The Graveyard spiral, the market for Lemons and cheap suedes.


Economists often employ stories to test and teach concepts. The “Market for Lemons” by George Akerlof was both a Nobel Prize winning example in addition to being a simple and easy to understand story. The following compares a couple of concepts, as they seem to apply to the suede processing sub-contractor to the drycleaner. This is particularly applicable when the cleaner, for cost or geographical reasons has two processors.

Recently I paid a claim on a Chico’s red suede jacket. Now, I don’t have to be reminded about red, or pigskin for that matter, I have heard it before. My intent has always been not to have to think about subcontracted products at the cleaners. However, in talking to the customer about expectations and how many cleaners claimed not to accept any leathers, I have been thinking.

Inexpensive suedes can be had at various places, most notably Costco and Sams club, often the purchase price is equal to traditional processing prices. A new set of consumers can purchase at this new lower price point, but do not necessarily have diminished expectations of product quality. The less expensive garments often mean skins may be mismatched or haphazardly dyed. The less reliable garments may not clean well, resulting in higher “go backs”, and ultimately higher process costs.

In Ackerlof’s story about the sale of used cars, “lemons” (slang for a car often in need of repair) demonstrated that if consumer preference (or a negative preference) was combined with the lack of information about which cars were in the best condition, could reduce the price for a that same kind of used car. The rational current owner of said car (if individual car was excellent) would be unwilling to sell at this low price. This negative price pressure causes the seller of the “excellent” used car to withhold his from the market. If this excellent car is not sold, the consumer’s negative preference is re-enforced. This cycle of asymmetrical information cycle/condition feeds on itself and is considered a market failure.

In Aviation, the graveyard spiral describes a piloting error that can result in serious loss of altitude or worse. The essence of this problem is one of timing and instinct. Prior to the start of a turn, slight back pressure on the “stick” must be initiated. If this pressure comes too late, the back pressure on the stick only hastens the progress of the downward spiral. Instinct tells the pilot that if too close to the ground….pull harder on the stick. This process to, also feeds on itself, both perpetuates and exacerbates itself.

Price theory is capitalism in its truest form and largely a derivative of the supply and demand model. When goods become scarcer, the price rises, indicating to the buyer the need to reevaluate his/her purchase decision; and conversely the producer may reevaluate his production decision. Without this mechanism, shortages, over supply and waste will result. Every time the messenger of the price is prevented from teaching the scarcity message, other methods of education will be used, either by deliberate action or otherwise. Those of us of a certain age my recall the President Carter’s jab at fuel prices. His freeze on prices caused shortages, which in turn caused lines, rationing, and the creation of black markets. A more recent example might be the California electricity shortages, where certainly the insulation of the consumer from the cost spikes largely prevented them from adjusting their behavior to more conservative consumption levels.

As with all market failures, when price is not allowed to aid the purchaser of the scarcity of the good; the need for rationing is the result. Also asymmetrical information about the quality of a skin and its dye, make early estimation of outcome more dubious. Leather processors have asked us for years to be very active at the counter in the acceptance of leathers and suede’s. I think the proliferation of cheap suede’s in the marketplace will necessitate rejection of certain skins in order to preserve the remainder of the business, most especially in a dual sub-contractor strategy. The lesson learned could be applied to others of us, if price or specialty forces us into an awkward market nitch.