View
215
Download
0
Embed Size (px)
Citation preview
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 1/64
Some Problems in Market DistributionAuthor(s): A. W. ShawSource: The Quarterly Journal of Economics, Vol. 26, No. 4 (Aug., 1912), pp. 703-765Published by: Oxford University PressStable URL: http://www.jstor.org/stable/1883802 .
Accessed: 11/11/2014 18:35
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp
.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact [email protected].
.
Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly
Journal of Economics.
http://www.jstor.org
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 2/64
SOME
PROBLEMS IN MARKET
DIS-
TRIBUTION
SUMMARY
Lack
of
systematic
study
of market
distribution.
Emphasis
on
production
explained by
economic causes.
Importance
of a better
organization
of market
distribution,
03. -
Complexity
of the
problem
facing
the
distributer.
Consumer's
surplus. Bearing
on the
dlstribu-
ter's
problem,
707.
-
Selling
at the
market
minus,
selling
t the
market,
and
selling
at
the market
plus,
712.
-
Social
justification
of the differ-
entiation of
commodities:
Importance
of
trade-marking,
718.-
Methods of
sale: sale in
bulk;
sale
by
sample;
sale
by
description,
721.
-
Available
agencies
for
selling:
middlemen,producers'
salesmen,
and
advertising,
direct and
general,
723
-
Emergence
and rise
in
im-
portance
of the
middleman.
Modern
tendency
to
decrease
number of
successive middlemen,725.
-
Analysis of the functionsof the middle-
man:
sharing
the
risk,transporting
he
goods,
financing
he
operations,
selling
or
communication
of ideas about
the
goods,
and
assembling,
assorting,
and
re-shipping
Development
of
functional
middlemen.
Advantages
of
direct
selling
in
some
industries.
Present
day impor-
tance of
the
direct
selling
n
some
industries. Present
day
importance
of
the
middleman,
731.
-
The
producer's
salesman as an
agency
in
distributlon,
40.-
Advertising
as
an
agency
in
distribution:
relation
to
sale
by
description;
relation to
trade-marking; analysis
of classes
of
demand
created
by
advertising,
742.
-
Social waste
in
distribution.
Practical problem of distributer, 746 -Analysis of market into
geographic
sections
and
economic
and
social
strata,
749.
-
Laboratory
study
of
distribution,
754.-
Wide
application
of
such
method of
study,
758.
-
Possibility
of better
organizatlon
of
distribution,
63.
INTRODUCTION
THE
business
man is concernedwith
the
production
and
distribution
f
goods. Factory production
he
findsrelativelywell organized. The era of the rule
of
thumb
s
passing,
nd the
progressive
usiness
man
can call
upon
the
production
expert,
technically
trained,
o
assist him
in
solving
his
problems
of
pro-
703
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 3/64
704
QUARTERLY JOURNAL
OF
ECONOMICS
duction. But themarketingftheproduct as received
little
attention. As
yet
there has
hardly
been
an
attempt
ven to
bring ogether,
escribe,
nd correlate
the
facts
concerning
ommercial
istribution.
Selling
is on a
purely mpirical
asis.
The
progress
that has
been
made
in
organizing
production
s the
result
of
systematic study.
For
centuries attention has been concentrated on the
problems
of
production.
Methods
of
study
that
have
proven
fruitful
n other
fields
have been
applied
to
the
problems
f
manufacturend
a
body
of
organized
knowledge
s
being
built
up.
Now the
problems
of market distribution re no
less
worthy
f
systematic tudy
than are
the
problems
of
factory
production.
It
is as essential
that the
finished
oods
be moved from he stockroom of the
producer
o the
hands
of the
consumer,
s
it is
that
operations
be
performed
pon
the raw material
to
produce
the
finished
goods.
And
the
problems
of
marketing
re
evenmore
omplicated
han
the
problems
of
manufacturing,
ecause
the
human
factor s
of more
direct
mportance.
Hence the rule
of thumb can
be
lessdependeduponin distributionhan inproduction.
Why
has not
systematic
tudy
been
given
to the
problems
of
distribution The
explanation
s
found
in
a
glance
back in our economic
history.
Chief
among
the
causes for the industrial
changes
leading
to
the establishment f the
factory ystem
n
England
in the
eighteenth
entury
was the
constant
widening
of the market. It was a rapidly ncreasingpressure
on
the
producer
or
greater
uantities
f
staple
articles
for
mass
consumption
that
gave
incentive
to the
revolution
n
the method f
production.
For
a
century
thereafter he
necessity
of
supplying
a
continually
wideningmarket,
s
means
of
transportation
teadily
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 4/64
SOME
PROBLEMS IN
MARKET DISTRIBUTION
705
improved nd thepopulation ncreasedwithunprece-
dented
rapidity,
made
production
the
dominant
pro-
blem.
Economic conditions ave
put
the
emphasis
n
production.
Where
he
felt
need s
greatest,
herewill the
organiz-
ing ability
of the human race concentrate tself.
The
problems
f
production
were ensed
s the most
pressing
that faced society. He who improvedmethods of
manufacture
o
increase
output
or
reduce cost
reaped
a
large
reward.
Hence
the ablest minds
were
drawn
toward
the solutionof those
problems.
The
business
managergave
his best
thought
o the difficult
ask
of
producing
more
goods
at lower
cost.
The
constantly
widening
market
made
selling
simple
problem.
As
a result we have
built
up
a
relatively
fficient
organization of production. While much remains
to be
done,
the
resources
f
modern cience
are
being
utilized to
improve
nd
organize
our
agencies
of
pro-
duction.
The
development
of
producing
capacity
has
been tremendous. New
processes
have
been and
are
being
introduced.
New forceshave
been called
into
play.
Methods
are
constantly
eing
scrutinized
to effect moreeconomical nd efficientrganization
of
production.
The
recent
introduction
n
many
industries
of
so-called
"scientific
management"
is
only
a
partial
crystallization
f
ong
years
of
progress.
While we are
but
upon
the
threshold f
the
possibili-
ties
of
efficiency
n
production,
he
progress
hus far
made has
outstripped
he
existing
ystem
of
distribu-
tion.
If
our
producing possibilities
are
to
be
fully
utilized,
the
problems
of distributionmust
be
solved.
A
market must be found
for
the
goods
potentially
made available. This
means,
in
the
main,
a
more
intensive
ultivation
f
existing
markets.
The unfor-
mulated
wants
of the individual
must be
ascertained
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 5/64
706
QUARTERLY
JOURNAL
OF
ECONOMICS
and the possibilityof gratifying hem brought to
his
attention.
There are
some,
o
be
sure,
who
deplore
he
ncreasing
complexity
f human wants.
This is a
problem
for
the
philosopher,
ot forthe
business
man.
Our
whole
civilization
has been
characterized
by
an
increasing
standard
of
living
due to the demand on the
part
of
the ndividual ormoregoodsandmorehighly ifferen-
tiated
goods.
The business man finds
his
practical
task
in
searching
ut human wants and
providing
he
means of
gratification.
Not
only
does
the chaotic
condition f
distribution
act
as a check
upon
further
evelopment
f
production,
but
it
also involves
a
tremendous
ocial
waste.
The
consumer
pays
for
"lost
motions
in
distribution
s
surelyas he does for" lost motions in production.
Society
can no more afford
n
ill-adjustedsystem
of
distribution
han
t
can inefficientnd
wasteful
methods
of
production.
The
social cost s
no less
real.
The
most
pressing roblem
f
the
business
man
today,
therefore,
s
systematically
o
study
distribution,
s
production
s
being
studied.
In
this
great
task
he
must enlist he trainedmindsof the economist nd the
psychologist.
He must
apply
to
his
problems
the
methods
of
investigation
hat have
proven
of
use
in
the more
highly developed
fields of
knowledge.
He
must ntroduce
he
laboratory
oint
of
view. To that
end,
an
attempt
s
here made to outline some of
the
problems
of commercial
distribution rom
the
point
of
view of the business
man,
to
analyze them,
nd to
point
out some methodsof
systematic
tudy
of these
problems.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 6/64
SOME
PROBLEMS
IN
MARKET
DISTRIBUTION
707
PRESENT
DAY
PROBLEM
OF THE
DISTRIBUTER
The
problem
presented
by
the
United
States
as
a
consuming
market
s a
complex
ne. Here are
ninety-
odd
million
people
distributed ver an
area of
more
than
3,000,000 quare
miles
excluding
Alaska).
Some
are gathered n the large cities,wheremillions ostle
elbows.
Some
are scattered over
great
areas
with
considerable
distances
between
them
and
their
neigh-
bors. Some
daily pass
hundreds of
retail
stores;
some
mustride
milesto reach the nearest
tore.
Wide
extremes
n
purchasing
ower
exist.
Millions
have a
purchasing
power
scarcely
sufficient o
obtain
for
themselves
he
barest necessities
of
life.
A
few can
satisfy
the most
extravagant
whims of the human
imagination.
Between
these extremes
ie all
degrees
of
purchasing
ower,
he number n
each
class
becom-
ing
greater
s
you
descend
n
the
scale of
purchasing
power.
Their
wants are
as varied
as
their
purchasing ower.
Environment,
education,
social
custom,
individual
habits,and all the variations n body and mindtend
to render
human wants
diverse.
In
each
individual
there are
certain
conscious needs
being
constantly
gratified y
the
purchase
of
goods
produced
for such
gratification.
Then
there
are the
conscious
needs
which
go
ungratified
ecause of the
limitations
pon
purchasingpower
and
the
existence of
other
needs
of greaterfelt importance.
And
then thereare the
unformulated,
ubconscious
needs whichfail
of
expres-
sion because
the individual
s
ignorant
f the
existence
of
goods
which
would
gratify
hem.
Twenty years
ago,
to
illustrate
his last
class,
there
existed
n
the
farmer,
ar from barber
shop
and
clumsy
n
touch,
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 7/64
708
QUARTERLY JOURNAL
OF ECONOMICS
an unformulated eed for a safety razor. Today,
the
distributer
orces
upon
his
attention he
existence
of
such
a device and the
unformulated
eed
finds
expression
n
effective emand.
The
accepted
system
of
distributionwas built
up
on the
satisfying
f
staple
needs.
The
pressure
of
the market
discussed above
made it
unnecessary
or
the businessman to search out unformulated uman
needs.
Only
in
recent
years,
when
the
development
of
production,potentially
outstripping
he
available
market,
has shifted the
emphasis
to
distribution,
has
the
businessman become
a
pioneer
on the frontier
of humanwants.
Today
the more
progressive
usiness
man
is
searching
out the unconscious needs of the
consumer,
s
producing
the
goods
to
gratify
hem,
is
bringing
o the attention f the consumer he exis-
tence of
such
goods,
and
in
response
to
an
expressed
demand,
is
transporting
he
goods
to
the
consumer.
The
task
is
one
of
adjustment.
The
materials and
forces f
nature
must
be bent to
human
use.
This sort of
activity
has
not
only
built
up
new con-
suming
power
in
the
market,
nd contributed o the
progress fcivilization, ut has givenriseto newprice
policies
that have undermined
he old
organization
of distribution
n
staple
lines.
Hence
it
is
important
in
outlining
he
present
day
problem
of
distribution
to
give special
attention to
the
more
progressive
distributer,
ather
han
to
the
typical
distributer.
It
is
not
alone
to
revealing
nd
gratifying
nformu-
lated wantsbythe creation
f new
goods
that the more
advanced
business
man turns. He finds
ike
opportu-
nity
in
the
difference etween
the
market
price
that
has
come
to
be establishedfor a known
commodity
and
the
varying
subjective
valuations
placed
upon
such
a
commodity y
consumers f
differingurchasing
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 8/64
SOME PROBLEMS
IN
MARKET
DISTRIBUTION 709
powerand of differingocial positionand individual
habits.
The economists
ell
us of the
"
consumer's
urplus."
Briefly,
this is
the
difference
etween
the market
value
for
commodity
nd the
subjective
value of
the
commodity
o
the
individual onsumer.
Each
individ-
ual sets
up
for
himself
a ratio of
exchange
between
commoditieswhich findsexpression n the price he
would
be
willing
o
pay
for
a
given commodity
ather
than
go
without
it.
These
subjective
valuations
constitute
the
demand
side of the market.
The
interplay
f
supply
and
demand
gives
rise
n
a
competi-
tive
market
to
a market
price
at which
the
consumer
can
obtain
the
commodity.
Now
if
this
market
price
is
above
that
fixed
by
the
subjective
ratio of
exchange ftheconsumer, e dropsout of themarket,
utilizing
is
purchasing
ower
o secureother
ommodi-
ties.
