Bryan Caplan  

How Growth Happens: CostCo Edition

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Soviet Shoes... Morning Commentary...
Normally I ignore self-congratulatory corporate publications, but for CostCo, I'll make an exception.  There's a fascinating story about their Kirkland Signature brand in the latest CostCo Connection.  See economic growth at work: How their product designers identify high-quality competitors, and figure out how to make them a little better and a lot cheaper.  (Hint: Packaging, transportation, and shelf space all figure prominently).  See reputation at work: CostCo doesn't just improve products; it figures out where the competition is cutting corners - and then boldly makes its products with their corners intact.

This article reminds me of a question I often have at CostCo: Imagine the old Soviet Union gave up on manufacturing, specialized in natural resource extraction, and invited CostCo to set up 10,000 warehouse stores in the Evil Empire.  I think it's clear that this would have been a massive improvement for Soviet consumers.  But how much of a difference would it have made?  Would a USSR that swallowed its pride and outsourced its brain work and customer service still be around today?


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COMMENTS (10 to date)
JPIrving writes:

I reckon the Russians would have been so thrilled to have abundant potable water, delicious food, and cheap American blue jeans that they could have dragged the CCCP out to '95 or '00. What happens when some smart-ass commissar asks about privatizing natural resource production though....

Interestingly, this is approximately what the Chinese government did. Though I think China only has Metro, Carefour and Walmart no CostCo...:( And they abandoned outright planning for a fascist economy.

Kurbla writes:

It doesn't have sense for USSR because as Marxists, they should believe that they can do everything better than capitalism, otherwise, whole revolution thing was premature. If they were sincere, it is better to give up than to compromise - and it appears that USSR, unlike China followed that way.

But: if Party leaders were interested only in power, yes, it was possible alternative. Finally, USSR was in practice more-less (anarcho)capitalist corporation owned by party elite (in one period, Stalin was sole owner) romantically decorated with red furniture and pictures of Lenin. OK, it was actually more like pre-feudal society with godlike emperor similar to Ancient Egypt or Rome, but anarchocapitalist corporation is not that far either.

RL writes:

Regarding your question, BC, of a Costco in the Soviet Union, I think David H's post below suggests it would have led Soviet citizens to no longer have to wait hours in line to purchase ill fitting, poorly constructed, aesthetically unpleasing shoes. With Costco they could have purchased ill fitting poorly constructed aesthetically unpleasing shoes much more quickly.

(Of course, Costco could then have taken over the shoe industry as well...shades of Time Will Run Back by Henry Hazlitt.)

Bryan Caplan writes:

RL, the assumption behind the thought experiment is that CostCo would manufacture the shoes and everything else in the capitalist world, and be paid in foreign exchange earned from Soviet oil, timber, uranium, etc.

David R. Henderson writes:

Bryan Caplan and RL,
I want to make sure I understand Bryan's thought experiment. Is the Soviet government in this hypothetical allowing totally free markets or just choosing a particular producer, CostCo? If the latter, then I think RL is right and maybe not even as right as he thinks. What I mean is that maybe CostCo won't be so fast. What's its incentive?
Also, is the Soviet government in this hypothetical just acting as resource owner and auctioning off the resources or is it choosing where to allocate?
Best,
David

David J. Balan writes:

It's worth noting that this is an example where stronger IP protection would make things worse: if the original innovators were better able to protect their innovations, CostCo wouldn't be able to take them and improve on them.

Steve Sailer writes:

Why doesn't Costco sell Kirkland brand cola soda in the U.S.? Does anybody know the inside story on the negotiations between Coke, Pepsi, and Costco to keep Costco out of the cola biz?

luispedro writes:

The interesting question is whether Costco would still be acting the same way if it had a soviet enforced monopoly?

Bill Conerly writes:

My fav Costco story:

A few years ago, a Costco buyer was called before management because the profit margin on this merchandise was TOO HIGH. He explained that he just got lucky; produce arrived just before a big shopping day, and they had much less spoilage than normal. Management said OK, but they reminded him that cost savings are to be passed on to the customers, not used to push up profit margin.
They want high volume, and they worried that a high profit margin would interfere.

Jeremy, Alabama writes:

Slightly off-topic: consider the impact of the mere threat of "Kirklandization".

I buy Gillette disposable razors at Costco, because there is no Kirklands for this - yet. I suspect Gillette produces special packaging, special pricing etc etc and works closely with Costco, to avoid being Kirklanded.

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