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A Modestly Priced Proposal

Recently, the New York Times ran a story on the predatory pricing policies of Wal-Mart.

“For years, Wal-Mart has used its clout as the nation’s largest retailer to squeeze competitors with rock-bottom prices in its stores…. But given Wal-Mart’s scale and influence in the marketplace, its free pass for shipping sets a new high — or low — in e-commerce. And it may create an expectation among consumers — free shipping, no minimum, always — that would make it harder for smaller e-commerce sites to survive.”

For years, I have been waiting for the moment when Wal-Mart would use the monopoly power that it has gained from cutting prices to… well, raise prices and gouge the customer now that its competitors have been vanquished. But this time, as it lowers prices yet again, it occurred to me that monopoly pricing wasn’t the danger at all. The real problem with Wal-Mart’s low prices is that they make it hard for small businesses to compete.

Well, that is certainly true. Looking at it that way, I find that I cannot argue with the reasoning. I am almost sure that at least some small e-commerce businesses will go under because Wal-Mart is offering free shipping. Confronted with this new understanding, I suddenly realized that Wal-Mart is not the only organization that is contributing to this problem. Forget low prices, there are people out there who are actually giving stuff away for free.

The most insidious of these “charities” is the soup kitchen. Lurking, unobtrusively, in strip malls and the basements of churches all over the country, soup kitchens are providing food for free to people who have a hard time affording it.

Has no one considered what this must be doing to the local diner? To the man pushing a hot dog cart? This practice of giving away free food deprives the local diner of some of its most regular customers, those on a fixed income and the homeless.

To make matters worse, soup kitchens are expected to ramp up activities for the upcoming holiday season; increasing both the quantity and the quality of the food served between the Thanksgiving and Christmas holidays.

This puts local diners and street vendors in a bind. The largely volunteer labor force of the soup kitchens, not to mention the donated food, makes it impossible for small businesses to compete. In fact, due to the higher wages that most diner employees demand during the holidays, many local diners and street vendors will be forced to close altogether for Thanksgiving and Christmas this year, or at best, to remain open with only a skeleton crew on staff. While they may not like it, there is really no choice. How do you compete with a free meal?

Unfortunately, the effects of this holiday banquet may reach far past the holiday season, as the availability of free food lowers the standards in the food service industry as a whole. When consumers become accustomed to the free alternative they may decide, increasingly, to eat the substandard food served in the soup kitchen rather than pay a modest price for a decent meal.

It may be debatable whether these free food providers are good for the elderly and homeless, but they are certainly not good for your local diner. Perhaps we should keep this in mind when deciding what to do with those canned green beans this year.

31 Comments

  1. SkepticalProf says:

    Anyone who’s taken a class on industrial-organization economics knows that “predatory pricing” is something that only rarely makes sense as a strategy. It requires prices to be low at first, then higher after rivals have exited. There’s no way to correctly accuse someone of predatory pricing if they never raise prices!

    What looks predatory is usually either a penetration strategy (at which Wal-Mart excels) or an overall cost advantage (ditto.)

  2. Jeanbart says:

    Do you know anyone who uses a soup kitchen? I do and I thank God everyday that they are available to people. I have had the wonderful opportunity countless times to volunteer at a soup kitchen. It is a humbling experience to say the least. Most people, and I say most not all, who use the soup kitchen would go hungry without it. They can not afford to go to the local diner, so the local diner is not losing their business. I know times are tough but comparing Walmart to a soup kitchen, in my opinion, is a little far-fetched. Your comments about Walmart are right on target but that is the US economy and always has been.

  3. Hank Rearden says:

    How are a soupkitchen and wal-mart that different? One costs nothing and one costs next to nothing. Yet the same people that cherish soup kitchens are the first ones to villify wal-mart for killing the mom and pop stores. If mom and pop were any good at running a business, wal-mart wouldnt crush them. Maybe mom and pop should apply for a job in wal-mart’s gardening department.

  4. Bill Barnett says:

    Perhaps you meant “free lunch” rather than “free meal?”

    Once upon a time when Galbraith and Friedman apeared together on Buckley’s Firing Line program, Galbraith tried to make Friedman come out in support of the “free milk,” program else be outed as one cruel man by asking if Friedman opposed the “free milk program” for poor children, to which Friedman replied, “Ken, you mean the farmers give the milk away?”