But
if
the market
price
s
below that
which the
consumer
would
be
willing
o
pay
to obtain
the com-
modity,
he
purchases
at
the
market
price,
and
the
difference
etween
his
subjective
ratio of
exchange
and
the
objective
market
ratio of
exchange
onstitutes
his " consumer'ssurplus." The man of means, for
example,
purchasing
his
morningpaper
for
a
cent,
would
still
purchase
if
the
price
of
the
paper
were
fixed
at
five
cents,
at ten
cents,
or
possibly
more.
Somewhere
n the
ascending
scale
a
point
would be
reached
at which
even
the
man
of means
would
drop
out
of
the
market.
But
long
before
that
point
was
reached
the
less
well-to-do
of
the
possible
readers
would
have ceased to
purchase
the
paper.
And the
difference
etween
the
price
at which the
well-to-do
man would
drop
out
of the
market
and
the market
price
of
one cent
which he
actually
pays,
represents
his
"
consumer's
urplus."
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 9/64
710 QUARTERLY
JOURNAL
OF
ECONOMICS
The more able distributersurn, housuallyuncon-
sciously,
to
the existenceof
this
margin
as
the
basis
of a demand
forwhat
is
to
all intents nd
purposes
new
commodity.
That
is, they
differentiate
product
from a
staple commodity
or
which
a
market
price
has
been
established
nd
establish
n
effective emand
for
he modified
roduct
upon
a
new
price
evel,
higher
than that establishedfor the commodity f whichit
is a modification.
The means
used
for
differentiationre
numerous.
Sometimes
light
modifications
ender
t
better
dapted
to
the use to which
t
is
put.
Sometimesniceties of
trimming
nd
equipment
are utilized.
Sometimes
a
new and more convenient
tyle
of
package
is used.
Sometimes
he
distributer
uilds
up
an
atmosphere
f
goodtasteabout thegoods,or a reputation or onstant
quality
which
nsures he
consumer
gainst
dissatisfac-
tion.
Sometimes
he
distributer
epends
upon
"
ser-
vice
"
or
special
conveniences o the
consumer
rovided
as
collateral o
the
commodity.
Always,
however,
he aim is to
isolate his
product
from
he
stock
commodity
f
substantially
ike nature.
Andnearly lwaysthedistributertilizestrademarks,
brands,
or
trade names to
identify
his
product
as a
distinct
ommodity.
He
must then
convey
to those
consumerswhose
subjective
ratio
of
exchange
would
have led them
to
pay
a
higher price
for the
stock
commodity
before
transferring
heir demand to
other
goods,
knowledge
of
the existence
of his
differentiated
roduct
at
a
higher
rice
evel.
By
calling
ttention
o the
superior
qualities
or
convenience,
r
constant
reliability
f his
differentiated
roduct,
he transfers o it
a
portion
of
the
demand
that
formerly
ound
expression
n
the
purchase
of the
stock
commodity.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 10/64
SOME
PROBLEMS IN MARKET
DISTRIBUTION
711
The marketing f hats furnishes good illustration
of
this
development.
If
derby
hats
were
distributed
as a
staple,
unbranded and at a
single
market
price
for a
given quality,
many
consumerswould
pay per-
haps
$3.00
for
a
staple hat,
whose individual ratio
of
exchange
would render them
willing
to
pay
more
than
$3.00
for
a hat
rather
than
go
without. But
certainproducershave distinguishedheir hats from
the
staple
hat
by
their
rand.
By
calling
he attention
of
the consumers
o
niceties
of
trimming
nd
finish,
and
by
emphasis
upon design,
some such
producers
have
built
up
a demand
fortheirhats at
$5.00.
Now
these
trade-marked
ats and the
staple,
unbranded
hats
selling
at
$3.00
are
substantially
he same
com-
modity,
but are
differentiated
y
detail modifications.
These detail differencesender he well-to-do onsumer
willing
to
pay
a
higher price
for the
trade-marked
hat.
No
doubt the demand
for
the more
expensive
hat
depends
n
part upon
the sense of
security
n
the
part
of the consumer
hathis hat
willbe
of
good
quality
and
of
proper
hape
if
it bears the
name of
these
pro-
ducers.
This
feeling
of
security
forms
part
of the
subjectivevaluationthat theconsumer lacesuponthe
hat.
No
doubt, too,
motives
of
pecuniary
emulation
sometimes
nter
n,
and
the
consumer erives
portion
of
his
gratification
rom he mere
factthat he
purchases
a
hat
which
ells
at a
higher
rice
than those
purchased
by
his
less well-to-do
eighbor.
It
is
of interest
o
note that other
manufacturersf
branded
hats
have
in recent
years
fixed
their
prices
at
$4.00
and
$6.00,
appealing
to
consumers
upon
different
rice
levels
from
those
reached
by prior
distributers
f
trade-marked ats.
Thus
they
reach
with
a
$4.00
hat
a
group
of
consumersnot
available
to
the
distributers
f
$5.00
hats
because their
ubjective
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 11/64
712
QUARTERLY JOURNAL
OF ECONOMICS
ratiosofexchangedid not render hemwilling o pay
$5.00
for
a hat. And with
a
$6.00
hat
they
draw
from the distributers
f
$5.00
hats a
part
of
those
consumers
whose
subjective
valuation
upon
a hat
rendered hem
willing
o
pay
more
than
$5.00
for the
commodity.
The
activity
of
the more
advanced
distributers
n
differentiatingommodities as tended to breakdown
the orthodox
methods and
policies
of
distribution,
and this
necessitates
n
analysis
of
the
possible price
policies
of the
present
day merchant-producer.
PRICE POLICIES
OF
THE
DISTRIBUTER
The
producer
who
today
enters he market o manu-
facture nd sell a commodityn competition ithother
producers
f
substantially
dentical
products
has
open
to
him
three
general price
policies.
He
may
adopt
one
of these
to the
exclusion
f
the
others,
r
may
use
them
n combination.
These three
policies
may
be
termed, 1)
Selling
at
the market
minus,
(2)
Selling
at the
market,
and
(3) Selling t the marketplus.
(1) Selling
at
themarket
minus
s that
policy
which
aims
to increase
ales
by
reducing
rice.
The
distribu-
ter
who
markets
his
product
at a
price range
below
that
established
for the identical
commodity
s
sold
by
other
producers
not
only
attracts consumers
rom
other
distributers,
ut also
brings
nto the
market as
consumers
ertain
of
those whose demand
was
before
unexpressed
ecause
the
price
evel establishedfor
the
commodity
was
above
that
warranted
by
their
sub-
jective
valuation
on
the
commodity.
This
policy
does
not
ordinarily
nvolve a
differentia-
tion
of the
product
from
the
stock
product
of
like.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 12/64
SOME PROBLEMS
IN
MARKET
DISTRIBUTION
713
nature,nor the use of trademarks,brands,or trade
names.
The
producer
ependsupon
increased
ales
to
give
a
reduced
proportion
f overhead
expense
and
reduced
costs
of
arge
scale
production,
hus
ncreasing
his
area
of
profit.
The
producer
ppeals
to
the
con-
sumer
mainly
through
the
difference
n
price
level.
Hence,
the successful
ursuit
of this
policy
n
a com-
petitivemarket vera longperiod nvolves continuing
ability
to sell
the
commodity
or ess than
the
price
at which
other
producers
of
substantially
dentical
products
re
willing
r
able
to
market hem.
This
policy
finds
llustration
n the
selling
policy
of
most
department
tores.
It
is
the basis
of
bargain
counter
selling.
In
one
class
of
department
tore
it
becomes
the
dominant
policy.
Some
such
stores
base their business almost entirelyon sellingunder
the
market,
advertising
the
purchase
of
bankrupt
stocks
and mill clearances
as
making possible
such
price
utting.
And in
nearly
all
department
tores the
manager
will
at
times
reduce
the
priceupon
a
staple
commodity
below
that at which
his
competitors
re
willing
o sell.
His increasedsales, arisingfromcustom drawnfrom
his
competitors
nd
from
new
consumers
brought
into
the
market,
decrease the
proportion
f overhead
expense
nd enable
him
to
purchase
n
arger
uantities.
His
larger
purchases
put
him
in
a
position
to force
the
producer
o
share
with
him
the economies
f
arge
scale
production.
Often, ndeed,
he is able
to take
over
the entire
utput
of
certain
actories.
In the
department
store,
moreover,
the further
element enters
that customers
ttracted
to
purchase
a
staple
commodity
t less
than the
prevailing
price
will also
purchase
other commodities
ielding
wider
margin
f
profit.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 13/64
714 QUARTERLY JOURNAL OF ECONOMICS
The working f thispolicy,especially s to bringing
new consumers nto the
market,
s
shown
graphically
in
Chart
I.
CHART
x
\L
Selling
tthe
Market
Minvs
0
c
C'
This
chart
attempts
o show
graphically
he
operation
on the
demand
side of
the
marketof
the
price
policy
termed
Selling
at
the
market
minus
"
On the
ordinate
ox
is
laid off
scale
of
prices
for he
commodity
On
the abscissa
oy
are laid off
he
number f
purchasers.
The
arc
LM showsthe number f
purchasers
t a
given price,
growing
ewer s the
price
ncreases nd
greater
s the
price
decreases
Now
if
oa
represents
he
prevailing
market
price
for
the
commodity,
nd
oo
the
number fpurchasers t thatprice, t is apparent hat f theprice s reducedfrom a
to
oat,
the new consumers
ill be
brought
nto
the
market nd
the
number
f
purchasers
at
the
price
oat will be
oc/,
number
reater
han
oc
It is
somewhat n
this
fashion hat the
policy
of
selling
t the
market
minus
perates
but the
chartdoes not ndicate the
mportant
lement hat
other
producers
re
selling
at a
higher
evel,
and hence
customers re attracted
from
hem,
as
well as
new
cus-
tomers
rought
nto
the market.
(2)
Selling
t
themarket as
been
the
policy
perhaps
most characteristic
of our
scheme
of
distribution
during
he
period
when
the
stress
was on
production.
It is still a commonpolicy n themarketing f staple
goods.
This
policy
consists
briefly
n the
acceptance
of
the
market
price existing
for the
commodity
s a fixed
condition. The
producer
does not seek
to attract
purchasers by maintaining price
level somewhat
lower than
that
at which other
producers
f
the
same
commodityre willing o sell,nor does he attemptto
establish
his
commodity pon
a
new
and
higherprice
level as
a
distinct
commodity.
He
recognizes
the
market
price
for
such
a
commodity
as
something
objective,
and sells his
commodity
t the established
level.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 14/64
SOME
PROBLEMS IN MARKET
DISTRIBUTION
715
The acceptance of this pricepolicy leaves open to
the
merchant-producer
wo
general
methods
f
ncreas-
ing
his area
of
profit.
He
may
devote
himself
o
a
reduction
n
his cost
of
production
y
a
better
rganiza-
tion
of
his
plant,
or he
may
seek to
increasehis
sales,
thus
giving
economies
of
large
scale
production
nd a
reduced
proportion
f overhead
xpenses.
Examples of the adoptionofthispolicyand the use
of
the
first
method
of
increasing
rofits
re
found n
the steel
industry.
The
small
independent
manu-
facturer
ften
ccepts
the market
price
of
a
given
steel
product
as a fixed
condition,
ells his
"share"
of
the
market,
nd
dependsupon
reducing
is
plant
costs
to
increase
his
profits.
If
the
merchant-producer
dopts
this
econd
method,
hemust, ngeneral, ifferentiateisproductfrom hat
of his
competitors
nd build
up
a demand
for his
particularproduct.
To do this he
must
depend
upon
the same means
that
would be
used
to
establish his
product
as
a
distinct
ommodity pon
a
higher
price
level.
Trade
marks,brands,
nd
trade
names,
coupled
with
niceties
of
finish,
venness
in
quality,
or
more
convenient ackages,serve s the basis for n increased
demand for
the
commodity
pon
the same
price
evel
as
substantially
identical
products.
When
selling
at the
market,
uperior romptness
n
delivery
may
be-
come a
factor
f
great mportance
n
increasing
ales.
A
recent
development
n
the textile
ndustry
llus-
trates he
adoption
f
the
policy
of
elling
t
the
market,
combined with an
attempt
to
increase sales
at the
market
price
by
a differentiationf the
product.
