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Lessons for a Rainy Day

by Elaine Schwartz    •    May 20, 2010    •    236 Views

Last Tuesday was a bad day for most umbrellas. In New York City, it poured, it was windy, and most umbrellas were flipping out, blowing sidewards, and doing everything except what they were supposed to do.  It makes sense that someone should have invented a better umbrella. As economists, we have some answers about why no one has.

On the demand side of umbrella markets, consumers are behaving rationally. Most of us easily lose umbrellas, they are not very durable, and they rarely provide a fashion statement. In fact, according to a recent WSJ article, 794 umbrellas were reported lost in New York’s Grand Central terminal and its Metro North line. The result? We want cheap umbrellas. With an average umbrella selling for $6, most consumers care more about price than progress.

Knowing that umbrellas have to be inexpensive, sellers keep production costs low. Consequently, most umbrellas are made in countries such as China with lower labor costs. Innovate? There is little financial incentive to innovate if price and profit margins are low.

Still though, several manufacturers are considering the high end. For the aspirational shopper and tech savvy individuals, umbrellas have countless possibilities. With additional wind tunnel research and experimentation with steel, fiber glass, aluminum, and other metals, a “souped-up” umbrella could develop a following. The 11% jump in umbrella sales during 2009 was on the high end of the market. Sellers of pricey umbrellas are even thinking of loss insurance to generate more interest.

The Economic Lesson

In order to understand the umbrella market, we need to look beyond demand and supply basics. Also, resource costs, the aspirational shopper, international trade and tariffsresearch and development, and risk relate to buy and sell decisions. The umbrella is even reminiscent of the Model-T and its low price, high volume profile. Indeed, an umbrella is not just an umbrella.

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