  5. Caleb Watkins says:

    at #2, I agree that most people who eat at soup kitchens do so out of necessity and cannot afford to eat at local diners, yet the problem lies elsewhere. It’s all the cheap bastards in the world who will choose to eat substandard meals at no cost as opposed to spending a little money for a decent meal. This mindset will cause the diners to lose virtually all business, because most small diners market to average income citizens who, for the most part, wouldn’t hesitate the least to save a little extra cash. Now, people who have lower marginal values for money and who are willing to pay for meals primarily tend to seek high-end restaurants, cuisines, etc. for their dining. As far as Walmart goes, I feel that they are too wise to even consider gouging consumers with high prices, for they would be investigated for predatory pricing and open the door for other competitors. Rather, perhaps Walmart, with its ever so low prices and continuing deals, has successfully pinned competition for eternity.

  6. Joseph Wilkinson says:

    There are a number of factors to take into account when saying that diners lose business because of soup kitchens. First of all, I agree with the statement that people with incomes disposable enough to eat in a restaurant would likely not go to a soup kitchen. Whether that be because of pride or the feeling that others with less could benefit from the soup kitchens more than themselves, it is impossible to say. I think people with disposable incomes will continue to go to restaurants and people without disposable incomes will continue to benefit from the services of the soup kitchens. Perhaps, though, the fact that more people are lacking disposable income because of the recession will boost the use of the soup kitchens and harm the business of the restaurants.

  7. Michael Dieffenbach says:

    I am not sure if I agree with these statements, but I have personal experience with both Wal-Mart and the restaurant business. My father is good friends with several of the top executives at Wal-Mart including the CEO. And I can say from talking to them that they have no intention of screwing over consumers and raising their prices. They purely are in business to make money, and not at the expense of the consumer. I will agree that they force local business to go under, but business is business. They are also one of the largest employers in the world, so they help the community at the same time. As for the diner, I am not really sure if soup kitchens effect the restaurant business. My family owns a small restaurant and we don’t consider a soup kitchen to be competition. Now when a new chain restaurant opens up right up the road, that would take business away from us. Just like when a Wal-Mart opens up right up the road from a little family owned convenient store.

  8. Zack Lapinski says:

    I total understand what you are talking about with Wal-Mart. These people seemingly drive small mom and pop businesses out of town because they cannot compete. But on the other hand, Wal-Marts bring in a ton of jobs for a town, which is a huge plus. So if you put a small store out of business and they only have 30 employees, then you bring in a Wal-Mart and higher those employees and more then no harm was done, well except for the small store owners. I wish small store could stay in business and compete with Wal-Mart, but they can’t.

  9. Grant Ascari says:

    I agree that with Wal-Marts low prices and affordable products, it is impossible for small local business to succeed. Wal-Mart competes with the local supermarkets and business and drives them out of business. I feel that Wal-Mart doesn’t even need to consider raising there prices of goods because they draw thousands of people into their stores and thrive from people who want and need to buy products at low prices.
    On the other hand, soup-kitchens are created to help the people who cant afford a meal on their own. They are self-supported and give opportunities to people who need them. I do not feel that they are driving out local diners because soup kitchens draw in people who wouldn’t be giving these diners business in the first place.

  10. Colin Dunlap says:

    The statement regarding soup kitchens being bad and putting small diners and street vendors out of business could not be further from the truth. Soup kitchens are made for people who have no other avenue to get food, and they are possible because of the wonderful volunteer people who put their time and effort into helping out the less-fortunate. How many times has there been a group of workers walking down the street and they come to a consensus decision to go to the soup kitchen for lunch? I can almost guarantee that they are not going to take advantage of the free lunch at a soup kitchen, and they will go by the hot dog vendor on the corner to grab a bite for lunch. Soup kitchens and food banks, alike, are great things for communities. They help out the people who are in need, and they also give individuals the opportunity to volunteer.

  11. Casey Grimes says:

    The soups kitchens and public dining halls are a community good produced by taxes; in essence, the public as a whole are entitled to take advantage of good if choose to. However with the limited space and food available, they prefer to cater to those less fortunate and unable to eat at the hotdog vender at the corner. Its not a problem of economic downfall of the hotdog vender competing with the soup kitchen. Soup kitchens are not open during all hours of the day; if so, many people consider a hotdog as a snack than a meal.

  12. Jay Strosnider says:

    I find it difficult to believe that Wal-Mart can be guilty of Predatory pricing because the “inevitable” raising of the prices once the others have been eliminated has yet to occur and may never occur. Their advantage is their ability to sustain these low prices as opposed to taking the hit now to win big later.

    Soup Kitchens are a lot like welfare. The public donates in the form of canned goods or volunteer work as opposed to taxes and the general public is given a service. It may affect the local diner, but every kind of welfare is going to have a backlash somewhere because it changes where money is being allocated.