Apparently
he textile
manufacturers ho are
beginning
to brand
their
goods
do not
seek to
establish
a
new
price
level for their
product
as
a distinct
ommodity,
but rather to
increase their
sales
by
building up
a
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 15/64
716 QUARTERLY
JOURNAL
OF
ECONOMICS
demand fortheircommodity s against the product
of other
manufacturerst
the
prevailing
rice
evel.
Chart
II
illustratesone
phase
of
this
policy.
It
is
intended o
bring
out
the
idea
that
new
consumers
may
be drawn
into
the market
at
an
existingprice
level
by
giving
to
the
differentiated
ommodity
a
subjective
valuation on
the
part
of
the
consumer
CHART II
UI ~
Selling
atthe
Market.
a
%
\X~~~I
I
l, l
o
c'
y
This
s
an
attempt
o show
graphically
he
effect
f
stimulation f ncreased
emand
for
commodity
ithout
ny
ncrease
n
the
price
at which
t
is marketed.
The
ordinate,
X,
is
a
scale
of
ncreasing
rice
The
abscissa,OY,
shows
he number
of
purchasers
The
arc LM
indicates the
number
f
purchasers
t
any given
price,
growing
ess
as the
price
s increased
nd
greater
s
the
price
decreased
If the
establishedmarket
price
s
represented y OA,
the
number
of
purchasers
t
that
price
will
be
represented
y
OC If then
by stimulating
n
increaseddemand
for
his
product,
he
merchant-producer
s
able
to
increase
proportionally
he number
of purchasers t each price evel,the demand curveLM will be replaced by
L/M/,
and
at the
price,
OA,
a
greater
umber
f
purchasers,
C/,
will
purchase
This
chart
does
not,
of
course,
how
how customers
lready
n themarket
re drawn
from
ther
merchant-producers
o
the
purchase
of
a differentiated
roduct
for
which
a demand s
stimulated
t the same
price
evel as
the
products
f the other
merchant-
producers
greater
han
that which
he
experienced
or
the stock
commodity
f
like
nature.
Hence,
while the
individ-
ual's
subjective
ratio of
exchange
was
too low
to
lead
him to
purchase
he
stock
commodity
t
the
prevailing
price,
he
may purchase
the differentiated
ommodity
at
that
price
because
of
his
greater ubjective
valuation
upon
the
atter.
(3)
Selling
at
the
market
lus
is
perhaps
the
most
characteristic
price
policy
of
modern
distribution.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 16/64
SOME PROBLEMS
IN
MARKET
DISTRIBUTION
717
The
exceptionally
able distributers
have in recent
years
turned more
and more to this
policy.
They
refuse
o
accept
as
a
fixed
ondition
he market
price
for the commodities
imilarto those
which
they
pro-
duce.
They
isolate their
product,
and
establish
it,
practically
s a
new
commodity,
n a
different
rice
level.
The whole basis of the policyis the differentiation
of a
product
from
other
goods
of
substantially
ike
nature
by
improvements,
inor r
substantial,
nd
the
identification
f the
product
by
trade
marks,
brands,
and
trade names.
This
done,
the
producer
timulates
a demand
for
his
product by
calling
attention
to
stability
of
quality,
niceties
of
finish,
mprovements
in package,or like modifications. He appeals to that
portion
of
the
consuming
public
whose
subjective
valuation
upon
the
stock
commodity
has left them
a
so-called
"
consumer's
urplus
over the market
rice.
The
differentiated
ommodity
s established
on
a new
and
higher
price
level,
and
is,
to
all intents nd
pur-
poses,
a new
commodity.
It
is this
policy
that
forms he most severe test
of
the
ability
of the distributer. To succeed he must
have an unusual
equipment, including knowledge
of
human
nature,
of
the
psychologicalorganization
of
the
individual
consumer,
nd must be
able
to
give
proper
weight
o such
motives
s social
emulation
nd
all
the varied factors
that
enter
nto
the
subjective
ratio
of
exchange
f the
consumer.
This policyhas alreadybeen illustrated y examples
from
he
hat
trade.
Examples
are
all about
us
today
and
further
llustrations
here
unnecessary.
Chart III shows
graphically
he
operation
of the
price policy
termed
selling
t the market
plus."
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 17/64
718
QUARTERLY
JOURNAL
OF ECONOMICS
CHART
II
X
\C:
t.Selling
at
the
Market Plus.
a
a' -
\
,,
Mi
0
-
c
-y
This
chart
llustrates he effect
f
the
price
policy
termed
selling
at
the market
plus
"
On the ordinate
s
laid off
scale of
prices
for a
staple
commodity.
The
abscissa shows
the number
f
purchasers.
The
demand
curve
LM
indicates the
number f
purchasers
t
a
givenprice,
growing
less
as
the
price
ncreases
nd
greater
s the
price
decreases Then
if
OA
represents
the
market
rice
ofthe
staple commodity,
C will
represent
he
number
f
purchasers.
Now
if
the
merchant-producer
ifferentiatesis
product
from he
staple
commodity
and stimulates
demand
for
t,
the effects to ncrease he
number
f
possible
purchasers
at
each
price
evel.
Thus the demand curve
LM
is
replaced by
the
demand
curve
LtM/.
Obviously
the
merchant-producer ay dispose
of the differentiated
roduct
at
a
price
OA/,
higher
han the
price
OA,
without
educing
he
numberof
purchasers,
C.
In
other
words,
he can
profit
y
the
ncreased
demand
through
aising
his
price
rather
than
by
increasing
his
sales.
SOCIAL JUSTIFICATION
OF THE DIFFERENTIATION
OF
COMMODITIES
It is
apparent
that the
process
we
see
going
on
as
a result of the increasing doption of the policy of
selling
at the market
plus,
involving
an
increasing
differentiationf commodities
t
various
price
ranges,
is
closely nalogous
to
the creation f new
commodities.
When
the
hat
trade
splitsup
into
a
number
f
solated
brands,
practically
distinct commodities
t different
price
evels,
the situation
s from social
point
of
view
littledifferent
rom
hat arising
fromthe creation
of
new
commoditieswhich
are
not
merely
modifications
of
pre-existing
ommodities.
If
the
safety
razor
be
regarded,
s
it
properly
may,
as
a new
commodity
ather
han
as a
modification
f
the old
stylerazor,
t
provides
us with
an
opportunity
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 18/64
SOME
PROBLEMS IN MARKET DISTRIBUTION
719
to examine the social justification orthe creationof
a
new
commodity.
When
the
first
widely
advertised
safety
razor
was
put upon
the market at
$5.00
a
considerable
margin
of
profit
was
left
the
producer.
It
was often
aid at
the time
that the actual cost of
manufacture
f that
razor
was
less than
$1.00.
Now this
wide
margin
made possible an extensive advertising campaign.
The
new device
was
brought
o
the attention
of
the
entire
consuming
public. Everyone,
whether
n the
large
centers
r
remote
districts,
earned of the
safety
razor and
its
uses. Great numbers
purchased
the
razor because the
subjective
valuation which
they
placed
on
the
commodity,
hen
t
was
brought
o
their
attention,
xceeded
the
price
asked.
The
large
reward
receivedby the distributermay perhaps properlybe
regarded
as
compensation
or
bringing
bout
a
better
adjustment
o
meet humanneeds.
Today
the
safety
razor demand
is
well established
and
those onsumers hose
ndividual
atios f
xchange
do not renderthem
willing
to
pay
$5.00
for a
safety
razor are able to
gratify
heirconscious
need at
prices
ranging s low as $1.00 owingto numerous roducers
entering
the
market
with
safety
razors at
varying
price
evels.
Now when the
producer
of a
commodity
lready
marketed
by
other
producers
ets off
his
commodity
from thers
f ike
kind,
nd
by
sometimes ven
minor
modifications
nd
improvements
s
enabled
to build
up
a
demand
for
t
on a
higherprice
level
than
that
existing
orthe stock
commodity
f like
kind, he,
too,
has made
possible
a more accurate
adjustment
in
supplying
uman
wants,
nd
has
brought
he
possibility
of this
more
accurate
adjustment
to
the attention
f
consumers.
The
purchaser
of
a trade-marked
at at
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 19/64
720
QUARTERLY
JOURNAL OF
ECONOMICS
$5.00wouldbuya staplehat for$3.00, fthe$5.00hat
did
not
give
him
equal
or
greater
proportional ratifi-
cation,
taking
into account the
differing
bjective
ratio
of
exchange.
Obviously,
the
consumer who
buys
a
trade-marked
at
does
so
because he
prefers
to
pay
$5.00
for
such
a
hat
ratherthan
$3.00
for an
unbranded
tock
hat.
To
say
that he
ought
not to
be
willing opay theadditional 2.00for he differentiated
product
because
the modificationsre not substantial
is
to
attempt
o substitute
or
he
subjective
valuation
of
the
consumer
as a basis of
exchange
an
external
social
standard.
The more
highly
differentiatedhe
scale
of commodities
s,
the more
accurately
will
it
be
possible
for
the
individual consumer to
satisfy
his
varied material
wants.
The distributerwho is successful n establishing
differentiated
roduct
as a distinct
commodity
n
a
new
price
evel
is,
for
time,
n
the
position
of
having
a
monopoly
s to the differentiated
ommodity.
Such
competition
s
he
has is the indirect
competition
f
the
staple
commodity
f
ike nature. His
monopolistic
position
often
enables
him to
obtain
temporarily
margin fprofit isproportionateo the actualimprove-
ments
n the differentiated
roduct
as
compared
with
the
staple
commodity
f
similar
nature.
This, again,
may
be
justified
s a rewardfor
enterprise
n
making
possible
more
xact
adjustment
f
goods
to the wants
of the
consumer.
And
in
the
long
run,
the
large
percentage
of
profit
will decrease as other
producers
follow his
example
and
differentiateheir
products
from
he
staple.
The
rise of
competition
t
the
new
price
level will
ultimately
force
in
the
competing
differentiated
ommodities he
substantial
improve-
ments
warranted
y
the
higher
rice.
Where he differentiation
f
a
product
rom
he
staple
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 20/64
SOME PROBLEMS
IN
MARKET
DISTRIBUTION 721
goods of like nature is not aimed at establishing
higher rice
evel,
but
rather
t an
increaseof
sales
at
the
prevailing
price
level,
an
indisputable
ocial
gain
appears.
Manufacturers dmit that
when
they
sell
trade-marked
goods they
find
themselves almost
unconsciously
putting
a stress
upon
quality.
The
manufacturer
f unbranded
goods
is in
some
respects
like the writerof an anonymous etter; he does not
have
the sense
of
responsibility
or
satisfaction o
the
consumer
hat exists
when
the
goods
reach
the con-
sumers
under
his name. The
manufacturer f un-
branded
goods
makes
his
goods
n
general
o
sell
to the
middleman;
not
primarily
o
satisfy
he
consumer. It
is the realization
f this
consequence
f
trade-marking
that
prompts
roposed egislation
uch as
the
Campbell
Bill, now beforeCongress,requiring verymanufac-
turer
o
distinguish
is
goods by
trade mark.
METHODSOF
SALE
The
general
market
problem
which
confronts
he
business
man
has
been
roughly
nalyzed.
The
differ-
ingmodernpricepolicieshave been outlined. Some-
thing
has
been
said
as to
the social
justification
f
the
increasing
ifferentiation
f
goods
involved
n
certain
price
policies.
We
now
may
examine
the
methods
employed
n
selling.
In
the
early
stages
of
our
industrial
history,
ales
were
made
in
bulk.
At all
stages
in
distribution,
the
purchaser
saw the
actual
goods
before
the
sale
was made.
Later,
sale
by
sample appeared.
The
purchaser
bought
goods
represented
o
be
identical
with
the
sample
he
was
shown. The
introductionf
this
method
of sale was
necessitated
y
the
widening
f
the
market
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 21/64
722
QUARTERLY
JOURNAL OF
ECONOMICS
and was made possibleby improvementn commercial
ethics and
by
increasing
tandardization f
the
prod-
uct. The
purchaser
must have
confidence
not
only
in the honest intention of
the
producer
to
furnish
goods
denticalwith the
sample,
but
also
in
his
ability
to
produce
identical
goods.
Hence,
increasing
uni-
formity
n
product through
machine
methods
of
manufacture
was a factor
n
the increase of
sale
by
sample.
Sale
by
description
s
the
most
modern
evelopment
in distribution.
An
even
higher
ethical
standard is
required
than
for
sale
by sample. Moreover,
sale
by description
equires
higher
evel of
general
ntelli-
gence
than sale
in
bulk or
sale
by sample.
Sale
by
description
n
its
modern
development s,
in
a
sense,
a by-productf theprinting ress.
