Reference no: EM13243366

It's hard to miss the barren shelves in grocery stores dueto a pending Eggo Waffle shortage. The recent run on the popularbreakfast food is one of the few times when a very clear-cut pieceof microeconomics hits home enough to capture the attention ofpeople without an economics background. What fascinates me the mostabout this story is how people with no interest in economics stillhave the shortage on the tips of their tongues. I believe there aretwo different microeconomics concepts at play here: one covered innearly every introductory economics class and the other a deeperassumption that deserves more discussion than it normally gets.

First, the shortage in stores essentially comes fromKellogg's self-imposed price ceiling. It seems that Kellogghas decided to continue selling Eggo Waffles at the samemanufacturer's suggested retail price (MSRP) rather thanraising it to reflect a decrease in supply since two of their fourproduction plants are out of commission. By leaving the price whereit is, there is a shortage in the market because more people wouldlike to buy at the MSRP than Kellogg wants to serve. This decisionseems odd to economists because it introduces inefficiency. Theprice ceiling creates a shortage in the market which leads to theinefficiency. On the corresponding graph, you can see the minimumamount of deadweight loss (DWL) in the market for Eggo wafflesgiven this shortage; the DWL could be larger if those consumerswith a lower willingness to pay are the ones who end up buying theexisting waffles. One possible reason for the price ceiling is thatKellogg does not want to appear like it is trying to profit off ofits own misfortune (the Atlanta plant closed due to heavy rain) andplanning (the Tennessee plant closed for repairs).

Operating under typical economic assumptions, unless Kellogg orindividual stores decide to raise the price, the shortage ingrocery stores should continue. This means that some consumers whowould be willing to pay more than the MSRP will be unable to getwaffles. Which customers end up with the waffles will only be amatter of timing and luck, and it is very likely that some peoplewho are unable to purchase waffles will value them more than otherswho buy a box they find on the shelves. One common explanationeconomists offer about how this situation will be resolved is theemergence of a secondary market or black market. USA Todayinterviewed Joey Resciniti, a shopper who bought one of the lastboxes, who said, "I told my husband that maybe I need to putthem on eBay." In secondary markets, people who are lucky enough tobuy the boxes at the MSRP are able to turn around and sell them toan unlucky person who is willing to pay above the sticker price butwas unable to buy any waffles in the store, exactly what Ms.Resciniti suggested.

The second economic concept at play here is the competitivehypothesis. The classic supply and demand analysis used above restson some core assumptions of economics, such as rationality ofagents, complete information, and the competitive hypothesis. Whenany of these assumptions are broken, we need a different model tounderstand what will happen in the world. The competitivehypothesis can be summed up by the assumption that a consumerbelieves that if they decide to buy a product they can afford, theyare able to get it. For example, if I worried that the gas stationnear my house would run out of coffee before I get there in themorning, I might behave much differently. The same can be said ofEggo Waffle consumers. In the USA Today article, Ms. Resciniti alsosaid, "We have eight of them, and if we ration those-maybehave half an Eggo in one sitting-then it'll lastlonger." If consumers believe they will have a hard timefinding an item they want to buy, they may instead chose to changewhat they want to buy. If for example, Ms. Resciniti does start toration her waffles, then she may need to buy more oatmeal or freshfruit for breakfast on other days. If consumers start rationingbecause the competitive hypothesis does not hold, a morecomplicated model is needed to correctly determine equilibriumbehavior.

Discussion Questions:

1. What should the shortage of Eggo Waffles do to the demand forother brands of waffles? What about the demand for maple syrup?

2. Think of some secondary markets you are familiar with, likeeBay, ticket scalpers, or craigslist. How are prices determined inthese markets? If a secondary market for Eggo Waffles forms, whatcan you say about the equilibrium price?

3. If a black market for Eggo Waffles did emerge, who would beworse off at the equilibrium? Would anyone be better off?

4. Think of some other real-world examples where the competitivehypothesis is violated. What would need to be added to the basicsupply and demand model to accurately predict what people do whenthey aren't sure if the store will have the goods they wantin stock?