Bryan Caplan  

When Is Entry "Easy"?

Doha Collapse... The Joy of Oblivion...

Is it "easy" to enter the market for tomatoes? In a sense, yes: Just plant some tomato seeds, pick the ones that grow, and you're "in the market." But in another sense, no: You'd have to grow a lot of tomatoes to earn enough money to make it worth your while. Ever know a home gardener who calculated that, counting the cost of labor, his tomatoes cost $50 a piece?

This point occured to me when I was thinking about comments on my earlier post on framing stores. A number of readers argued that there are lots of framing stores because of the "ease of entry." But doesn't this conflates physical and economic ease? Yes, it's physically easy to set up a framing store. But that hardly implies that it is economically easy to set up a profitable framing store. Think tomatoes.

Admittedly, legal restrictions on entry make entry both physically and economically more difficult. But it's perfectly possible for unregulated entry to be physically easy and economically difficult. In fact, in retail businesses where consumers make infrequent, large-value purchases - like t.v.s or picture frames - that's precisely what we should expect.

So why are there so many framing stores? I still don't know.

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COMMENTS (11 to date)
blink writes:

True, a backyard tomato farmer is a long way from competing into the tomato market. But if the point is to show the “economic difficulty” of entering a market, the example is a red herring. Ease of entry should be gauged with reference to the marginal firm. That is, how costly is it for the most likely entrant to open up shop?

In the case of tomatoes, this will probably be another large-scale farmer (one growing strawberries, beets, corn – whatever is the closest substitute): How costly is it to switch to tomatoes?

So, is it “easy” to enter the framing business? I do not know – clearly I am not the marginal firm in the market. Maybe it is the local trophy store, a carpenter, an engraver, or someone wholly different. My bet, though, is that entry is easy for someone, and that is what counts.

By the way, any estimate for the price of a jar of home-grown raspberry jam?

Tom Schofield writes:

Maybe people open businesses such as framing stores because its what they want to do, what they feel they can do. Their business plan, if they have one, is written on the paper of hope with the ink of desire. If economic rationalism is even considered, it is soon rationalized into a pie-in-the-sky escape from the would be proprietor's present situation. Little more than a miter-box and a back saw provides at least a chance for independence. This kind of emotional motivation can easily obscure economic reality.

dearieme writes:

But keen gardeners don't count the cost of their labour, since it's part of the pleasure - part of the return, not part of the cost. That's probably why, at least in civilised lands, gardeners often give away a large part of their crop. Marrows, anyone?

Matt writes:

I guess the framing store phenomena is regional. Where I've lived for the past six years (with a metro population of around 350k) there are exactly three and only one of the do-it-yourself kind.

Here it's restaraunts, which seems strange because the start-up costs are huge and the life spans are generally short.

Chipshot writes:

Found you through Megan McArdle's post on Instapundit.

Having owned and run a framing store for 5 years. I will try to give my 2 cents worth on the Frame shop question. I believe it is a combination of 4 things.

Ease of entry is certainly one factor, especially when many owners are either artists or crafters before opening the shops and thus, already have much of the equipment needed to get started. If business picks up, they can buy bigger, better and faster equipment, but just to get started - they already have that expense covered.

The biggest factor, IMHO, is the custom nature of the business. This manifests itself in 2 ways.

Clientel with something nice, or valuable, to frame do not feel comfortable going to a BigBox type store with a teenage clerk. You sell service.

Also, you do not have to carry a huge inventory. Just like the equipment, where you can get by with less until you can afford more, you do not have to pay for and stock everything you need. It is obviously more profitable to buy in bulk and lower your cost per item, but you do not have to, because the customer pays for their products up front, with a deposit. Someone walks in on Tuesday to place a custom order (with a 1/2 down deposit), you place an order with your wholesaler that afternoon. Frame and matt are delivered Wednesday and paid for with that deposit. You complete the order and the customer picks up on Saturday and pays in full. Great for cash flow.