All
three
methods f
sale are
in
use
in
modern
om-
mercial
life. The
consumer still
purchases
a
large
part
of the commodities hich
he uses
under a
system
of
sale
in
bulk.
He
sees the
goods
before he
buys
them. The
middleman,buying
in
larger
quantities,
generally urchases
rom
ample.
But
sale
by
descrip-
tion
becomes each
year
of
increasing mportance
t
every stage
in the
system
of distribution.Even
where
the
purchaser
actually
sees
a
sample
or the
goods
themselves
before
the sale is
concluded,
the
method
of
sale
by description
as in
many
cases
pre-
viously
been used
to
create
n
him
a
demand for the
commodity.
Sale
by
description
s
found not
only
in
goods
for
onsumption,
ut
also
in
the sale of
machin-
eryand like commodities. So rapidhas beenthe devel-
opment
that
Mr.
Edison,
the
inventor,
as said that
he
expects
the
store
of
the
future o
be
upon
the
slot
machine
plan,
all
the
goods
being
sold
by
description.
That even
the
conception
of
such
an
arrangement
can arise
s
significant.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 22/64
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 23/64
724
QUARTERLY JOURNAL
OF
ECONOMICS
(2) the producer's wn salesman,and (3) advertising,
direct
and
general.
The business man
faces
the
problem
of what
agency
or
what
combination
of
agencies
is the most efficient
machinery
or
the
dis-
tribution
f his
particular ommodity.
The
methodof sale
adopted
will
largely
govern
the
choice
of
agency
to be
employed.
If
the
sale is to
be
in
bulk,
the
purchaser eeing
the
actual
goods
before
the purchase is made, distribution hrougha series
of
middlemen s
generally
most feasible.
However,
such sale
in
bulk
through
he
producer's
own
sales-
men
is
possible
in
some cases.
Small
household
appliances
are
often
sold in
this
manner
by
door-to-
door salesmen.
If
sale
by sample
is
the
general
method
adapted
to
the commodityn question,middlemenor salesmen
will often
be the more
desirable
agencies.
Many
commodities re
distributed
hrough
middlemen,
he
sale
at each
stage
in the
process
being by
sample
save
forthe
final
tage
from etailer
o
consumer,
herethe
sale
is in
bulk.
Direct
salesmen,
perhaps
in the
ma-
jority
of
cases,
sell
from
sample.
And
even
selling
by
direct
advertising
lone
is in
some cases
adaptedto a methodofsale
by
sample.
Thus the distributer
by
mail of a
commodity
hich
s
not
bulkymay
enclose
in his
direct
advertising
material a
sample
of
the
commodity.
Where
sale
by description
s used
exclusively,
dver-
tising,
irect
r
general,
s
likely
o be
the
most
efficient
agency.
Yet here
again
it is
possible,
tho
generally
not economical, o distribute commodity hrough
series of
middlemen
nd
yet
the
sale at
each
stage
be
accomplished
by description.
And the
use of sales-
men
in
selling by
description
s
common,
as
where
heavy
machinery
s sold
by
the use of
photographs,
or
hardware
nd
like
commodities
rom
atalogs.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 24/64
SOME
PROBLEMS
IN MARKET
DISTRIBUTION
725
The numberof possible combinations f methods
and
agencies
renders
the
problem
of
the
producer-
merchant
n
intricateone.
It will
be seen
that
he
has
a
difficult
ask
in
analyzing
he
market
with
refer-
ence
to
his
goods,
and
in
working
ut that
combination
of methods
nd
agencies
which
will
give
him
the
most
efficient
ystem
f
distribution.
It is necessary, owever, o turn o a brief onsidera-
tion
of
the
position
of
the middleman
s
a
part
of
the
evolution
of
organized
distribution.
The
history
of
the middleman's
unctions
as
not
yet
been
adequately
studied,
but
a
tentative
suggestion
may
be
made
in
default
of the fuller
tudy
whichthe
subject
deserves.
THE MIDDLEMAN IN DISTRIBUTION
The
middleman
s a
by-product
f a
complex
ndus-
trial
organization.
Chart
IV shows
in
rough
outline
the
evolution
of the
middleman
rom
he
early
period
when
producer
dealt
directly
with
consumerto
the
appearance
of the
orthodox
ype
of
distribution
late
in the
eighteenth
entury
nd in
the first
uarter
f
the
nineteenthcentury) when a complicated series of
middlemen
existed.
It should
be
noted
that
this
chart
represents
the
typical
case of
the
domestic
product
rather
han
that of
mported
ommodities.
In
the
more
primitive
arter
conomy,
he
producer
deals
directly
with the
consumer,
and
middlemen
take
no
part
in
the transaction.
In
the
mediaeval
period,
as
the
handicrafts
ecome
specializedoccupa-
tions
under
a townmarket
regime,
he
producer
s a
retailer
and
sells
directly
to
the
consumers.
Then
as
the
market
widens,
divisionof
labor is
necessary
and
the
merchant
appears
as
an
organizer
of
the
market.
The handicraftsmanecomes
steady
worker,
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 25/64
CHART
IV
EVOLUTION OF THE
MIDDLEMAN
REMOTE
AGES
AND
UNCIVILIZED
REGIONS
BARTER
w1
MEDIEVAL PERIOD
HANDICRAFTS
/ %A
LPRODUCER
1
RETAILER
I
I
PRODUCER
MERCHANT
RETAILER I
BW
I
PROI
I
MER
f
ET
[CHNIS
I'HiNJUM-I.IRF
MODE
lbOME,ST
MERCHA
DUCER
I|
LPRODUC
CHANT
I
WHOLES
AILER
jI
RETAI
UIM+IE
\I
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 26/64
SOME
PROBLEMS
IN
MARKET
DISTRIBUTION
727
no longer oncerningimselfwith elling. He becomes
in
many
cases
practically
n
employee
f the
merchant-
retailer,
who
provides
the stock
and
bears
the
risk.
The merchant akes
the
finished
oods
from
he
pro-
ducer
and sells
themto the consumer.
Steadily
the marketwidens
until
we
find
national
market. The
merchant
s no
longer
a
single
inter-
mediary
between
the
producer
and
the consumer.
The merchantwho takes the goodsfrom heproducer
disposes
of them
to retail merchantswho in
turn
distribute hem
to the
consumer. After
long period,
we
find the
producers gradually
strengthening
heir
financial
position,
and
freeing
themselves from
the
control f
a
single
merchant.
They
become
merchant-
producers.
They
assume
the burden of
production,
and disposeof theproductto variouswholesalerswho
in turn sell
to
retailers,
nd
they
to the
consumers.
As
a world
market
appears,
the
producer
disposes
of
a
part
of his
product
o the
export
merchant.
In
the
early
days
of the
factory
ystem,
hown
n
Chart
V,
we
find that the
producers
have
lost
their
character
as
merchants
nd
are
devoting
themselves
to the
problems
of
production.
The
pressure
on
production
has continued,and with the
increasing
intricacy
f
ndustry
roducers
ave found t
necessary
to
concentrate
their
attention
on
production.
The
selling gent
appears
as a
link n the chain
of
distribu-
tion to relieve
the
producer
of
the task of
selling
his
product.
The
selling agent
undertakes
to sell
the
entire
output
of the
producer,
distributes t
among
wholesalers,who in turn distributet to retailers, nd
the retailers
o
the
consuming
ublic.
This
may
be termed
he orthodox
ype
in
distribu-
tion,
a
type
almost
universal
n
the
early
decades
of
the nineteenth
entury,
nd
still
common,
s
in
the
textile
ndustry
n
New
England.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 27/64
728
QUARTERLY
JOURNAL
OF
ECONOMICS
Just s the ongperiodofdevelopment rom system
of
barter
economy
o
the
early
decades
of
the
factory
system
howed a continuous
endency
for
ncrease
n
the number
of middlemen
ntervening
etween
the
producer
nd
the
consumer,
o
recent
years
have shown
a
growing
endency
o decreasethe number
of
succes-
sive
steps
in distribution. The
tendency
s
apparent
in nearlyevery ndustry nd has been clearlymarked
in
recent
years.
Under
the orthodox
ype
of
distribution,
ith
numer-
ous
middlemen
intervening
between the
producer
and
the
consumer,
he
producer
s
in
a
position
of
disadvantage.
The fixed
charges
under
which
he
operates
render t
necessary
hat he
operate
continu-
ously.
The
outlet
for
his
goods,
however,
s
controlled
by middlemen. Hence the middlemanis able to
exert
pressure pon
the
producer
nd force
narrowing
of
his
margin
of
profit.
To
free
themselves rom
his
pressure,
the
stronger merchant-producers
eek
to
go
around
the immediate
middlemen,
hus
decreasing
the
number
f
steps
n
the
system
f
distribution.
Chart V
is an
attempt
to
show
diagrammatically
the developmentof this tendencyto decrease the
number
of
successive
middlemen.
By
the use
of
salesmen
going
directly
to
the
wholesaler and
by
advertising
irectedto the
retailer
the
producer
has
displaced
the
selling gent
n
many
cases.
Sometimes
the
advertising
s
directed
not
only
to
the
retailers
but
also
to the wholesalers. To
strengthen
till
farther
his
position
the
producer
will often
use
advertisingdirectedto the consumer o build
up
a demand
for
his
product.
This
involves he
necessity
or
product
differentiated
y
trade
mark,
brand,
or
trade name.
When the
producer
hus
directly
uilds
up
a
demand
among consumers,
e often
akes
the further
tep
of
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 28/64
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 29/64
730
QUARTERLY JOURNAL
OF
ECONOMICS
sendinghis salesmento theretailer, husomitting he
wholesaler
ntirely
rom is
system
f
distribution.
The
most
extreme
tep
n the
process
s
the
complete
elimination
f
middlemen,
nd the sale
direct
from
he
merchant-producer
o
the
consumer,
ither
y
advertis-
ing
alone or
by
salesmen
upplemented
y advertising.
Manufacturers
f
specialties
have
largely dopted
this
schemeof distributionnd the enormousgrowthof
the mail order
business
n
recent
years
gives
evidence
that
in
some lines
of distribution
here
are
economies
in
this
system.
The
tendency
o decrease
the
number
f
middlemen
is one
of
the
most characteristic eatures
of
modern
distribution.
It
promises
to
show much
greater
development
n
the future
f
present
economiccondi-
tions
substantially
ontinue. The
attempts
of asso-
ciations of retailers
to check the
growth
of
direct
selling
have thus
far not been
successful.
In
their
desire
to
force the manufacturer
o
dispose
of his
product
throughregular
trade
channels
they
some-
times
invoke
the
boycott.
But our common
state
statutes,
prohibiting
combinations in
restraint
of
trade, preventeffective greements o boycott pro-
ducers who
sell direct.
And
the
advantages
of
direct
selling
in
some
lines render the
producer willing
to
incur
the
disfavor
f
the trade.
It shouldbe
noted,
however,
hat
changed
onditions
might
give
the
middleman increased
importance.
Suppose,
for
nstance,
hat
the
protective
ariff
ystem
of the United
States
were
to be
sweptaway
and free
trade
instituted.
The
middlemancould then draw
upon
the
foreign
roducer
for
supplies
of unbranded
staple
goods,
which
might
erve to
increase
his
impor-
tance
as
a link
in our
system
f
distribution. While
this would
perhaps
tend
to
increase the number of
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 30/64
SOME PROBLEMS
IN MARKET
DISTRIBUTION
731
successive middlemen n some lines, it is probable
that when the
foreign roducer
n
turn
was
subjected
to
pressure
by
the
middleman,
e,
too,
would
tend
to
go
around
him
and
deal
directly
with
the
consumer.
ANALYSIS OF
THE
FUNCTIONS OF
THE
MIDDLEMAN
To understandwhatseemsto be a presenttendency
to
go
around
the middleman as
well as to
consider
the
problem
of the
merchant-producer
ith
reference
to
the use
of
middlemen
n
distribution,
t
is
necessary
to
analyze
the functions
erformed
y
the middleman.
Roughly
he
general
unctions
may
be
listed
s
follows:
1.
Sharing
he
risk.
2.
Transporting
he
goods.
3.
Financing
he
operations.
4.
Selling
(communication
of
ideas about
the
goods).
5.
Assembling, ssorting,
nd
re-shipping.
These functions
were at first aken
over
by
areas;
that
is,
each
successivemiddleman
n
the series took
over a part of each function. Each took the risk of
destruction f
the
goods
while
he
held title.
Each
took
the risk
of
credit osses.
