Some time ago we received an anonymous e-mail from a reader who was quite angry. The reader (let's call her Disappointed - although we have no way of knowing the actual gender) either had a toy store or was starting one. Consequently, Disappointed was scouring toy manufacturers in her search for the best toys kids may like. Inevitably, she came across Lego and she did what any prospective retailer would do; she contacted TLG (The Lego Group) in order to ascertain wholesale terms and conditions. The reply she got can be seen below (with some minimum editing we were lead to understand).
As you can plainly see, it would seem that Lego is simply not interested in selling products and this deeply upset Disappointed because in following our writing she was sure, absolutely sure that it would be in Lego's best interest (i.e. greed) to increase their profits. Apparently not.
Consequently, she got upset with us because of all our wonderful theories are nothing but a pile of manure and we are dicks. Yes, we are referring to the anatomic part that distinguishes males from females.
Smelling an interesting point, our crack team of investigative journalists set to work and it discovered a worldwide conspiracy from Lego whose evil, evil goals we can only guess, but which have as a cornerstone their unyielding desire to lower their profits by the expedient means of not selling their products. The Bastards! Accompanying this new attitude there seems to be a chorus of ITD's (Independent Toy Dealers) who are of the same opinion while cheerfully chant the ode to the low profit margin. It would seem that Lego sees fit to squeeze them like lemons by "overcharging" on everything including S&H. So, clearly, Lego wants to succeed by not selling their products while at the same time "exploiting" retailers. Obviously. This is a clear and patent example of "free market" going amok, thus crying for government intervention because "society" must have inexpensive Lego toys… for the "greater good", you know? Because it is a human right to be able to buy cheap Lego toys and to retail them at inflated prices! If you don't belive us, just read the Universal Declaration of Human Rights, where we are absolutely sure there will be a clause dealing specifically with this Lego issue. And if a clause is missing, then we are absolutely sure that a regulation is in place. And if a regulation is missing, then an interpretation bulletin is available. And if an interpretation bulletin is not there, then a list of expectations must be at hand. And if everything else fails, we are positive that the janitor from the third floor at the UN building can clarify the issue to your satisfaction. There. Problem solved!
Look. This is not complicated, what is complicated is the mentality that was embedded in people such as Disappointed over many long years of "public" education. What this so-called education forces people to do is to think in terms of absolutes. We "have" to have such-and-such product or service because it is our "right". Sounds familiar? Yet, when we apply this very principle to Lego it sounds exactly for what it is; ridiculous!
There is a gigantic misconception as to how the free market actually operates. Most people believe that when we speak about free markets and competition, these processes will somehow and somewhat miraculously provide them with what they want at a ridiculously low price. This could not be further from the truth.
To begin with, a free market is a pay-as-you-go process; it is a trial-and-error process. It is not an absolute process that generates goods and services based on ludicrous long term estimates. The free market is not a canonical process; it is not based on some sort of law or regulation. The free market operates on averages; on what most people want. This means that some people won't get what they want, regardless of how many "rights" they have and/or how good or "right" the idea may be.
Think Mac versus Windows wars. At the time it was patently clear that Apple products were far superior to Microsoft ones. Yet, most people opted for Windows over Mac. Why? Who knows! Maybe it was because Microsoft had a better marketing strategy, maybe because Microsoft made sure that there were more software applications running on Windows, maybe because Microsoft was more effective at FUD (fear-uncertainty-doubt), maybe Microsoft played rough in the marketplace or maybe because Microsoft used industry standard hardware architecture while Apple used proprietary one. Who knows. The point is that an inferior product (Windows) triumphed over a superior one (Mac). In this case it is obvious that from a market (and people) satisfaction point of view, Microsoft's strategy was superior to Apple's. People simply preferred Windows over Mac probably due to an agglomeration of reasons.
In the case of Lego this is exactly the same. Lego made a determination to prefer to deal with larger wholesalers than with smaller ones. Obviously, smaller ones won't be happy about this. But then again, Lego is taking a big gamble here. By not supporting smaller retailers, Lego is losing market presence; it is losing shelf space. In addition, it is betting the farm to bigger retailers, which will now have more negotiation power because they will have a near-monopoly in several geographic areas. To make matters worse, it becomes increasingly difficult to Lego to create "special editions" of toys for certain retailers because all the other retailers will demand the same. The difference is that now these larger retailers command a much larger market share and thus their negotiation power will rise. Furthermore, consider what will happen to Lego if this strategy fails. They will have managed to piss-off a large base of retailers which will then demand a much larger profit margin just to carry Lego products.
