Thought-Experiment of the Day (6 April 2011)
I want to open a pizza place. I find an available space; a previous pizza place that went out of business. The only catch is that there are four other pizza places nearby, none of which is overcrowded, except at the peak of peak hours.
One–a block or two away, on another street–is the oldest and best: table service, other dishes, liquor license. The other three–two across the street, one up the block–all offer traditional and Sicilian slices and fountain and bottled sodas.
My store will offer regular and Sicilian slices, with fountain and bottled sodas.
When I use up all my capital and go out of business, is there any rational observer who would describe that as a “failure of the market”?
Yes, because the market place failed to slap you up side the head thus you had not received a correct signal from the market place. : )
No market failure. The entrepreneur rejected the null hypothesis (Demand for product of 4th Pizza shop not yield enough revenue to stay afloat), and the null hypothesis came to be true. The presence of excess capacity may beg investigation into why there are so many willing to make type I errors.
I agree with Ilsm on this one. The desire to run a pizza joint overcame rational thought. Behavioral economics suggests this is often true. Many folks think that they and their businesses are from Lake Wobegone, being all above average, and with above average chances to succeed. Of course it takes some confidence to go into business for yourself anyway and aquire IMHO the worst possible boss who nags you 7×24 and who you can’t get away from (yourself). So perhaps the very act of going into business for yourself implies that you think you are from Lake Wobegone, otherwise you would never do such a thing.
Negotiate a six-month lease that includes installed ovens from the land-lord. Set up a generic, pizza menu… reap the short-term windfall that ANY pizza shop will have during its frist six months… walk away.. go do it again in another part of town.
I also agree with ilsm. This is not a market failure. Lyle was 100% right with his comment:
“The desire to run a pizza joint overcame rational thought.”
He should have opened up something totally different. Like Tex-Mex or seafood. The guy woul dhave been better to just get all his capital in Franklin’s and burn them. Quicker and far less frustrating that what he did….
Islam will change
Ken, what’s your next great idea?
Absolutely market failure. Good small business rule of thumb is to always open another of what is already in the neighborhood. Just like a banker is more respected for failing conventionally than succeeding unconventionally, businesses have a better chance of survival if there already is one. If there are NO pizza places around, there is a reason.
I disagree with most of what LK has to say, but the “no pizza places and therefore there is a reason” comment has a certain common wisdom to it.
We’ve had a few restaurants go out of business in the last 30 months that I’ve been living in my neighborhood, one was mexican, one was a somewhat upscale pizza place, and one was an American style place called Top of the Pub.
The mexican place was replaced by a third chinese restaurant within one block (and there is a Japanese/Korean place which could be considered a substitute by some). The pizza place was replaced with a butcher shop/bodega, and the third restaurant was replaced with an east-african halal restaurant with is very good but hasn’t had much traffic.
There’s some distinction between the three chinese places, one has a liquor license and bar, one is more of a fancy sit down place, and one is clearly oriented only towards take-out. It seems like the east-african place is about to have an upturn, they started in September, and we had a hard winter, but they’re able to put out their sign now, and my neighborhood has a strong pedestrian presence when the weather is nice.
Opening a “just the same” is a mistake, but opening a “too different” at the wrong time can make for a tough six months.
J. Goodwin has just explaining why Michael Lewis’s The Big Short could not have been written in 2005.
Glad to see the consensus is that there is no market failure (though I like the way RweTHEREyet thinks).
I suspect Looky Kool gets to the heart of the matter when you’re trying to distinguish Small Business Owners from Entrepreneurs. But that’s for someone else to extend.
This conversation re: SBOs vs. Entrepreneurs reminds me of an old joke: “How do you make a small fortune in the bar business? A: Start with a large one.”
Whatever may motivate business creation of all kinds you don’t have to study bar owners very long before you realize how delusional most of them are… “If my town only had a place where people like me wanted to go drink…” is a phrase that has wiped out many nest eggs.