Leggo My Eggo! Really!

It’s hard to miss the barren shelves in grocery stores due to a pending Eggo Waffle shortage. The recent run on the popular breakfast food is one of the few times when a very clear-cut piece of microeconomics hits home enough to capture the attention of people without an economics background. What fascinates me the most about this story is how people with no interest in economics still have the shortage on the tips of their tongues. I believe there are two different microeconomics concepts at play here: one covered in nearly every introductory economics class and the other a deeper assumption that deserves more discussion than it normally gets.

First, the shortage in stores essentially comes from Kellogg’s self-imposed price ceiling. It seems that Kellogg has decided to continue selling Eggo Waffles at the same manufacturer’s suggested retail price (MSRP) rather than raising it to reflect a decrease in supply since two of their four production plants are out of commission. By leaving the price where it is, there is a shortage in the market because more people would like to buy at the MSRP than Kellogg wants to serve. This decision seems odd to economists because it introduces inefficiency. The price ceiling creates a shortage in the market which leads to the inefficiency. On the corresponding graph, you can see the minimum amount of deadweight loss (DWL) in the market for Eggo waffles given this shortage; the DWL could be larger if those consumers with a lower willingness to pay are the ones who end up buying the existing waffles. One possible reason for the price ceiling is that Kellogg does not want to appear like it is trying to profit off of its own misfortune (the Atlanta plant closed due to heavy rain) and planning (the Tennessee plant closed for repairs).

Operating under typical economic assumptions, unless Kellogg or individual stores decide to raise the price, the shortage in grocery stores should continue. This means that some consumers who would be willing to pay more than the MSRP will be unable to get waffles. Which customers end up with the waffles will only be a matter of timing and luck, and it is very likely that some people who are unable to purchase waffles will value them more than others who buy a box they find on the shelves. One common explanation economists offer about how this situation will be resolved is the emergence of a secondary market or black market. USA Today interviewed Joey Resciniti, a shopper who bought one of the last boxes, who said, “I told my husband that maybe I need to put them on eBay." In secondary markets, people who are lucky enough to buy the boxes at the MSRP are able to turn around and sell them to an unlucky person who is willing to pay above the sticker price but was unable to buy any waffles in the store, exactly what Ms. Resciniti suggested.

The second economic concept at play here is the competitive hypothesis. The classic supply and demand analysis used above rests on some core assumptions of economics, such as rationality of agents, complete information, and the competitive hypothesis. When any of these assumptions are broken, we need a different model to understand what will happen in the world. The competitive hypothesis can be summed up by the assumption that a consumer believes that if they decide to buy a product they can afford, they are able to get it. For example, if I worried that the gas station near my house would run out of coffee before I get there in the morning, I might behave much differently. The same can be said of Eggo Waffle consumers. In the USA Today article, Ms. Resciniti also said, "We have eight of them, and if we ration those—maybe have half an Eggo in one sitting—then it'll last longer.” If consumers believe they will have a hard time finding an item they want to buy, they may instead chose to change what they want to buy. If for example, Ms. Resciniti does start to ration her waffles, then she may need to buy more oatmeal or fresh fruit for breakfast on other days. If consumers start rationing because the competitive hypothesis does not hold, a more complicated model is needed to correctly determine equilibrium behavior.

Discussion Questions:

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

2. Think of some secondary markets you are familiar with, like eBay, ticket scalpers, or craigslist. How are prices determined in these markets? If a secondary market for Eggo Waffles forms, what can you say about the equilibrium price?

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

4. Think of some other real-world examples where the competitive hypothesis is violated. What would need to be added to the basic supply and demand model to accurately predict what people do when they aren’t sure if the store will have the goods they want in stock?

PlayStation 3 and Arbitrage

Two weeks ago, thousands stood in line to be among the first to get their hands on the PlayStation 3. Surprisingly, many of these people who waited through the cold, rain, and snow did not actually want to keep the PS3. They wanted to buy it for $600 and sell it on eBay for twice the price--a profit-seeking behavior known as arbitrage.

