Late one evening in 1989, economist Jeffrey Sachs discovered himself in a smoke-filled room of presidency officers in Warsaw, Poland. The nation had simply declared independence from the Soviet Union, which had exerted central management over costs of tens of 1000’s of things, resulting in frequent shortages.
For hundreds of thousands of Poles, that was a daunting proposition. Costs posted by the command-style authorities had been straightforward for odd folks to see and perceive, however the ideas of the free market have been an summary concept. It required religion to leap into the unknown world of provide and demand the place an unseen drive referred to as “the invisible hand” would now regulate costs.
Sachs’ plan was put in movement the subsequent day, and newly unregulated costs of odd grocery gadgets instantly spiked, inflicting anxiousness throughout the nation. The Polish finance minister, Leszek Balcerowicz, paced the streets, searching for a glimmer of hope. He determined to focus on one factor: the value of eggs.
If the market was working, the upper value of eggs would create incentives for farmers to deliver extra eggs to market, resulting in a fall in costs. Certain sufficient, in a couple of days, egg costs started to drop. “That was an important day,” Balcerowicz recounted, a sign that the brand new free market was working its magic in allocating items and companies in essentially the most price efficient method.
* * *
However right here’s the unusual factor: the egg market is just not appearing in a method that financial textbooks would predict, and definitely in a unique route than Sachs’ assured prediction to the Polish folks.
There are two egg puzzles that go nicely past Econ 101 textbooks’ customary explanations of how companies and shoppers work collectively. The solutions in the end give us a richer understanding of the complexities of people’ promoting and shopping for habits.
What’s occurring right here? In puzzle #1, the scarcity of retail eggs and self-imposed retailer quotas point out extra demand. In puzzle #2, the elevated wholesale egg costs imply a better enter price for supplying retail eggs. Textbook economics predicts that in each instances, retail costs must be pushed greater.
Meaning we must be paying at the very least $8 a dozen, not $5, on common nationwide.
Some may clarify that that is taking place as a result of eggs are a “loss leader,” that encourages clients to purchase different worthwhile gadgets whereas they make their method to the again of the shop, the place eggs and milk are sometimes bought.
There’s little proof this clarification is true for any size of time. The beneath determine charts the previous historical past of retail vs. wholesale egg costs. The orange line representing wholesale costs is nearly at all times beneath the retail costs in blue.
Actually, we see an attention-grabbing phenomenon: grocery shops solely lose cash on eggs when the wholesale costs spike up in a short time, as they briefly did in 2015, 2018, 2020 and 2023 as nicely. In any other case they’re making round an inexpensive 20-75 cents revenue per dozen, relying on the kind of eggs bought.
Determine 1. U.S. Egg Retail and Wholesale Costs, 2010-2023.
Since there was no value management on retail eggs a la the previous Soviet Union, we flip to the different clarification. A humble pack of a dozen eggs is probably going an emotional buy, at the very least when the costs go excessive. We’re in contact with the costs of eggs as intimately because the Polish finance minister who wandered the streets, seeing them as a bellwether of the financial system as a complete.
Grocery shops have a troublesome determination to make: they should weigh the price of their retail losses from egg gross sales versus the loss to their repute if they’re seen as “villainous price gougers” in a time of quickly rising costs. It seems on this case at the very least, grocery shops will take the short-term losses on the chin, as a result of they’ve 1000’s of different gadgets the place the earnings can offset these losses.
Mockingly, shoppers could complain about sky-high egg costs in 2025, however they’re largely saved at midnight about how protected they’re from the fact of far greater wholesale costs.
The quotas instituted by the grocery shops now make sense: the practically $3 loss per dozen eggs bought is sort of a retailer’s funding in retaining buyer’s goodwill, serving to restrict the harm from even greater priced eggs.
So it’s rational on the a part of the grocery retailer to distribute their eggs among the many largest potential buyer base by disallowing bulk purchases by particular person clients. That method, they improve their repute as a enterprise who cares for purchasers and preserve their eggs out of only one buyer’s grocery basket.
The lesson: even in one thing so simple as an egg market, a fragile dance of emotion and repute can intertwine with costs discovering equilibrium. In all instances, the extra competitors the higher, particularly underneath very long time frames. Shoppers stand a much better probability of being protected by companies in these conditions than command economies or rules that create boundaries to entry for different rivals, similar to medical health insurance markets.
That’s eggsactly what we should always want for. (I needed to get a nasty pun someplace).
Craig Richardson is the BB&T Distinguished Professor of Economics and Finance at Winston-Salem State College.
