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Tuesday, November 19, 2013

The Economics of the Corn Dog

One man’s story of being gouged by a heartless vendor at a biker rally


Recently, at the Lone Star Biker Rally in Galveston, Texas, I had a sort of epiphany involving corn dogs. 

Wandering among the mobile vendors lining the side streets of the historic downtown area, as bikers from all over the country roared down the main drag, I set off in search of a jumbo corn dog. I went up to the first stand I saw but they were sold out. Disappointed, I made my way down the block and found the next stand—sold out too. But across the street I finally found another stand that had them—for $5.50 apiece. It also had a long, barely moving line, so I had time to stand there and think. 

My first impression was that the price seemed too high—I could see people calling it a rip-off or gouging, and moving on. Although I don't know the corn dog’s bottom-line cost of the corn meal, weenie, frying oil, and wooden stick, I’d estimate that corn dogs cost around $1 to make—probably even less when bought in bulk. There's clearly a high markup. Maybe I could conclude I was being exploited. Admittedly, I wasn't thrilled to pay that much, but there I was standing in line. 

Next I thought: Maybe it’s just greed? Perhaps they jacked up the price just because they could. There was clearly competition from other vendors, but their corn dogs were all similarly priced. If I’d stopped thinking here I might have assumed there's a corn dog cartel that schemes in a smoky room and agrees to their inflated prices beforehand. 

That seemed unlikely, so I took a step forward in the line. 

Then I wondered about the cost of paying the city of Galveston for a vendor’s license for the weekend. While I don’t know the exact price, it’s a safe assumption that it’s not cheap. A quick glance at the vendor application page shows that vendors also need to pay a fire tent fee, a health permit fee, and a state sales tax registration fee. All these sunk costs are certainly factors in the production cost and subsequent price, but also come with the effect of limiting competition, to where a local guy on a bike cannot choose to meet the sudden demand by selling cheaper corn dogs from a bicycle stand. Maybe this guy set up in a dark alley selling black-market corn dogs—but if so, I didn't see him.

I suspected most of those vendors were from out of town, maybe out of state. So the cost of transporting all their equipment, in large, fuel-guzzling trucks, must also be a factor. And these people had to sleep somewhere for the weekend, so there’s another cost that has to be considered. 

OK, maybe they’re not so evil after all. I took another step up in line.

And then there's the cost of compensating the employees. To work in those conditions, at that pace, for that amount of time, the compensation must be worth the effort. Sure, many of these stands are probably family-owned and -staffed, but still: The profits must be greater than what this amount of time and energy could be worth in other lines of employment. In other words, all this must be worth more than they could make simply flipping burgers or whatever. And how many opportunities do they get to sell to this kind of crowd? There’s not a rally every day.

This line of thought stirs feelings of empathy; these people work hard, and despite the seemingly high prices they charge, they probably don’t make all that much when all things are considered. Maybe they’re the ones being exploited.    

The labor theory of value says that the value of a given product is proportional to the amount of labor involved in its production. On the surface, and perhaps even a few layers down, this is an apparently logical way to account for prices. Karl Marx based many of his conclusions on it and even Adam Smith was among its proponents.* Perhaps there’s some truth in that line of thinking, but something vital is still missing. For instance some people care little for corn dogs regardless of the price. A vegetarian wouldn’t eat one if it were free. 

I also chose to bring my own beer and keep it in a cooler, even though there were numerous vendors that sell beer. I valued the beer, but not enough to overpay for it in the street. 

I was getting close to the corn dog stand now.

The most revealing thing of all is the simple fact that I was willing and eager to pay $5.50 for a corn dog. Getting lost in the production-cost aspects suddenly seemed a lot less revealing. Clearly the high price did not significantly reduce demand—we’d all been standing in line for a while now—and the market was more than able to bear the extra cost. If anything, corn dogs were actually priced too low: Other stands had already sold out. 

As I took one more step up in line I realized I was living out an example of the subjective value theory, which states that a product’s value is ultimately determined by what consumers value. A product’s value can vary widely among individuals, or even vary with the same individual in different circumstances and points in time. 

So even though, for $5.50, I could go to the store and buy an entire box of corn dogs and make them myself, I would have to leave the rally, which wasn't desirable. And I wanted a hot, fresh corn dog right then. It wasn’t much effort to bring ice and beer, but it would have been extremely costly (considering the effort, opportunity cost, and time expended) to bring my own fryer and corn dogs. The convenience of having hot food served to me in the street, in the midst of thousands of people, automatically raised my willingness to part with my money. Had it been a normal day, I probably wouldn’t have paid that much. But in those specific circumstances, I valued the corn dog more than the $5.50. And of course, the vendor valued my money more than the corn dog.  

But the best conclusion of all is that this line of thought means that both parties benefit when a voluntary trade is made, or else they wouldn’t participate. On a normal day, when I’m unwilling to pay $5.50 for a corn dog, the vendors don’t even set up shop. Therefore as I stepped up to the stand and ordered my corn dog, I realized it wasn’t a rip-off or exploitation in any way; we both came out better and the world was a better place for it. Rather than being a greedy scalper of cornmeal and mystery meat, the vendor was performing a highly valued service, and I was glad for the experience. 

In fact, after I paid and the man handed me my jumbo corn dog, I left a dollar in the tip jar. He smiled and thanked me, and I did the same.

*[Editor's note: Thank you to James C.W. Ahiakpor for pointing out an error in this statement.]

  • Brett Stone is a family man and closet guitarist who works in accounts payable in Alvin, Texas. When he's not waiting in line for a corn dog, he continues his decade-long self-education in economics.