Economists define arbitrage as the act of profiting without bearing any risk. A large shortage is the best indicator of an arbitrage opportunity. A shortage occurs when quantity demanded exceeds quantity supplied--in other words, when the number of PS3's that consumers are willing and able to buy at the current retail price exceeds the number of PS3's available in stores. A shortage implies that there are consumers willing to pay more than $600 for a PS3 who were unable to purchase one because they were too busy to stand in line or too far back in the line. Arbitrage is a means to allocate the PS3's from the initial buyers to the people who want them even more than the original buyers.

Discussion Questions

1. Sony should have forecasted the shortages and price bids on eBay for the PS3 because they sold out of other popular consoles when they were first released (PlayStation, PS2, and PSP). Would it be profitable for Sony to eliminate the "frenzy shortages" by pricing high during the first months and lowering prices afterwards? For example, they could charge $1,000 for the PS3 in November and December, but lower it to $600 afterwards.

2. Sony reports that it costs more than $600 to produce a PS3. Why would it be profitable for Sony to sell the PS3 at an initial loss?

3. Why would a gamer prefer to pay $1,200 for a PS3 on eBay rather than standing in line to buy one for $600?

The Organ Shortage

Newspaper ads on every college campus beckon cash-strapped students to sell their plasma, sperm, or eggs to the appropriate medical intermediaries. It's Adam Smith's invisible hand at work: People need plasma for blood transfusions; students with excess plasma need cash. Plasma banks facilitate the transaction and everyone's better off.

The enterprising student will wonder whether he can collect on other spare parts--say, a kidney. He cannot. The sale of human organs, whether it benefits a living kidney donor or the family members of a recently deceased heart donor, is illegal in the United States. Why, asks the latest Freakonomics column, is selling a kidney illegal in a country where thousands of people die each year waiting for kidney transplants? Read the column to see what Stephen Dubner and Steven Levitt have to say about the organ shortage.


1. Suppose the graph above represents a market for transplantable kidneys from live donors. Under current law, the price of a kidney is restricted to zero. At a zero price, 15,000 people (most likely friends and family of the recipients) supply a kidney to eligible patients each year. What's the shortage of kidneys at a zero price?

2. Beyond the 15,000 charitable donors our hypothetical supply curve takes a more familiar, upward-sloping shape. Each point on the supply curve represents the seller's cost of providing a transplantable kidney. According to Dubner and Levitt, what are some of the costs that influence the supply decisions of living kidney donors? (Think about forgone wages, medical risks, and the fact that supplying a kidney is a one-time event.)

3. In our hypothetical market for kidneys shown in the graph, what price clears the transplantable kidney market? (See an actual economic estimate of kidney prices in this paper by Gary Becker and Julio Jorge Elias.) Notice that closing the kidney shortage with a free market adds to the cost of a transplant (already upwards of $200,000). Might the additional cost of procuring a kidney price some patients out of the market altogether? That is, would an increase in the price of a transplant reduce the quantity of transplants demanded? Do you think the quantity of transplants demanded is sensitive or insensitive to price (is the price elasticity of demand for transplants perfectly inelastic)?

4. If you're like most normal people, the prospect of a market for kidneys raises all kinds of moral and ethical questions. According to the column, Alvin Roth helped devise a program that uses incentives to elicit organ donations from strangers, but stops short of a free market for organs. How does the New England Program for Kidney Exchange align the incentives of non-related donors and recipients without monetary incentives?

5. Kidneys from living donors are preferable from a medical perspective, but usable organs from the recently deceased are important as well. Of course, doctors can't just go around harvesting organs every time someone dies. Americans, usually at the Department of Motor Vehicles, have to sign-up if they wish to donate usable organs upon death. What would happen to the organ shortage in the United States if all Americans were donors by default?

Check out the Freakonomics website for more about creative solutions to the organ shortage.