to achieve greater success and progress.

Therefore, the "aggregation effect" is conducive to the formation of accumulated advantages for merchants, thereby attracting more consumers to come to buy, and then the enterprise can obtain more benefits.Decentralized operation prevents enterprises from gaining the advantages of sharing resources with other enterprises, and on the contrary increases market risks significantly and reduces profitability of enterprises.In the above example, when both merchants A and B choose to operate together, because the two enterprises have complementary advantages, the profits of both will increase to 8 units, which will be far greater than the utility of one or both parties' decentralized operations.

Of course, there is inevitably competition in the selection of aggregation sites. Enterprises involved in large-scale operations must create their own unique personality images if they want to survive and develop in the fierce competition.Therefore, the gathering of merchants is not a bad thing for us consumers.We can find that whether it is McDonald's VS KFC, Suning VS Gome, or in large-scale automobile cities and home building materials cities, various merchants are carrying out promotions and activities in a variety of ways, in order to establish a brand that is different from other stores. The brand image attracts more consumers.

Then, let the snipe and clam fight together, and we consumers will be happy to reap the benefits of the fisherman!

Wisdom Pieces: The Matthew Effect

Matthew Effect: The Matthew Effect comes from a fable in the Bible Matthew.It refers to a phenomenon that the good is better, the bad is worse, the more is more, and the less is less. The "Bible" says: "Whoever has, more will be given to make him superfluous; whoever does not have, even what he has will be taken away."

(End of this chapter)