Each
took
a
share
n
the
transportation
f
the
goods
along
the
route
from
the
producer's
tock room
to
the
hands
of
the
consumers.
Each
took
a
part
in
financing
he
entire
operation.
Each
had a
part
in
the
selling,disposing
f
the
goods
he
purchased
to
succeeding
middlemen
nd
finally
o
the consumer. And each
finally
took a
part
in as-
sembling,
ssorting,
nd
re-shipping
he
goods
to make
them
physically
vailable
to
the consumer.
But
at a
relatively arly
date a
taking
over
of these
functions
y
kind nsteadof
by
area
appeared. Today
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 31/64
732
QUARTERLY JOURNAL
OF ECONOMICS
we have what may be termed functionalmiddlemen
in
the
insurance
companies,
direct
transportation
companies,
nd
banks.
The
insurance
ompany
s in a
real sense
a middle-
man
in distribution.
When
it
insures the
producer
against
oss of
goods
by fire, gainst
credit
osses,
and
the
like,
t is
taking
over the function f risk
formerly
sharedbysuccessivemiddlemen. Today the nsurance
company
will
assume
practically
he entire
lementof
risk.
It
is
possible,
or
nstance,
or
large
department
store
to
insure
against
unseasonable
holiday
weather.
The
insurance
company
differs
from
the
ordinary
middleman
n that it takes over
one function s such
rather
han
portions
f
a number
f functions.
So
improvements
n direct
transportation
have
enabled the
producer
o turn to a functionalmiddle-
man
to
convey
the
goods
to the
consumer. The
transportation
ompanies
and
the
express companies
are
in
a true sense
middlemen
n
distribution,
ho
they
perform
ut one
of the functions
ormerly
hared
by
the successive
middlemenwho took over
functions
y
area.
The
physical conveyance
of
the
goods
to the
consumerwas formerly ne of the most important
functions
erformed y
a
series of middlemen.
Hence
every
mprovement
n
the
agencies
of
direct
ransporta-
tion
has tended
to
modify xisting ystems
f distribu-
tion.
It
is
this fact that
gives
enormous
mportance
to
the
projected
establishment f a
parcels post.
The
innovation
will,
of
necessity, arry
with it
radical re-
adjustmentsn ourpresent ystem fdistribution.
So
the
function of
financing
he
operations
has
largely
been
taken
from
the
regular
middleman. In
former
imes he
middleman ook
his
part
n the burden
of
finance
n
addition o his
other
functions. It is true
today
in
the
textile
ndustry
n
New
England
that the
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 32/64
SOME PROBLEMS IN MARKET DISTRIBUTION 733
selling gent is as much a bankeras a mereagencyfor
the
sale of the
goods.
This is
accomplished,
owever,
by
the
selling gent endorsing
he
commercial
aper
of
the
producer,
giving
two name
paper
acceptable by
savings
banks
in that
region,
nd hence
making pos-
sible
a
lower
rate of
nterest.
In most
industries
oday
the
bank,
as a functional
middleman,cares for the elementof finance n the
operations
of distribution.
By advancing
on
goods
and on commercial
aper,
it
largely
bsorbs the
func-
tion
of finance
n
distribution.
Legislationproviding
for an asset
currency
based
on
commercial
paper
might considerably
widen the
range
of the banks'
activity
n
the commercial
ield.
Another
development
has lessened the
dependence
of the producer upon the middleman for financial
assistance.
The
application
of the
corporate
orm
o
industrial
organization
has made it
possible
to
draw
together arger
bodies
of
operating
apital
and
hence
to
place
the
producer
n a
stronger
inancial
osition.
As a
result
of the
development
f functionalmiddle-
men, ready
to take over
the functions f
sharing
he
risk,transportinghe goods,and financinghe opera-
tions,
the
importance
of
the
middleman for these
functions as diminished. There
remain
the
function
of
selling (the
communication
of ideas
about the
goods)
and the function f
assembling, ssorting,
nd
re-shipping.
It is
as to these
functions
that the
middleman
s of
most
mportance oday.
Under the orthodox
ype
of distributionwhich we
have considered
bove,
the
producer
s not n
any
sense
a merchant. The
selling gent
takes
upon
himself
he
initial distribution f the entire
output.
He sells the
goods
to the wholesaler.
The basis
of
the sale
is that
the wholesaler an
dispose
of the
goods
at a
profit
o
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 33/64
734 QUARTERLY
JOURNAL
OF
ECONOMICS
the retailer. The wholesaler n turnsellsthegoodsto
the
retailer.
Again
the inducement to
purchase
is
not
primarily uality
or service
but
the
opportunity
to resell
at a
profit
o the actual
consumer.
Only
when the retailer
omes to
sell
to the
consumerdoes
stress
fall
upon
quality
and
service,
s
the inducement
to the sale. Hence
the
ideas
to
be
conveyed
to the
prospective urchaser
o
create
in
him
a demand
for
the
goods vary
at different
teps
in the
complicated
process
of
distribution,
ecause
of
the different
oints
of view of those who
buy
for
re-sale
and
those who
buy
for
consumption.
Price
and
saleability
are
the
all
important
actors o
the
middleman;
quality
and
service re as
important
o
the
consumer s
price.
The
tendency
f
the orthodox
ystem
f
distribution
of unbranded commoditiess to turn the energiesof
the
producer
primarily
oward
lowering
the
cost of
production
nd
hence the
price
which he is
able to
offer
he
middleman. The influence
f
satisfaction r
dissatisfaction n the
part
of the consumer omes to
him
only indirectly hrough
a chain of
middlemen.
Moreover,
where
the
goods
are
undifferentiated
y
trade
mark or trade
name,
their
dentity
s
often om-
pletely
lost in the successive
stages
of distribution.
Even
the
retailer
n
many
cases
concerns imself ather
with
saleability
han
with
ultimate atisfaction
o
the
consumer.
Hence, only
marked defects in
quality
are
likely
to
be
brought
o
the
attentionof the
pro-
ducer.
Thus
the
producer
oses the
touch with the
consumer
which
will
assist
him
to
make
improvements
in qualityand service n his goods. His attention s
not forced
upon
those elements n the commodities
which
he
manufactures. So under
the
orthodox
type
of distribution
f
unbranded commodities
the
standard of
the
producer
ends to
become
saleability
rather han satisfaction
o
the
consumer.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 34/64
SOME
PROBLEMS
IN MARKET
DISTRIBUTION
735
Suppose,however, heproducerdoes give conscious
attention to
elements of
quality
and
service
in his
goods
which
render them more desirable from the
standpoint
f
the ultimateconsumer han other
goods
of
ike
nature. Before he
knowledge
f
these
superior
points
reaches the consumer
t
must
pass through
he
distorting
edium f chainof
middlemen,
ho
are
not,
for the mostpart, primarily nterestedn quality or
service nd no
one
of
whom
ordinarily ives
undivided
attention to the
single commodity.
The
ideas
that
the
retailer must
communicate
o
the
consumer to
create in
him
a
desire
for
the
commodity
re
not the
ideas which
the wholesaler
conveyed
to the retailer
to
induce
him
to
purchase.
Hence a
producer
who has added to his
goods
specialadvantages n qualityorservicefinds t difficult
to
convey
to
the consumer
hrough
chain of middle-
men
the
precise
deas
about those
advantages
that
will
lead
the
consumer
o
demand
his
goods
in
preference
to
those of
another.
These
considerationsrender
the
increasing
com-
munication
f ideas about the
goods
by
the
producer
directlyto the consumeran improvement f great
social
significance
n our scheme
of
distribution. The
producer
s
forced o
study
the consumer'swants
and
to
adjust
his
product
to
them.
He
can
no
longer
devote
his
attention
xclusively
o cost.
He
realizes
that
the
consumer's atisfaction
epends
on the
quality
of
the
goods
and the servicethat
they
render. These
become to
him
considerations
s
important
s that
of
cost.
Moreover,
when he works out in his
product
some
improvement
n
quality
or
service which more
adequately
adapts
the
commodity
o the wants
of
the
consumer,
e is
able
to
convey
to
the consumer
recise
and
accurate
knowledge
f these
mprovements
nd
to
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 35/64
736
QUARTERLY
JOURNAL
OF
ECONOMICS
reap in increaseddemand forhis productthe reward
for
his
efforts.
Direct
selling
means,
of
necessity,
better
adjustment
of
production
o the needs of
the
consumer. Goods
are
being
made to
satisfy
rather
than
to sell.
Obviously
direct
ellingdepends
on a
differentiation
of
commodities.
The
producer
can
effectively
om-
municate deas about his goods directly o the con-
sumer
only
when the consumer
s
able to
identify
he
goods.
Where
the
physical
distribution
s
through
retail
stores,
the
goods
must
be
distinguished
rom
other
goods
of like
nature
by
trade
mark,
brand,
or
trade
name,
or the direct
elling
fforts
f
the
producer
are wasted.
The
advantages
of direct communication f ideas
about the goods by the producer o the consumer s
just
outlined
o6perate
with the
desireof the
producer
to
escape pressure
xerted
by
the middleman. As
a
result we find n
the
past
half
century
nd
especially
in
the
past
decade a
rapid adoption
by producers
of
agencies
for direct
communication
f ideas about the
goods
to the consumer. This means that another
function ormerly ividedamongmiddlemen s being
taken
over as a function. The
newspapers, eriodicals,
and
other
advertising
gencies
may
hence
be
termed
functional
middlemen,
s were the insurance
com-
panies,
the
transportation
ompanies,
nd
the
banks.
And with the rise in
importance
f those
functional
middlemen
he
position
of the
old
type
of
middleman
is
again
weakened.
We
have still to discuss the
function
f
assembling,
assorting,
and
re-shipping.
This function
is
that
which renders
he
goods
physically
vailable
so
that
an arouseddemandcan be
gratified.
Here the middle-
man
retains,
for
the most
part,
his
importance.
To
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 36/64
SOME
PROBLEMS
IN
MARKET DISTRIBUTION
737
be sure we find direct shipmentfromproducerto
consumer
teadily
ncreasing.
This is to be
expected
as a
consequence
of the
direct communicationof
ideas about
the
goods
by
the
producer
o the
consumer.
But
in the
more
important
ines
today
the consumer
still
depends
on
the retail
store
for the
supply
of the
goods
forwhich
demand
has been
stimulated nd
the
retail tore ngeneral urns or tssupplyto the whole-
saler.
The
problem
of
the
distributers two-fold:
(1)
to
arouse
a
maximum
f
demand,
and
(2)
to
supply
that
demand
with a
minimum of
leakage.
The second
phase
of the
problem
nvolves
the elements
of
time,
convenience,
nd
service.
If
the
demand which has
been
aroused
among
consumers
s to be
fully
utilized,
it mustbe made possibleforthemto obtain thegoods
promptly
when
the
demand arises.
It must be con-
venient
for them
to obtain
the
goods.
And in
many
cases,
certain
collateral
services such
as
instruction,
demonstration,
nd
repairs
must be
given.
It is
here
that
the
retailing
middleman still retains
his
impor-
tance in
most ines.
If,
when
a consciousdemand has
been raised for a certainfoodproductby the direct
communication
f
ideas
about the
goods
by
the
pro-
ducer
to the
consumer,
he
latter
s
unable to
find
he
product
at
a convenient
grocery
store,
the aroused
demand
s
likely
o be
ineffective.Hence the
producer
will
often
continueto
distribute
his
product
through
the
regular
rade
channels fter
aking
over the
selling
function
by directly ommunicating
deas about the
goods
to
the consumer. Distribution
by
mail order
and
direct
shipment
y
the
producer
have
thus far
proven
applicable
only
to certaincommodities
nd
in
reaching
ertain ections
nd classes. The
middleman
is a social
necessity.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 37/64
738
QUARTERLY
JOURNAL OF
ECONOMICS
When a producer begins to communicate deas
about
goods
directly
to
the consumer to
arouse
a
demand,
t
is
apparent
hat
the middleman s
perform-
ing
only part
of
the
functions
e
previously erformed.
On strict conomic
grounds
he
margin
f
profit
f
the
middleman should
be
reduced in
proportion
o his
reduced
functions.
As compensation or this reducedmarginof profit
on each
sale,
the middleman obtains a
rapidity
of
turnover
due to the
selling
efforts
f
the
merchant-
producer.
But the middleman s
often low to
see this
compensating
eature. He
usually
resists
ny
attempt
to
reduce
his discounts
ecause
the
producer
as
taken
over
the
selling
function.
If
his
compensation
per
sale
is reducedhe
may
refuse
o
handle the article.