Third is profit margin. As you said it can be expensive to "custom" frame something. You can pick up a made in China framed print for $19.99, but Grandma's needle point was not made to go into a standard size frame. And if someone is going to frame it, they understand that custom costs more.

The fourth factor is that in many ways it can be a labor of love. As I said, many start because they come from an artist/crafter background, and have wanted to open a "gallery" for a long time and soon learn that framing pays the bills. As I like to say about our place - For the first 6 months we paid the bills, for the second 6 months, we paid the bills on time.

I do not know if this helps, but it is at least a real world look at the question.

kenshi writes:

I've been thinking about this framing store issue for a bit and think I have a partial answer for you. The answer is that a framing job is not a true commodity product, yet does not require lots of specialized skill or equipment to accomplish. Many of the things people frame do not fit industry-standard sizes or require some small level of customization to make fit in an attractive manner (colored matting, etc.) Off-the-shelf solutions can't satisfy this large category of demand, but premium framing stores are too expensive for most of that segment. For this reason, frame stores serve as a "mass customization" option and proliferate.

Giovanni writes:

blink nailed the issue. chipshot, very interesting and authoritative. Good comments today.

lostingotham writes:

The risks and inconvenience associated with getting the object to be framed must be included in your calculation of transportation costs. For most consumers, the value of the frame is a fraction of the value of the object to be framed. Hence, even a small risk of damage in transport translates into a large transportation cost. In addition, framed objects are often bulky and difficult to transport, multiplying the transportation costs still further.

Anecdotally, I have a large (4' x 8') painting that I recently got framed. In my market (Manhattan) frame stores will generally deliver but will not pick up. Because I was worried about getting the thing into a car (or worse still, a cab) in one piece, my purchasing decision was driven not by price but by location.

Karl Smith writes:

My guess is that economies of scale in customing framing are extremely low.

Now I have only ever framed something using the 19.95 kits from Micheals but its seems that the kind of framing speciality framing people want is a labor intensive activity, requiring acute attention to detail.

Furthermore, the transportation costs of objects to be framed is rather high.

Both of these result from the fact that the object to be framed is delicate and sometimes irreplacable.

Therefore, the transportation and manufactuering costs include and additonal destruction cost. Which is the probability that the painting might be destoyed times its value. The more valuable the painting the higher the destruction cost.

This cost probably increases rapidly with scale because of monitoring difficulties.

Therefore, a corrlary hypothesis is that most high end framing is done by owner-managers. Is this true?

Stuart Buck writes:

Just FYI: I don't see how anyone could possibly spend $50 per tomato to grow their own garden. Here's my own expenditure for my garden: Maybe $1.50 for a pack of seeds, $3 or $4 for a growing container to start the seeds indoors, and 5 sacks of manure for fertilizer ($1 apiece at Lowe's). Total is probably around $10, and for that I get up to a few dozen tomato plants, each of which can produce literally dozens of tomatoes apiece over the course of a growing season. I'd be surprised if the total expenditures amounted to more than about a penny per tomato. A gardener would have to be spectactularly incompetent to spend $50 per tomato. The only way you could do it is this: Start a garden on top of a concrete surface, buy a hundred bags of most expensive potting soil at Lowe's for maybe $1000, grow only one tomato plant, and then forget to water it so that it doesn't produce more than 20 tomatoes in the entire season.

Stuart Buck writes:

OK, I missed that you were counting the cost of labor. Still, it really doesn't take much labor to set out a few tomato plants. A few hours total is all it took for me to 1) transplant them; 2) tie them up to stakes as they grew; and 3) occasionally water them for 2 or 3 minutes with the hose. Again, to get to $50 per tomato, you'd have to 1) grow only one plant, AND 2) figure your labor is worth several hundred dollars an hour. (Is this realistic? Even the highest-priced lawyers who do earn several hundred dollars per hour might want some leisure time, and if leisure time is spent gardening, wouldn't a more appropriate comparison be to the "value" of time spent watching television?)

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