  13. LaRushell White says:

    Walmart’s ability to cut cost does make it tougher on the small businesses, but at the same time Walmart is able to provide a lot more jobs. In a small business you might have 5-10 employees running your store. Yes, it might be a personal gain to yourself, but walmart is stimulating the country by being such a big company. I live in Chesterfield, Virginia and 2 new Walmarts were built that had a mass hiring for jobs. Next, soup kitchens are there only because there is a demand for soup kitchens. The people who go to soup kitchens just cannot afford a decent meal, so its hard to say they are driving out the local diners. It’s a good chance that if soup kitchens didn’t exist, it will have a negative impact on local diners. The “poor” will have to get food a different way, and another way to get food would be to just try and steal it. Local diners would be a target because of less security. Soup kitchens can not be called substitutes to me because the only thing a soup kitchen is substituting is an empty stomach.

  14. Jennifer Dirmeyer says:

    I want to address the many thoughtful comments that I have received in response to this post.

    First, I want to acknowledge that to claim the good done by soup kitchens is somehow negated by some slight harm to local diners, is ridiculous.

    (Aside: In fact, people who go to soup kitchens do go to local diners and food carts. I have known, personally, in excess of 20 people who frequent soup kitchens. I lived in New Orleans and worked in the French Quarter for five years. However, I do agree that those people who frequent both soup kitchens and diners make up a small proportion of diner customers.)

    Back to my ridiculous claim. I am not generally a lunatic (I said generally!); so what was I saying?

    I was denying the claim that the good that Wal-Mart does for the communities where it locates is negated by the harm that it does to the small local stores that its low prices and enormous selection force out of business. Yes, Wal-Mart puts local stores out of business– by providing the things that people need and want at prices so much lower than its competitors that it overcomes all the negatives of shopping at Wal-Mart. I refer to the crowds, the atmosphere, the lack of personal attention, etc.

    When Wal-Mart facilitates the purchasing of everyday household goods at dramatically lower prices, the people in these communities can use their money for other things.

    I know this, while soup kitchens do good for the poor, Wal-Mart is better. How do I know?

    The highest estimate that I could find for the value of food donated to soup kitchens and food pantries was $1.9 billion yearly. This year Wal-Mart sold over $335 billion dollars worth of goods (mostly groceries). That means, people found that giving Wal-Mart $335 billion was the best way to make themselves better off.

    That is a lot of mutually beneficial exchange.

  15. Baker Allen says:

    This is a very good point. There should be significantly less restaurants than there are today. The existence of so many restaurants indicates that there is a flaw in this argument. The flaw is that everyone has been assuming that eating at a soup kitchen is free. If a person who could afford food went into a soup kitchen they would be frowned upon by society for taking advantage of the system. Basically the social cost is too high for people to take advantage of the system.

  16. Justin Pugh says:

    From personal experience I do not believe the local diners loose a substantial amount of money from the local soup kitchens that pop up during the winter holidays. I have worked a few different sort of “soup kitchens” and have learned a lot. The majority of the people who do use these are not “cheap bastards” they are people who would otherwise be eating a can of beans not going to a local diner buying a meal that is around 5 or 6 dollars a person. In my experiences most of the users have been families where the cost would be over $30 dollars for a family meal at even a cheap diner. This is not to say that there are the occasional “cheap bastard” who will slip in get the meal and dip out but i feel that a overwhelming percentage of soup kitchen “users” are in need of them and would not be visiting the local diners as a substitute.

    For Walmart being accused of predatory pricing, i feel this isn’t true. We have not seen them raise the price on there goods now that they have most all of the market share. This is not to say they do not have such low prices they do not run their competitors to the ground. Which will be shown here locally with the recently accepted plans to build a new walmart in rural powhatan. Almost all of the local businesses will be run to the ground because they can not lower their prices to compete with walmart’s. Walmart is able to instate low prices because they sell so many that their profits are still high. A small business does not sell as many products so they must make a higher profit off of each item.

  17. Newton Ray says:

    Walmart is truly a Super market because it can put a local grocery store out of business then put out a local electronics store the next day. It is a monopoly that is able to price their products at any prices and still get business. It is an overwhelming system that no other business can replicated because Walmart will put them out of business before they even get started.
    I think soup kitchens are one of the last things that are making local restaurants and vendors to go out of business. Soup kitchens provide food for people who can go to the restaurants and buy a meal in the first place. If anything it is a good thing because it provides the less wealthy a decent meal for free instead of not getting food at all. The local restaurants shouldn’t have to worry about soup kitchens because they wouldn’t profit from the people going to the soup kitchen even if the soup kitchen didn’t exist.