It
is fairto say, however, hatmanyprogressiveetailers
are
appreciating
he
possibilities
f
more
rapid
turn-
over of stock
and are
adjusting
themselvesto
the
changed
onditions.
Now
if
the
producer
akes
over the
selling
function
and does
not reduce the
discounts
llowed
the
middle-
man,
the
middleman s
being
paid
for a
function
he
no longerexercises. And ultimately his must come
out of the
pockets
of
the consumer. He is
compelled
to
pay
twiceover
for
he exercise
f
a
single
function.
The
opposition
f
middlemen o
reduced
compensa-
tion
upon
reduction in their
functions
presents
a
difficult
roblem
o the
producer.
Often he
producer
postpones
aking
over the
function
f
selling
by
direct
communication
f ideas to the
consumerbecause
he
sees
that he
must continueto
allow the
middleman
compensation
orthat function
f
he is
to
continue o
use
the middleman
orthe
physical
distribution
f the
goods.
Sometimes
he
producer
s forced o
establish
branch stores
and
so
eliminate
all middlemen
from
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 38/64
SOME PROBLEMS
IN MARKET
DISTRIBUTION
739
his system fdistribution.This, however,s generally
possible
only
n
large
centers
f
population
and
appli-
cable
only
to
certain classes
of
goods.
The
system
of distribution
hrough
branch
stores s
illustrated
n
its
application
by
certain
large producers
of
trade-
marked hoes.
It
is, however,
easible
n
many
ines
of
trade-marked
goods to take over the assorting,assembling,and
re-shipping
unction f the wholesaler
atherthan to
continue
to
compensate
him
for
the
selling
function
no
longer performed.
For
example,
one
large paint
manufacturer,
ho stimulates
demand
for
his
branded
paints
and varnishes
argely
by
direct
communication
of
ideas
about the
goods
to the consumer
nd to
the
retail
paint
dealer,
found t desirableto
drop
out
the
wholesaler romhis schemeof distribution.He finds
in branch
houses
certain
marked
advantages.
(1)
He
is able
to
obtainthe entire ime
of
trained
men,
devoted
solely
to
the
handling
f his
products.
(2)
He obtains
a direct
contact
with
the retail
dealer,
who,
he
finds,
prefers
n
the whole
to
buy
directly
rom
he manu-
facturer.
(3)
He
is enabled
to
carry
arger
nd
better
assorted tocksthan the wholesalerwouldbewilling o
carry.
(4)
In his
experience
he
credit
osses
are less
when
the wholesaler
s
eliminated.
(5)
He
obtains
better
control
of
general policy
and
prices.
The
larger
capital
required
for a
system
of
branch
houses
is an
objection
of
decreasing mportance
wing
to
the
rapid
increase
in
the
available
capital
fund
and
its
greaterfluidity.
And
the increased
need
of
mana-
gerial
ability
is
being
met
by improved
systems
of
training
men for
managerial esponsibilities.
This rather
lengthly nalysis
of
the
position
and
functions
f themiddleman
n
distribution
s still
ncom-
plete.
Factors
not of an economic
haracter
nter.
The
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 39/64
740
QUA
RTERLY JOURNAL
OF
ECONOMICS
businessman seldomfaces a problemon purelyeco-
nomic
grounds.
There
s
always
a
human
element
o
be
considered,
rising
rom he
character
ftransactions
s
they
exist
n actual commercialife.
One does
not
buy
of a dealer
solely upon
narrow
economic
grounds.
Social
and
personal
considerations
play
their
part.
Hence,
when
the business
man considers he
position
of the middleman n his own schemeof distribution,
his
problem
s
complex.
Its
solution
s
likely
to be
found
n
the
rise
of a class
of
efficient
nd
progressive
middlemen
who take
advantage
of the
producer's
selling
efforts
n more
rapid
turnover
of stock
and
provide
he
necessary hysical
distribution
f the
goods
at a reduced
percentage
f
profit
n
the
unit sale with
an increased
nnual
profit.
THE PRODUCER'S SALESMAN
AS
AN
AGENCY
IN DISTRIBUTION
A
less
detailed
analysis
than
was
necessary
n
the
case of
the
middleman
willbe
required
or he salesman.
The
primary
unction
or
which
salesmen
are used
is
the communication f ideas about the goods to the
prospective
urchaser;
that
s,
the
selling
unction.
The
salesman,
n the
sense
of a man sent
to
prospec-
tive
purchasers,
generally
sells
from
sample.
In
some
few cases
the sale
may
be
in
bulk,
the
salesman
showing
the
prospective
purchaser
the actual
goods
to be
purchased.
And as
has
been
suggested,
the
salesman may sell entirelyby description,merely
showing
the
prospective
purchaser pictures
of
the
goods,
as
in
selling
rom
atalogue.
When
the
producer
inds
t
desirable
o
go
around a
middleman
nd
to sell
directly
o
a
subsequent
middle-
man
or
to
the
consumer,
e
may
use
for
the
selling
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 40/64
SOME PROBLEMS
IN
MARKET DISTRIBUTION
741
function itherhis own salesmen or
advertising,
r
the
two n
combination.
When
one
analyzes
the
salesman
as an
agency
for
sale
by description
n
contrast
with
advertising,
irect
or
general,
he
must
take
into
account the human ele-
ment
again.
Advertising
as
the obvious
advantage
that
you
can
convey exactly
the
idea
you
wish to
convey n the formyou wish to convey t. It lacks,
however,
the
personality
nd
the
timeliness
of the
salesman's
visit;
it
lacks
adaptability,
he
opportunity
to
use
the
mood of
the customer
nd all the various
human
factors
hat
make the salesman
effective.
More
than
this,
when the salesman
has
aroused
in
the
prospective
urchaser
demand for the
goods
in
question,he is on theground o close the sale at once.
In the case of
advertising,
he demand aroused
must,
in
general,
be
strong
nough
to lead
the
prospective
purchaser
o
go
to
some troublebeforehe obtains
the
actual
goods.
Hence
a
less intensive
demand
may
be
more
mmediately
ffective
n
the
case of the salesman
than
when
advertising
s concerned.
It
should
here
be
emphasized
that the
analogy
betweendirect alesmenand advertisings veryclose.
Each
agency
s
largely
used to enable the
producer
o
take over one
function
of the
middleman,
that
is,
the
selling
function.
And in each case
the root
idea
is the
same.
The
producer
eeks to communicate o
the
prospective
purchaser
through
one or
the other
agency,
r
a combination
f the
two,
such
ideas about
thegoodsas will create a consciousdemand forthem.
The
direct salesman
and
advertising
are
different
modes
of
accomplishing
he same end.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 41/64
742
QUARTERLY JOURNAL
OF
ECONOMICS
ADVERTISING
AS AN AGENCY
IN
DISTRIBUTION
Advertising
n
the modern commercial ense
is
of
comparatively
ecent
evelopment. Only
n
the
middle
of the
nineteenth
entury
did
it
commence
to be
of
real
importance
n the
commercialworld. And
as
in
its
early
xtensive
se
that for he sale of
proprietary
medicinesof doubtfulvalue predominated,t was at
first omewhat
n bad
repute
as
an
agency
n
distribu-
tion.
This
notion
lingers
among
many economists,
who
are
satisfied
to condemn
casually
advertising
under
the
name
"puffing,"
and who
fail
fairly
to
analyze
its
position
as
an
agency
in
our
scheme of
distribution.
That there
are evils
and abuses
in
connection
with
advertising
oday
may be frankly dmitted. It is a
new
economic
gency,
nd
ignorance
f
ts
true
function
causes
wasteful
use. Moreover
it
lends itself
to
conscious
misuse.
So the
factory
system
carried
with
it evils
which
were
far
greater
a
century
go
than
today.
And
just
as the
factory
system, by
gathering
together
large
bodies
of
workers,
drew
attention o evils whichexistedunnoticedunder the
domestic
ystem
f
manufacture,
o
advertising
ends
to
bring
nto
the
lime-light
f
publicity
certainevils
which
existed
as well
in sale
through
ther
channels.
But
these
are
rather undesirable and
non-essential
incidents
than
anything
fundamental
n
the
thing
itself.
The evils
must
be
recognized
nd
combatted,
but should
notcloud
the fact
that
advertising
s
today
an
element
f
tremendous
mportance
n our
economic
organization.
The
steady
and
remarkable
ncrease
n
advertising
vidences
ts
efficiency
s a
selling
force.
In the
United
States
we
are
expending
annually
upon
advertising,
n
its
inclusive
ense,
not
less
than
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 42/64
SOME PROBLEMS
IN
MARKET DISTRIBUTION 743
a billiondollars. This is a cold economicfactwhich
renders
dvertising orthy
f serious
nalysis.
Advertising
s
a
necessary consequence
of
sale
by
description.
It has
been
pointed
out that
so
long
as
the
prevailing
ode of commercial
thics made sale
in
bulk the
only
practical method,
the middleman
was
an
indispensable elling
agency.
As business morals
bettered and manufacturingmethods improved so
that a standardized
roduct
could be turned
out,
sale
by
sample appeared.
Then it
became
possible
forthe
producer
to
send
his own salesmen
with a
sample
to
the
prospectivepurchaser
nstead of
being dependent
solely upon
the
selling
efforts
f
a
middleman.
And
then,
when
sale
by
descriptionappeared,
with
an
even
higher
thical
code and a
higher
evel of
general
intelligence,
thirdselling agency became possible.
In
advertising,
s
in
selling
through salesmen,
the
producer
communicates deas about the
goods
to the
prospective
purchaser
to
raise
in him
a demand
for
the
goods.
While
the
purchaser
demanded
that
he
see
the
actual
goods
before
urchasing,
ale
by
advertis-
ing
was
impracticable.
While he
still
required
to
be
showna sample of the goods, advertisingwas not in
most
cases feasible.
But now
that
the
general
verage
of
intelligence
nables the
prospectivepurchaser
to
gain
an
idea of the
goods
without
seeing
them
and
without
eeing
a
sample,
and now that the
prevailing
code
of business ethics
is such
that
the
prospective
buyer
feels
that he
may rely
upon
the
description
givenhim, dvertising
ecomes
n
many
ines
the most
economical
gency
for the exercise
of
the
selling
func-
tion.
Even
where
he actual sale
is
made
by
salesmen
from
sample,
advertising
s used
as
a
supplementary
agency
to build
up
a demand which the
salesman
crystallizes.
And sale
by
advertising
lone
may
be
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 43/64
744 QUARTERLY
JOURNAL OF
ECONOMICS
applied today even where the purchaserdemands to
see the
goods
before
concluding
the
purchase,
by
sending
he
goods
to
him
on
approval.
Not
only
s
the modern
development
f
advertising
dependent
upon
the
possibility
f sale
by description,
but
it
also
depends upon
the
increasing
ifferentiation
of
commodities
by
trade
marks, brands,
and
trade
names. As before suggested,the producer cannot
profitably
onvey
o the consumerdeas about a
certain
food
product
which
will build
up
a
demand
for
that
product,
unless the consumer
s
able
to
identify
he
particular product
when he
goes
into
the
grocery
store
to
purchase
t.
Advertising, hen,
may
properly
e
regarded
ither
as
a
substitute
for
middlemen and
salesmen or as
auxiliary o them nthe exercise ftheselling unction.
Owing
to the rise
of
sale
by
description
nd
the
in-
creasing
ifferentiation
f
commodities,
t
tends to dis-
place
in
many
ines of
distribution
hese other
gencies
in whole or
part
as a
more economical
and
efficient
means
of
communicating
ith
he
consumer.
Advertising,
n
the sense
here
used,
is to
be de-
fined s the communication o possible purchasers y
written r
printed ymbols
of
ideas about the
goods,
designed
to create
a
demand for the
goods.
In
this
broad sense
it
includes
not
only selling
etters and
circulars,
but
newspaper
and
periodical
advertising,
bill-boards
nd
window
ards,
electric
igns,
treet-car
advertising, atalogs,
and
all
the varied forms
of
modern
commercial
ublicity.
A
rough
classification
is
made
between
general
nd
direct
dvertising.
Gen-
eral
advertising
ncludes
newspaper
and
magazine
advertising,
ill-boards,
lectric
igns,
treet-car
dver-
tising
and the
like,
aimed
at the
general
public
or
some
section
of it. Direct
advertising
s
used
in
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 44/64
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 45/64
746
QUARTERLY
JOURNAL
OF
ECONOMICS
It isnecessary o include nthishasty ndincomplete
analysis
of
advertising
s an
agency
in distribution
reference
o the character
of
the
demand
aroused
by
advertising.