And the whole thing does not end here. By doing this, Lego is encouraging smaller stores to buy competing and compatible products, which, if chosen properly, are equally entertaining at a fraction of the Lego cost! Basically, Lego has decided to lose a fraction of its market share.
Why would Lego do so? We don't know but we can speculate. They may have probably calculated that they may be able to demand higher prices and thus higher profits if the total amount of Lego toys available to the market is limited. There. A monopoly. The problem is, of course, that in so doing they will lock-out a percentage of their previous customers who will no longer be able to afford their products… which will lead them to buy competing goods and services.
What we are trying to express here is that decisions made in free markets are risky and the risk cuts both ways. Not only that, but that decisions can and very often fail. Lego has had quite a number of near-misses and near-bankruptcies over its life. Many decisions that Lego higher-ups took were disastrous for the company. Yes, the free market is indeed a hard place.
And this is precisely what makes the free market tick. The fact that you cannot afford to make dumb mistakes. The fact that you don't really know what people want or how much they can afford. The fact that you, as an entrepreneur, must accept a significant risk if you want to have profits.
On the other hand and as a consumer, you may find yourself quite upset and tired because of the idiotic decisions that certain companies take.
The problem is that, believe it or not, this system of experimenting is the best we currently have, barring none. Look. Let's assume that Lego made a really, really stupid decision by disallowing more retailers. So what? If Lego goes under will you be financially affected? Certainly not. Only Lego owners will be. What this means is that in the very big picture, a very tiny amount of capital will be lost and this capital won't be yours.
Now let's take a look at the opposite view. Let's say that what Lego is doing is, for some reason, considered "illegal" or "inappropriate" or "immoral" or "against human rights" or whatever other idiotic excuse politicians may think of. Then what? Then, they act. And enact laws and regulations forbidding Lego to only sell to whomever they feel like it. Lego it is thus forced to sell to everybody. Fine. And then what? Transportation costs go through the roof because now Lego is forced to deal with increasingly smaller retailers. This means that final consumer price goes up. And what else? Lego won't be able to deliver products because its manufacturing capacity is limited which means that there will be shortage of Lego products in some places. Discrimination lawsuit? You bet! And what else? Lego will be forced to produce more quickly, which means lowering quality and lowering quality means failing products and failing products means less sales and less sales means less profit and less profit means less Lego products. See where we are going? We can go on and on and on, on hypothetical scenarios but in the end we always get the same result; somehow the consumer gets less stuff; i.e. you standard of living decreases.
What people don't understand (because they have been thoroughly brainwashed) is that the free market is not a magical process whereby if you dial up competition all your dreams will come true. Don't laugh. This is what politicians believe.
The truth is that the free market is an optimization machine, not a perfect machine. It will deliver the best it can to satisfy the most people at a price they can afford with a minimum of screw-ups. Nowhere in this definition it says that everybody will be happy. Nowhere in this definition it says that everybody will be satisfied. Nowhere in this definition it says that your political, ethical, moral, social or communist sensibilities won't be bruised. They will. There is always a price to pay. There is no free lunch.
The bottom line is that risk cuts both ways. This may be the dumbest idea Lego had, ever. Or, it may be the brightest. We don't know. Lego does not know. The only judge, jury and executioner is the market and we all bow to it. This time truly For The Greater Good!
The conclusion is quite simple. The point is that the free market is not your little bitch that you can slap around whenever you feel like it as politicians do. Because if you do, then her big, bad uncle Mr. Economic Crisis will come around and slap you good. Capisce?
Unless you believe that we don't need no stinking physical means. Unless you believe that goods and services appear miraculously when you need them. Unless you believe that other people must bend to you will, all "for the greater good" of course. Then, yeah, you can do some slappin' around. Just one thing, what yo gonna do when everybody comes for yo?
Note: please see the Glossary if you are unfamiliar with certain words.