A couple of years ago, I found myself standing in a grocery store in Boston, waiting for the person behind the counter to make me a cheesesteak hoagie. I noticed that I was near the meat section of the grocery, and as a Minnesota person, I wandered over to sightsee the seafood. The seafood was quite reasonably priced by Midwestern standards, but when I looked more closely at the labels, the scallops and shrimp and a lot of the fish it had been imported from China and the far East.
Have you ever found yourself in an area which is well-known for some local product, but that local product–at least in its highest quality version–doesn\’t seem available in local stores or restaurants? Here\’s an economic explanation for that phenomenon taken from the World Trade Report 2013 from the World Trade Organization, based on the effects of per-unit transportation costs. The report discusses:
The mysterious case of the missing delicious red apples
\”Before it became associated with corporate behemoths like Amazon, Boeing, Microsoft and Starbucks, as well as the cultural phenomenon that was grunge music, the US state of Washington was famous for its apples. To some irate state residents though, it appeared that only the small and old-looking ones remained in the state, while all the red and delicious apples were being shipped out of state. To the state residents who wrote to their local newspaper the Seattle Times expressing their disappointment, it was a mystery that had no obvious explanation.
However, the answer to this mystery had long been part of the lore in the economics department at the University of Washington and was even part of classroom discussions and exams. The answer to the mystery relied on the fact that a per unit transportation charge applicable to both high-quality and low-quality products lowers the relative price of the high-quality product at the point of destination. This leads consumers at the destination to purchase a greater proportion of the high-quality product than consumers in the place of origin. The explanation provided by the economists of the University of Washington to the readers of the 28 October 1975 edition of the Seattle Times is reproduced below:
“Suppose, for example, a good apple costs 10 cents and a poor apple 5 cents locally. Then, since the decision to eat one good apple costs the same as eating two poor apples, we can say that a good apple in essence costs two poor apples. Two good apples cost four poor apples. Suppose now that it costs 5 cents per apple (any apple) to ship apples East. Then, in the East, good apples will cost 15 cents each and poor ones 10 cents each. But now eating two good apples will cost three, not four poor apples. Though both prices are higher, good apples have become relatively cheaper, and a higher percentage of good apples will be consumed in the East than here. It is no conspiracy, just the law of demand.”
The reference to \”economists at the University of Washington\” refers to an 1978 article by Thomas E. Borcherding and Eugene Silberberg, “Shipping the Good Apples Out: The Alchian and Allen Theorem Reconsidered,\” which was published in the Journal of Political Economy (February, pp. 131–38). As their title implies, Borcherding and Silberberg were drawing on a classic examples from the 1964 University Economics textbook by Armen Alchian and William Allen. That book offers a parallel example of high-quality grapes at 10 cents per pound, low-quality grapes at 5 cents a pound and a shipping cost of 5 cents per pound. The overall hypothesis is that when a fixed cost (like a per unit transportation cost) is added to two substitute goods, the user will tend to substitute toward the higher-quality good. (In the jargon, adding the fixed cost to both goods means that the opportunity cost of consuming the high-quality good, expressed in terms of the low-quality good, is lower.)
This thesis has been good fodder for argument ever since. For example, good restaurants in Boston do have excellent lobsters. Borcherding and Silberberg argued that this tends to support the Alchian and Allen hypothesis, because \”it does not matter if the goods are shipped to the consumers or the consumers are shipped to the goods.\” The key distinction here is whether natives and those buying at roadside stands or local groceries typically end up with lower-quality lobsters than those eating at restaurants that cater to tourists.
If you\’re interested in delving into the more recent research literature here, a useful starting point is the paper by David Hummels and Alexandre Skiba, \”An Empirical Confirmation of the Alchian‐Allen Conjecture,\” published in the December 2004 issue of the Journal of Political Economy (112:6, pp. 1384-1404).