  18. Patrick Roche says:

    I agree that the Wal-Mart is taking away from local stores. Some one told me that there once was little general stores througout Farmville that no longer exist. This is mainly due to the new Wal- Mart in town. Although the free soup kitchens are great for the needy and homeless, it hurts the small business such as hole in the wall restaurants.

  19. Gene Callahan says:

    “I was denying the claim that the good that Wal-Mart does for the communities where it locates is negated by the harm that it does to the small local stores that its low prices and enormous selection force out of business. Yes, Wal-Mart puts local stores out of business…”

    So, you admit that local soup kitchens do not result in many local businesses going under, while Walmart does. Therefore, your analogy is nonsense.

    “I know this, while soup kitchens do good for the poor, Wal-Mart is better. How do I know?

    “The highest estimate that I could find for the value of food donated to soup kitchens and food pantries was $1.9 billion yearly. This year Wal-Mart sold over $335 billion dollars worth of goods (mostly groceries).”

    Well, heroin and cocaine dealers sell far more dollar value to the poor than that paltry soup kitchen amount! Therefore, becoming a heroin or cocaine dealer is a better way to help the poor than is working in a soup kitchen!

  20. Jennifer Dirmeyer says:

    @ Gene Callahan: The analogy is not nonsense just because the scale of the harm from soup kitchens caused by way of competition is smaller than the scale of the harm that Wal-Mart does. The scale of the benefit that Wal-Mart does is also much greater.

    As to that, I must admit that I was relying on some form of revealed preference to compare the benefit gained from Wal-Mart’s offerings to the benefit gained from soup kitchens and that according to my stated standards of judgement drug dealers are extremely productive members of society.

    Without debating the productivity of drug dealers I must point out that I was illuminating the good that Wal-Mart does in providing non-controversial *products* to people at low prices. Selling billions of dollars worth of housewares to people is certainly more comparable to what a soup kitchen does than is selling billions of dollars worth of risky recreational substances.

    I suppose I will have to say, therefore, that your analogy is nonsense.

  21. Gene Callahan says:

    “The analogy is not nonsense just because the scale of the harm from soup kitchens caused by way of competition is smaller than the scale of the harm that Wal-Mart does.”

    But *no one* is complaining that some competitors harm other competitors — they are complaining that a huge multinational comes in and drives local business into the ground, in the process shattering communities (as the social bonds that make communities vanish for cheaper underwear). That you still act as if the complaint is “low prices” is due to the grip of ideology.

    “Without debating the productivity of drug dealers I must point out that I was illuminating the good that Wal-Mart does in providing non-controversial *products* to people at low prices. Selling billions of dollars worth of housewares to people is certainly more comparable to what a soup kitchen does than is selling billions of dollars worth of risky recreational substances. ”

    Only because it is convenient for you to think it is so. Drug dealers and Walmart both sell things — soup kitchens give things away. Walmart, like drug dealers, is controversial, or you wouldn’t have written the above. Walmart, too, sells risky recreational substances (alcohol) and very controversial products (guns). But none of that is really important — YOU decided to declare confidently that you KNOW Walmart is better for the poor because the deliver a higher dollar value of products. Therefore, you are compelled to either:
    1) Abandon that contention; or
    2) Admit that heroin dealers are also better for the poor than soup kitchens.

  22. Jennifer Dirmeyer says:

    @Gene Callahan: I will, of course, admit that I was relying on a commonly-made distinction between drugs and housewares to distinguish the activities of Wal-Mart from those of drug dealers. While Wal-Mart itself is controversial, the products that it sells are not, despite the tack that your love of a good argument prompted you to take.

    Since, admittedly, interpersonal utility comparisons are nonsense and revealed preference suffers from the problem of incomplete markets and markets for addictive substances then we cannot really say anything about the relative benefits of anything with any real certainty.

    Of course, I do not KNOW Wal-Mart is better for the poor than soup kitchens, any more than you KNOW that Wal-Mart destroys communities. Social bonds are not made up only by business owners in a small community and all small businesses don’t disappear when the Wal-Mart shows up. Some close, others open. There are more jobs and people have more discretionary income.

    How are you so confident in *your* standard of judgement for what makes a community? On what grounds are we to argue?

    I realize that people who deny the benefits of Wal-Mart are not focused on the low prices and it is not ideology that has me pointing the spot light on the low prices regardless. (BTW: of what ideology am I the unwitting slave? It would be good to know.)

    People who focus on the loss of some small businesses are missing the benefits that arrive with Wal-Mart. I do not deny the costs. I have mentioned them in every iteration of my argument. I am simply pointing out that there is reason to believe that the benefits may be greater.

