Here's a puzzle I'd like to resolve before I teach Industrial Organization again: Why are there so many framing stores? It seems like there is a place that puts your artwork into frames on practically every street corner. According to yellowpages.com, there are fourteen framing stores in Fairfax, compared to only eight Pizza Huts.
What's the puzzle? We normally see lots of small stores in markets for frequently-purchased low-price goods. Think 7-11. On the other hand, we normally see a few large stores dominate retail in market for infrequently-purchased high-price goods. Think Best Buy.
The economic logic is simple. Retail has economies of scale, but for petty purchases, these are outweighed by transportation costs. Convenience stores cost more, but they're usually a lot closer. This is especially true for low-price items. It is probably worth 30 minutes of your time to save 50% on a $100 purchase, but not worth 30 minutes of your time to save 50% on a $4 purchase.
Where does framing fit in? I doubt most people frame more than two or three items per year. No one gets home at 7 PM and says "My God, we forgot about our framing! Luckily we can just run down to our corner framing store." Furthermore, framing is expensive. A custom frame usually runs around $100-$200. Both of these reasons lead us to expect the opposite of the market structure that we see.
So what gives? I'm genuinely baffled. A few possibilities that don't convince me:
1. My area is weird.
2. This retail market does not have economies of scale.
3. Framing is an "impulse purchase" - unless they pass by the framing store on a daily basis, people will not bother to frame anything.
When a market doesn't work in the way that economists intuitively think it should, they usually have one of two reactions. The first: "Market failure!" The second: "Maybe there is something about this market that I don't understand. Does anyone out there know more about the details of this industry than I do?"
I don't rule the first answer out of court, but the second one is usually more promising. After all, I've been in school my entire life! The world is full of people who know more about the framing market than I do. The question is whether any of them read Econlog.