Advertisingmay
be said to build
up
three
general
classes
of
demand:
(1)
expressed
con-
scious
demand, (2) unexpressed
conscious
demand,
and
(3)
subconscious
emand.
The threeclassesmaybe illustrated y supposing
product
or ale
by
grocers
o be advertised n
a
periodi-
cal of
large
circulation
y
a double
page
costing
for
one insertion
8,000.
If
as a result of
the
advertise-
ment
30,000
people go
to
the
grocery
nd
buy
the
product,
0,000
plan
to
purchase
the
product
t
some
future
imewhen such an article s
needed,
nd
100,000
more become
open
to a further
xciting
orce,
uch as
seeing the productat the grocery nd recognizingt
as
one
advertised,
hen
we
should call the
30,000
the
expressed
onscious
emand,
he
60,000
the
unexpressed
conscious
demand,
and
the
100,000
the subconscious
demand
resulting
rom
he
advertisement.
Expressed
conscious demand
means
present
sales;
unexpressed
conscious
demand means future
sales;
subconscious
demandmeans that the field has been fertilized o
that future
elling
efforts
ill
be more
fruitful. Un-
expressed
onscious
demand and subconsciousdemand
are difficult
f
measure but
must
always
be
taken
into
account
in
any
consideration f the
efficiency
of
advertising
s a
selling agency.
PURPOSE OF FOREGOING ANALYSIS
What has
gone
before as all been
by way
of
analysis.
The
generalproblem
of
distribution,
he
present day
differentiation
f
products,
he
price policies open
to
the
producer,
he
methods
of
sale,
and the threechief
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 46/64
SOME
PROBLEMS IN
MARKET DISTRIBUTION
747
selling agencies have all been subjected to hasty
review.
This has
been rendered
necessary by
the
fact that
neithereconomistsnor
business men
have
previously
made such an
analysis.
Tho what
follows
s
by way
of
practical suggestion
to
the
business
man,
the
social
significance
f
the
problem
must not be
forgotten.
While
a
more
syste-
matichandling f distributionroblemsmeans to the
business man
business
success,
a better
organization
of
distributionmeans to
society
the
prevention
f
an
enormous nnual waste.
It
is not
alone
that a con-
siderable
part
of
the
billiondollars
annuallyexpended
on
advertising
s
wasted,
that
expenditures
re often
unwarranted
nd
ill-directed,
nd that the
distributer
often
fails
to
take
advantage
of the demand
aroused
by makingthe goodsphysically vailable at the time
and
place
they
are
wanted,
but
also
that our
cumber-
some
and
chaotic
ystem
f
distributiondds
materially
to the
cost
of
goods
to
the consumer. It is to the
costly
and
awkward
machinery
f
distribution
hat
the TariffBoard
refers
n
its
Summary f
the
Report
on the
Cotton
Schedule,
ubmitted
to
the
President,
March22, 1912:
"
On account of more
costly
methods
f
distribution
in this
country
rom
producer
o
consumer,
he latter
pays
a
decidedlyhigher
etail
price
than the
European
consumer,
ven
in
the case of
fabrics
n
which he cost
of
production
nd the
mill
price
are as
low here as
there."
Nor is the social
importance
of
improvements
n
distribution
matter
merely
of
reducing
he cost of
products
to
the consumer. Our
ill-organized
ystem
of
distributionmeans
that
the
consumer
s
not able
readily
and
accurately
o
satisfy
his
needs. And
this
unfortunateondition
s
not
inevitable.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 47/64
748
QUARTERLY
JOURNAL
OF
ECONOMICS
While it is true that up to this time the facts of
distribution ave
not
been
gathered,
described,
nd
classified
n
such
a
way
as
fully
o indicate
tendencies
and
underlying rinciples, et
the
way
is
open
to
a
better
organization.
The businessman must
apply
to
the
problems
of
distribution
methods
of
systematic
study
hat
have
been successful
n
other ields
f
human
knowledge.
There is an
increasing
need of
scientific
researchmethodsin business. As business becomes
more
highly integrated,
mere
intuition must
play
a
smaller
part,
and a
scientific
pproach
to
the
problems arising
s
demanded. And a
scientific
p-
proach
to the
problems
f distribution
s
feasible.
The
ordinary
usiness man
today
markets
his
prod-
uct
by
rule
of
thumb.
He
gambles
on
his
business
instinct. The success or failure f a sellingcampaign
is almost his
sole
source
of
knowledge
s to
whether
his
business instinct
was a safe
guide.
If
his
past
experience
with other
commodities as
indicated that
one
agency
or
another f
selling
s
more
efficient,
hen
he will
adopt
that
agency
for
commodities
which he
subsequently attempts
to
market.
If
he
compares
the different
gencies,
t
is
through
he
average
cost of
selling y
one oranother
gency.
Thus ifhe finds ver
a short
eriod
hat
the
average
cost of
selling
product
through
middlemen s less
than the
average
cost
of
selling
t
through
alesmen and
advertising,
e relies
solely upon
the
formermethod.
He
does not wait to
analyze
the
market as a
basis for
his
consideration
f
the most
economical
agency.
As an advocate of
one
particularmethod fselling, e does not alwaysrealize
that
an
agency
which s
most
economicalfor
distribu-
tion
n
one
section
r
stratum f
the
market
may
not
be
so
in
another.
And
least of
all
does he
systematically
test the
ideas to
be
conveyed,
nd
the
very
forms
f
expression,
hat
are the
basis
of
his
selling
fforts.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 48/64
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 49/64
750 QUARTERLY
JOURNAL OF
ECONOMICS
termed the market contour. The market,for the
purposes
of
the
distributer,
s not a
level
plain.
It
is
composed
of
differing
conomic and social strata.
Seldom
does the
ordinary
business man
appreciate
the
marketcontour
n
reference o
his
product.
Yet
obviously
he success
of
the
producers
f
trade-marked
hats
depends
upon
a realization
of
this element
of
market
contour. The
distributer
f
a
staple
hat
at
$3.00
appeals
to differentconomicand social
strata,
faces different
onsiderations,
and finds
different
selling
methods
necessary,
s
compared
with distribu-
ters
elling
$5.00
trade-marked
at,
or those
distribu-
ters
elling
$4.00
or
$6.00
trade-marked
ats.
Differ-
ences
in
economic
and social strata to
be
reached
are
as
important
s differences
n
geographic
ocation and
density, f a sound systemof distribution s to be
worked ut.
Take the distributer ho seeks to
map
out
a
selling
campaign
for a Catholic
publication.
It
is
essential
that he
take
into
account
not
merely
he
geographic
distribution f the Catholic
population
n
the
United
States,
the
regions
where
t is
relatively
ense,
and
the
regions
where it constitutes small
element
in
the
population,
but also he must take
into account
the
distribution f that
population
through
he
economic
strata
of
society.
A
method
of distribution uccessful
in
New
Orleans,
where the
Catholic
population
is
dense
and
spreadthrough
ll
economic
trata
of
society,
might
well
fail
f
applied
n
Maine,
where
the
Catholic
population
is
relatively parse
and
found
mostly
in
the ower conomic trata.
A
careful
nalysis
of
his
market,
hen,
by
areas
and
by
strata,
s
the
first ask
of
the
modern
distributer.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 50/64
SOME
PROBLEMS
IN
MARKET
DISTRIBUTION
751
CHOICE
OF
AGENCIES
IN
DISTRIBUTION
Nor
does
the
merchant-producer
rdinarily
ealize
how
intricate s his
problem
s
to the
agency
or com-
bination
of
agencies
that will be most efficient
n
reaching
his market. As has been
suggested
above,
the
businessman
often
dopts
one
method nd
becomes
an advocate of t,disregardingntirely thermethods.
While
the method
dopted
may
be more efficienthan
any
other
ingle
method,
t is
apparent
that a method
which
s
relatively
fficient
n
reaching
one area
may
be
inferior o
another
method
in
reaching
another
area.
And
so
a
system
of
distributionwhich
has
proven
very
ffective
n
reaching
ne economic
tratum
may
be
relatively
nefficient
hen
employed
to reach
a differentconomic tratumn
society.
The
problem,
hen,
f
working
ut
the most
effective
combination
of
agencies
is a
most
complicated
one.
Each distinct
area and
economic
stratum
must be
treated
as a
separate problem, and, moreover,
the
economic
generalizations
embodied in
the Law
of
Diminishing
Returns
must
be taken into account
in
choosingthat combinationof selling agencieswhich
will
give,
n
the
aggregate,
he most efficient
rganiza-
tion of the
market.
Thus
the
distributer
ay
find
s he
extends
is
opera-
tions
in
his
immediate
territory,
eographically,
hat
his
selling
cost
steadily
decreases,
but that
when he
further
xtends his market
the
selling
cost increases.
He may findthat in more distant areas sellingby
salesmen ceases to
be
profitable,
nd
there
he will
perhaps
establish
more economical
ystem
of
selling
by
a combination
of salesmen and circular etters.
That
is,
he
may
reduce
the number f visits
by
sales-
men
by
one-half,
nd
supplement
heir
efforts
y
a
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 51/64
752 QUARTERLY JOURNAL OF ECONOMICS
series fcircularetters rmore ersonal orrespondence.
In
even more distant
areas,
it
may
be
necessary
to
eliminate
the salesmen
entirely
nd
to
sell
only by
direct
dvertising.
Perhaps enough
has been
said
above,
in
analyzing
the functions f
the
middleman
and
the extent
to
which
the rise
of
functional
middlemen has made
alternativeagencies of distribution ossible, to free
us from
the
necessity
of
here
pointing
out
at
length
how
complicated
s the
problem presented
when
the
businessman
balances
distribution
hrough
middlemen
against
direct
elling hrough
alesmen nd
advertising.
Attentionmust
be
called,
however,
o
considerations
that enter
when
one
compares
the use
of
salesmen
with
the use of different ormsof
advertising.
The
businessman willoften
udge
betweendifferent
elling
agencies
solely
upon
the
basis
of
the direct
return
over a
short
period.
In
discussing
advertising
we
spoke
of
three classes
of
demand aroused
by selling
effort:
1)
expressed
onscious
emand,
2)
unexpressed
conscious
demand,
and
(3)
subconscious demand.
The
direct
and immediatereturn
from
elling
efforts
depends solelyon expressedconscious demand. But
the business
man must take into account the unex-
pressed
onscious
emand nd the ubconscious emand.
Suppose
a
smoking
tobacco is advertised.
A
man
notices the
advertisement,
eads
it,
and decides that
at some
future imehe
will
try
t,
and
perhaps
months
later does
so. This is not reflectedn the
direct
mme-
diate returns, et clearly s a result to be taken into
account. Or
suppose
a
man
merely
noticesthe
adver-
tisement.
At
a
later date when
purchasing
obacco,
he is shown
the advertisedbrand
with other
brands.
The
advertisedbrand
being vaguely
familiar
to him
from
the
advertisement,
e
purchases
t
in
preference
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 52/64
SOME
PROBLEMS
IN
MARKET
DISTRIBUTION
753
to the others. Here, too, the arouseddemand would
be of a
degree
not
reflected
n
direct
mmediate
eturns,
yet
of value
to
the distributer.
It
is
obvious,
then,
that
if
one
were
balancing
the
advantages
of
selling
through
salesmen as
against
selling
hrough
dvertising
n
whole
or
part,
he should
consider
not
only
the
expressed
conscious
demand
reflectedn the direct mmediatereturns ut also the
lesser
degrees
f
demand
which,
while
not
immediately
effective,
end
to
render
ubsequent
elling
asier.
Thus
a salesman
might
make
fifty
alls
at an
expense
of
$100,
and ten
sales
might
result
from
his
efforts.
Or for he
same
$100, 5,000 pieces
of
direct
dvertising
might
be
mailed,
resulting
erhaps
n
only
eight
sales.
Or,
perhaps,
f
the same
$100
were
used forthe
inser-
tionof a page advertisementn 100,000of the circula-
tion of
a standard
magazine,
nly
ix sales would
result.
Now
it is
apparent
that
judging
by
the direct
results,
the salesman
is
the most
efficient
gency
of distribu-
tion,
the direct
advertising
next,
and
the
magazine
advertising
east efficient.
