Friday, June 7, 2013

Oh, fudge

I was recently vacationing with my family on Mackinac Island. It is a 3.8-square-mile island in Lake Huron, depicted in this map. Its attractions include the Grand Hotel, where much of the 1980 film Somewhere in Time was filmed; Fort Mackinac, which my son (below) particularly enjoyed; and an abundance of fudge. The map inset depicts a stretch of Main Street that is less than 1500 feet long and includes 10 fudge shops. There are 6 firms that own all of the shops on the island, and 3 of them had at least two outlets on Main Street. I did not sample extensively, but I had the impression that all the shops had similar selections of fudge, salt water taffy, and peanut brittle, as well as similar prices. There is a classic economic explanation for this kind of phenomenon: that, in some contexts, firms compete most effectively with each other by minimally differentiating themselves from other firms. Firms might differentiate by locating at a distance from other firms or by varying their products in any number of ways. This page illustrates the pressure for firms to locate close to their competitors, and this same reasoning applies metaphorically to product characteristics.  (There are lots of complications to this model, some of which result in greater degrees of differentiation.)

I think that one reason this effect is so strong in this case is that the market is relatively uninformed: most of the market is tourists, and most of them don't have good information about what they can buy on Main Street. Tourists do know that they will be able to buy fudge at lots of different locations; but this raises the question of how this came to be. Did all of these fudge sellers enter the market because of the enormous demand for fudge on Mackinac Island? Or perhaps it is a supply issue: a local abundance of materials or expertise necessary for fudge production. That fudge shops are common in many highly touristed areas favors the demand-side explanation. Maybe people associate fudge consumption with vacation, and maybe this is one means of restricting one's indulgence in certain items. I wonder how sensitive this situation is to its initial conditions, whatever they were: is the prevalence of fudge, peanut brittle, and salt water taffy in American resort towns a historical accident, or is there something about these products that inevitably leads to their provision in these markets? In either case, we live in an era in which consumers can expect a certain array of amenities at many vacation spots, and firms cater to these expectations. (I find it amusing that salt water taffy is popular at freshwater locales like Mackinac Island, although its production doesn't involve salt water per se.)

This minimal differentiation story applies in lots of other tourist-dominated markets. In Venice, for example, you can hardly walk a hundred feet without running into a gift shop selling cheap blown glass figurines and Mardi Gras masks.

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