  23. Gene Callahan says:

    “Of course, I do not KNOW Wal-Mart is better for the poor than soup kitchens…”

    Thank you for admitting this. That was my only goal in making these points. I readily concede that my opinion of Walmart’s effects is only a considered judgment, and not a rigorous scientific conclusion, as well.

  24. Jennifer Dirmeyer says:

    @ Gene Callahan: Now that’s out of the way, on what grounds are we to argue the benefits versus the costs of Wal-Mart? Or was your goal was only to discipline my language and not to engage the point?

  25. Gene Callahan says:

    Ah, but disciplining your language IS engaging the point. Now that you realize your conclusions aren’t certain based on dollar amounts spent, you can begin to see the other side of the argument.

  26. Jennifer Dirmeyer says:

    I have always seen the other side of the argument. I have mentioned the other side of the argument in every discussion. I maintain that the benefits of Wal-Mart, in the form of low prices for everyday things, outweigh the costs in the form of defunct small businesses.

    In fact, I contend, that those who argue that Wal-Mart is destructive do not see the others side. For instance, your disdainful reference to cheap underwear reveals your lack of sensitivity to those for whom saving $70/ month on housewares and groceries makes a large difference in quality of life.

    The point, and the reason that I brought them up, is that dollar amounts are one way to measure benefits. You say that Wal-Mart destroys communities with absolutely no standard of judgement that I can see other than a personal preference for small business combined with a gut feeling that the loss of a small business is not worth the gain of cheaper goods.

    So I ask you, once again, what is your standard of judgment?

  27. Greg Knabel says:

    As someone who has spent some time in a soup kitchen, I can tell you that the people who are using soup kitchens as a means of feeding themselves are not the same people who eat out at a diner. They are the people who would most likely go the day with no food at all so they accept some aid from the community. The folks who can go out to the diners for lunch or with their family value the quality and relative privacy (as compared to a soup kitchen) of a booth at a restaurant much more than the money they have to put down for the meal. On the other hand, the folks who go to the soup kitchens will eat the lower quality food and eat in a cramped cafeteria-style room with, for the most part, complete strangers, rather than go the day with no food.

    Given that you had a steady job and could afford to eat out at a diner with friends and/or family, would you go to a soup kitchen to save a couple bucks? Honestly? I know i wouldn’t.

    So, the impact that soup kitchens have on diners is minimal; I will not say the impact is nothing but i believe it to be a negligible amount. Also, if soup kitchens were to have any financial impact on any dining establishment it would be the cheap convenience restaurants like McDonald’s or Burger King, neither of which will notice a loss of revenue due to a soup kitchen.

  28. Connor Crowley says:

    Consumers have a choice whether to eat at a soup kitchen or at a street vendor/restaurant. Most middle class Americans and above will never have to eat in a soup kitchen, nor want to. By going out to a fancy restaurant or eating a hot dog for lunch everyday from a vendor, Americans are displaying their wealth. They want to be seen as wealthy and not someone forced to eat free food from soup kitchens. For lower class Americans soup kitchens are great for they provide a meal that otherwise could not be afforded. Restaurants and street vendors do not have to worry about losing business because the people who go to soup kitchens most likely can not afford to go out to eat so the restaurants are not losing business.

  29. Phyo Win says:

    It’s a good argument, but money is not the only marginal value that people think of. When people go to the restaurant, they are not only buying food but also buying the lifestyle. For example, when a person go to a five star restaurant, he is not only getting a food, but also getting a satisfaction of being “cool” and being able to have a luxurious lifestyle. Therefore, as long as there are people who thinks in this way, the restaurants would not get into trouble.

  30. he people who go to soup kitchens just cannot afford a decent meal, so its hard to say they are driving out the local diners. It’s a good chance that if soup kitchens didn’t exist, it will have a negative impact on local diners. haushaltswaren

  31. Zach Dodson says:

    Superstores such as Walmart generally do put the “little guy” out of business as I have seen first hand when a Walmart opened in the rural area where I live. These small stores simply cannot come close to competing with the Walmarts low prices on virtually all goods. Although this is generally what happens, the Walmart also helped the rural area I live in to a certain extent. It offered many new jobs into a small town that desperatly needed them and allowed several new restaurants to open nearby due to the increased traffic. A family friend opened a Bojangles nearby the building site of the Walmart and struggled untill the opening. Now that the Wallmart is opened his resturant is doing well. Wallmart, although it puts some small stores out of business, it can also help stimulate the economy with new jobs and allow specialty stores such as restaurants to exist nearby.

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