There are many reasons why “happy businesses” are able to earn excess returns, and we have already spent considerable time covering the ability of a strong brand to charge a premium price compared to the generic creators. The appeal of a happy business, however, extends beyond the core products themselves to the products closely related to a given business empire that are under-scrutinized.
Did you see the recent news out of Voorhees, New Jersey? Some gas station owner has decided to stop selling gas at the competitive price of $1.80 per gallon and instead is selling gas at the non-changing price of $3.98. The fine people of Voorhees have been right to dislike this business practice of selling a commodity at a clear premium relative to the peers, but the legal analysis of the townsfolk is a bit off.
People like Jeff Pettitt are threatening legal action against the gas station under a price gouging theory because his son paid $65 for 12 gallons of gas. Others are demanding that the Gasoline Retailers Association shut the place down for price gouging.
Those calls to action won’t be successful because they do not match current price gouging law in New Jersey. A business is found to be price gouging if: (1) it is a monopoly charging “excessive prices” or (2) it is selling a necessity for more than 10% above the price at which the good or service was offered immediately prior to the state of emergency. (Source: New Jersey Statutes §§ 56:8-107 to 8:109).
This gas station isn’t running a monopoly–there are gas stations everywhere in Voorhees, and part of the citizen complaints involve pointing out how much more expensive this gas station is compared to the one across the block. And it’s not a state of emergency, so neither clause can be triggered.
If I were a local citizen? I would not patronize a place that charged almost double the price for the exact same good, and I would tell people close to me to pay attention to gas prices in general before pulling up and point out that station specifically. If I were Jeff Pettitt and had a teenaged son overpay, I would consider the lesson cheap tuition to learn the personal responsibility of caveat emptor.
When I was in first grade, I traded one of those Mark McGwire Olympic baseball cards that was worth $16 at the time for an Ozzie Guillen baseball card worth about $0.20. Perhaps I would have been legally correct to demand a return (under the theory that minors exchanging goods constitute voidable contracts) or maybe not (because a court might rule that trading baseball cards among youth is a common practice and serves the pro-social impact of teaching kids how to improve their lives through bartered-for exchanges).
Either way, I’m glad my dad taught me that boneheaded decisions lead to boneheaded consequences, and the $15.80 in lost value served as very cheap tuition for providing valuable instruction that the world’s job isn’t to look out for my interests and I should anticipate the natural consequences of my actions before engaging them. That’s the posture I hope Jeff Pettitt eventually strikes toward his son.
But while the high price charged by the Voorhees gas station is receiving sufficient media attention that the local ABC affiliate saw fit to cover the high price, there are plenty of businesses that work in happy industries that do the same thing without receiving proportionate outrage.
Take something like Disney. We have discussed the strength of the business here many times before. But one of the additional strengths of the enterprise is that it is able to do things like charge premiums for products that aren’t even inherently Disney. For instance, if you visited a Disney theme park last year, you would have paid $16.49 for a Coca-Cola refillable cup. When I looked at the menus of Disney restaurants, I saw soda priced between $4 and $8. Sporting events do the same thing.
If morality is involved in charging excessive prices, surely the Disney experience with soda is much worse because parkgoers are a captive audience that can’t easily buy Coca-Cola or even competitor Pepsi during the day. In Voorhees, there is nothing compelling you to buy $3.98 per gallon gas–you can drive right across the street and pay $1.79. The coercion is stronger at Disney and sports ballparks, yet the outrage from the gas station price is excessive compared to the Disney experience.
It has to do with the emotional nature of businesses. And it extends beyond this example. Best Buy charges 5% for layaway, and this receives frequent ridicule during each Christmas season. Meanwhile, a popular jeweler charges 25% of a 25% down-payment price for layaway, meaning that a $4,000 ring would charge $250 just for the act of storing it until payment is complete. And there is a hardly a grumble from the people buying rings compared to the people buying TVs and laptops on Best Buy layaway.
That is a perpetual advantage to companies in these industries that exists year after year, and helps augment the earnings growth. It helps explain yet another intrinsic advantage a firm like Disney or Tiffany enjoys, and explains why those firms have earnings per share growth north of 10% in nearly every long-term measurable period.
When you look at the New Jersey story, it is easy to see that no one is a moral exemplar–the gas station isn’t putting on a halo by charging $3.98 for gas, and the residents aren’t paying tributes to personal responsibility by demanding that legal action be taken rather than recognizing that this problem can be solved socially if the community collectively withholds support for the gas station business.
But it does teach us something about reality, especially as it relates to happy businesses that tap into the emotions of its customers. Acts that don’t flow from the happy business itself–selling soft drinks, offering layaway plans, and so on–yet are loosely connected to the happy business get to join in the halo effect as well. And this halo effect means that the market will bear higher prices for goods and services that would cost less in a different context, and offers insight into the small institutional advantages that these happy businesses enjoy when it comes to creating superior shareholder returns.
Originally posted 2015-12-08 18:09:52.