Mamdani’s cheap grocery scheme won’t help poor families

At the end of the 19th century, Herbert Dow, founder of the Dow Chemical Company, faced a dilemma.

After years of experimentation, Dow’s company had developed a cheap method of extracting a chemical called bromine, which has multiple useful purposes, including industrial production, water treatment, and chemical manufacturing.

Bromine was not a new invention, however. The world market for the chemical had been dominated by German companies since its mass production began in the mid-1800s. Indeed, about 30 German companies had formed a cartel in the global bromine market, setting prices high and reaping significant profits.

This cartel protected its near monopoly in the bromine market by, among other things, threatening to flood the market with cheap bromine anywhere a competitor rose up to start selling the product.

Facing such cheap alternatives, new entrants couldn’t compete and would go out of business. Meanwhile, the German cartel could survive the strategy because they set aside funds to survive this temporary offering of extremely cheap product. Once the new entrant went out of business, the Germans would once again raise their prices.

When Dow expanded beyond the US and began to offer his bromine in England, the German cartel pounced, flooding the American market by selling bromine at 15 cents a pound, far below its typical price of 49 cents and well below Dow’s of 36 cents.

What was Dow to do?

Recognizing an arbitrage opportunity, Dow had one of his agents secretly buy up the German’s bromine at 15 cents per pound, then resold it across Europe for 27 cents, undercutting the German cartel with their own product.

Confused as to why Dow wasn’t backing down, the German cartel got more aggressive, lowering their prices still further. Dow continued buying at these lower prices and selling at 27 cents per pound.

Eventually the German companies caught on to Dow’s strategy, but there wasn’t much they could do. This pricing war lasted about four years, finally resolving with each side agreeing not to sell in their competitor’s country while leaving the rest of the world market open to competition.

I was reminded of this story in the recent and widely publicized announcement by New York City Mayor Zohran Mamdani that a set of five city-owned grocery stores will be offering certain food staples at 30% lower prices than the city’s privately owned stores, with the difference to be made up by taxpayers.

Such sizeable discounts create arbitrage opportunities similar to the one Dow exploited. Enterprising private grocery store owners could send secret shoppers to buy up the discounted groceries from the city-owned stores, bring them back to their own stores and resell the produce at a higher price that would still be below the market price. The result would be a tidy profit.

These secret shoppers would be incentivized to be first in line every morning to clear out the shelves. Actual New York shoppers searching for discounted groceries would find nothing but empty shelves.

Even if none of the privately owned grocery stores were to take advantage of this situation, however, there’s a broader economic lesson here.

All economic goods are rationed by some mechanism. In a market system, goods are rationed by the price system. Specifically, in a system of production and exchange involving people using their own property and money, prices emerge to reflect relative scarcity and demand, causing resources to flow to where they are most urgently needed.

Conversely, Mamdani’s scheme of heavily discounted groceries being made available in limited supply rations these groceries mostly on a first-come, first-served basis. The critical lesson is this: When the system of rationing is changed, the way in which people compete for scarce resources will also change.

Those who are first in line every day, whether they are regular consumers or people from competing grocery stores, will be the ones to scoop up the cheap groceries. Those unable to get to one of the stores until later will go away empty-handed. Consumers will have to compete to be first in line. Instead of goods being rationed by a money price, the currency will be time.

Those with sufficient and flexible free time will be able to get first in line in anticipation of the stores opening every morning.

The busy, working single mother of three is not likely to have such free time. Many of the very people this policy is supposedly designed to help — working class folks struggling to make ends meet — will typically be the least capable of accessing the discounted groceries.

Those people who are relatively better off financially, with flexible work-from-home jobs, will be most likely to benefit. The unemployed will also have the free time to queue up in line first, but this advantage goes away once they regain employment.

One possible response to such a scenario would be to pass out ration cards, limiting the amount of discounted groceries each customer can buy in order to ensure there’s enough remaining for those shopping later in the day.

Long food lines and food ration cards, however, are the hallmarks of a failing Soviet Union and have no place in a free society.

The urge to make groceries more affordable is a noble one, but Mamdani’s plan would do more harm than good.

“Mamdani’s cheap grocery scheme won’t help poor families” was originally published on www.carolinajournal.com.