But the distributer
must
bear
in
mind
that
there
are
grades
of demand which
do riotbecomeeffectivemmediately,nd must take
into account
that
while
the salesman
made
ten sales
he
had
only
forty pportunities
o create
these lesser
grades
of
demand,
while the
direct
advertising ave
4,992 opportunities
or the creation
of demand
falling
short
of
expression,
nd the
magazine advertising,
perhaps,
49,994
such
opportunities,
ssuming
for our
presentpurpose
that the
advertisement
was
seen
in
one
half
the
copies
by
one
person.
This is not an
improbable
supposition
s each
copy
of a
magazine
is
usually
read
by
several
persons.
A sound
sellingpolicy,
then,
must be built
up
on a
careful
analysis
of
the market
in
areas
and
strata,
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 53/64
754
QUARTERLY JOURNAL
OF
ECONOMICS
and upon a detailed study of the proper agency or
combination
f
agencies
o
reach ach
area
and
stratum,
taking
into
account
always
the economic
generaliza-
tions
expressed
n
the Law of
Diminishing
Returns.
It must also
take
into account
not
only
the
direct
results
btained
from he use of
one
or
the other
gency
over a
short
period,
but also
the
ess
measurable esults
representedby the unexpressedconscious demand
and
subconscious
emand,
which
go
to
aid
future
elling
campaigns.
LABORATORY
STUDY
OF
DISTRIBUTION
All
this tends rather o
give
a
general
ense
of
direc-
tion than
to
serve
as
a
practical
and
tangible
method
of
handling
a
specific
problem
of distribution.A
clear
grasp
of the
problem
through
careful
nalysis
is the
first
tep
in
solving
difficulties.To
suggest ny
cure-all
or even
any
panacea
for
the
existing
mal-
adjustments
n
distribution,
ven were it
possible,
s
not the
purpose
of this
paper.
The
very
complications
revealed
by
analysis
indicate the
inadequacy
of
any
single emedy.But it is possible oface theproblem f
remedy
s well
as
of
diagnosis
n a scientific
pirit,
to
introduce
what
may
be termed
the
"laboratory
method."
The
crux of the
distribution
roblem
s
the
proper
exercise
of
the
selling
function.
The
business
man
must
convey
o
possible
purchasers
hrough
ne
agency
or another uch ideas about theproduct s will create
a
maximum
demand
for
t.
This is the
fundamental
aim,
whatever
the
agency
employed.
Hence this
is
the
point
where
a scientific
tudy
of
distributionmust
firstbe
applied.
How is
the
business man
to
deter-
mine
what
ideas are
to
be
conveyed
to the
possible
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 54/64
SOME PROBLEMS
IN
MARKET
DISTRIBUTION
755
purchaser nd whatform fexpressions best adapted
to
such
conveyance
Here,
as
elsewhere
in
distribution,
he
ordinary
business
man
is
today
working by
rule of
thumb.
He
guesses
t the suitable deas
and forms f
expression,
and
gambles
on
his
guess.
On the
basis of
his a
priori
selection
of ideas fitted
o build
up
a
demand
forhis productand of a formof expression uitedto
effectively
onvey
the
ideas,
he
invests
tens,
even
hundreds,
fthousands
f dollars
n
a
selling
ampaign.
The more
able business
men,
to
be
sure,
seek
to
determine those
facts about
their
goods
that
will
attract
the attention
of the
possible
purchaser
and
awaken
in
him the desired
reaction,
that
is,
a
demand
for the
article.
They study
in
a
general
way
the
points
of
superiority
n
quality
and service
possessed by
their
products
as
compared
with
other
goods
of
ike kind.
They
also seek
guides
as
to
the
form n
which
the
ideas should
be
conveyed,
n the
general
principles
f
style,
all based on the fundamental
notion of
con-
serving
he
prospective urchaser's
mental
energy
by
cuttingdown the friction f communication.They
know,
for
nstance,
hat
they
should
use
short
familiar
words
expressing
heir exact
shade
of
meaning;
that
they
should
give preference
o
figurative
anguage;
that
they
should
suggest
a
concrete
mage only
after
the materialsof which
t
is to be
made
are
conveyed;
that
they
hould avoid abstraction nd
generalization
where possible; that when they are suggesting he
reaction
desired
their
language
should
become
quick,
sharp,
nd
compelling.
These
things
he more
efficient
usiness
men
know
and
apply.
But all this
s a
priori.
The
need is
for
method
of
practical
test that will
enable
us
to
try
out
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 55/64
756
QUARTERLY
JOURNAL OF
ECONOMICS
selling deas and forms fexpression, nder aboratory
conditions,
s it
were,
before
he
investment
f
thou-
sands and
hundreds
of thousands of dollars
s
staked
on
the success
of the
selling
ampaign.
Mention
has
been
made
of
the annual
expenditure
of
not
less
than
a
billion
dollars n
advertising.
Un-
questionably
an
extremely
arge
percentage
f
this is
wasted. This means not merely ndividual oss, but
social
loss.
It
is a
diversion
f
capital
and
productive
energy
nto
unprofitable
hannels.
The
causes
of this
waste
are
numerous.
The com-
modity
n
question
may
be
one not
possessing
hose
elements
of
quality
and
service
which
constitute
he
basis for
demand
on
the
part
of
the
consuming ublic.
If
the
goods
advertisedare not
adapted
to
satisfy
need,
conscious or
subconscious,
of
consumers,
the
advertising
annot be effective.
Attempting
o
sell
a
thing
hat
nobody
needs
is
wasted effort.
Again,
the
medium
used
for
the
communication
f
the deas
about
the
goods
may
not
be one
that reaches
the
particular
economic
or social
stratum n which
possible
purchasers
of
the
commodity
ie. Hence
theideas fail to createa demand because theydo not
reach
those
n whom a latent
need
for
the
commodity
exists.
Another
mportant
cause of
advertising
waste is
in the
failureto
take
advantage
of
aroused
demand.
The
distributer
ften
fails to
give
proper
ttention o
the
matter
f
the mechanicaldistribution f
the
goods.
There resultsa considerable eakage in demand from
the
inability
of
persons
n
whom a
demand has
been
created
to
obtain the
goods
at the
timewhen
desired.
But
the
great
cause
of
waste is
probably
the fact
that
the
ideas
about the
goods,
or the
form
in
which
those
ideas are
conveyed
o
possiblepurchasers,
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 56/64
SOME PROBLEMS
IN MARKET
DISTRIBUTION 757
provesill-adaptedto secure the desiredreaction, nd
thus
to
create
n
the
consumer n
effective emand.
If
we
can
apply
to this
pressing
roblem
f
dvertising
waste
methods f
study
which
have
proven
efficient
n
other
fields,
he
gain
is clear. The
engineer
does
not
choose material
or
bridgeby building
bridge
of
the
material
and
waiting
to see
whether t stands. He
firsttests the material in the laboratory. That is
what
the business
man must do.
The statistician
urns
n his
problems
o
the law
of
averages.
He
is
familiar
with
what are termed
mass
phenomena.
He knows
that he can learn
something
of the
average height
of
a
body
of
people
by studying
the
heights
n a
group
of
a
few
thousands of
people
drawn
at random
from the
larger
body.
Provided
that thesmallergroup s not so selectedas to prevent
it
being
typical
of
the
largerbody,
and
provided
the
group
is
large enough
to render the law
of
averages
applicable,
the statisticianknows
when
he
has deter-
mined
the
average height
of
the smaller
group
that it
will
roughly
coincide
with
the
average
height
of the
larger
group.
Thismethod fstudycan be appliedby thebusiness
man
in
testing
he
ideas and forms f
expression
o be
used
in a
selling
campaign.
In
direct
advertising,
the
mailing
of
selling etters, irculars,
r
catalogs
to
prospective
urchasers
o
drawfrom
hem
an
order
for
goods
as
evidence
of an
awakened
demand,
you
have
a
stimulus
nd
response adapted
to direct statistical
measurement.
The
number
f
responses er
thousand
communicationscan be determined. Here is the
agency
that
the
business
man
can
employ
n
testing,
under
what
are
equivalent
to
laboratory
onditions,
the
ideas
and
formsof
expression
hat seem to
him
best
adapted
to awaken
a demand for
his
product.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 57/64
758
QUARTERLY JOURNAL OF ECONOMICS
Suppose theproducer f a foodproduct s planning
a
campaign
o
reach,
not
the
consumer,
ut the
grocers
of the
country.
Now
the
whole
body
of
dealers,
arge
and
small, handlinggroceries
umbers
omething
ike
250,000.
Let
the
distributer,
fter
working
ut a
set
of ideas and forms
f
expression
which
seem to
him
likely
to be effective
n
arousing
the
desired
demand,
test thismaterialby mailing t to say 1,000 grocers.
The
group
selected
must
be
large enough
to
give
typical
results nd
it
must not be so
selected
as
to be
distinct
n
character
from
he whole
body
of
grocers.
Granting
these
elements,
the distributer
an
deter-
mine
the numberof
responses
from
he
1,000
grocers
to whom he
communication as
sent,
nd
can
estimate
from that result the
average response
per
thousand
of communications hat would have been obtainedif
the same ideas
in
the same
form
f
expression
ad
been
conveyed
to
the whole
body
of
250,000
dealers in
groceries
n
the
country.
He
can
then test
by
means
of direct
mailing
o another
group
of
1,000,
a
varying
set
of
deas
or
varying
orm
f
expression.
And
so
on
with another modification f
the
selling
material.
Thus it will be possibleto determinewhat ideas, in
what
arrangement,
nd in
what form of
expression,
are most effective
o
arouse the
desireddemand.
That the
plan
suggested
s
practical
s
indicated
by
the results
of
such
an
intensive
study
presented
n
Table
I.
Here
are
shown
the results
of
"
tests
"
and
the results
of
completemailings.
The tests
here
cov-
ered
only
one stratum of
society,
a
mailing
list of
bankers
eing
used. The
purpose
f
the
elling
material
mailed was
to obtain
orders
for
certain
publications.
Various forms
of
"copy"
were tested
by
mailing,
usually
to
500 nameson the
ist.
Where the
return
n
any
test exceeded
the
minimum
tandard
of
twenty
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 58/64
SOME PROBLEMS
IN
MARKET
DISTRIBUTION
759
BANKERS'
TESTS
MINIMUM
STANDARD
=
20 PER
M.
Tests
Mailings
Material
Mailed
No
of
Total
No of
Total
No
per
Date
pieces
orders No
per
Date
pieces
orders
M.
mailed
received
M
mailed
received
1909
1909
A1
3/30
500
3 6
A2
3/30
500
5
10
B1
8/13
500
6
12
B2
9/13
500
3
6
C1
9/15
500
4
8
C2
9/15
500
3
6
D2
9/15
450
18}
25
9/27
19,943
360
18
D2
9/15
500
18
E
9/16
500
7
14
F1 9/21 500 24 36
Fi
9/21
500
12}
36{
11/23
16,511
589
35
F2 9/21
500
12
G
10/18
1,000
30
30
11/28
21,790
643
29.5
1910
H
11/16 500
11
22
1/24
6,554
165
24
1/246,039
390
1910
I
4/11
500
12
241
5/5
6,810
145
25
4/11
500
121
5/4
12,154
336
Note
-Where
the
same letter
ppears
with
different
xponents
nder"
material
mailed"
t
indicates hat
on the test
mailing
results were
kept
separately
or
he
same
material
mailed to two
small
groups
orders
per
thousand
communications
he
material
was
mailed
to
the
complete
list.
In
only
one
case
did
the
complete
mailing
fail to show
an
average
return
per
thousand
communications
ubstantially
he
same
as
that
derived
rom
he
test
mailing.
In
the
case of
Test
D1,
mailed
September
15,
1909,
the return s
clearly
ut of
proportion
o the results rom
he
mailing.
The same
material
mailed
on the same
date,
however
(Test
D2),
gives
for similar
mall
group
return
much
closer
to the results
obtained
fromthe
final
mailing.
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 59/64
760
QUARTERLY
JOURNAL
OF
ECONOMICS
Whena minimum tandardas low as twenty s used,
and the test
group
numbers
nly
500,
there
s
danger
that the
average
will be disturbed s
by
one
individual
sending
n
several
orders. The
larger
the
test
group
the
more exact
an
indexwill it
give
as
to the results
whichwill
be obtained
from
complete
mailing.
This
method
of
studying
deas
and
forms f
expres-
sion in direct advertisingwould be important, ven
tho
ts
usefulness
id not extend
eyond
direct dvertis-
ing.
It
would
permit
ne to
guide
a
widely
extended
direct
advertising ampaign
by
an
investigation
ela-
tively nexpensive.
But the
importance
f the method
described
does
not
end with
direct
advertising.
Remember hat
the
root idea is
the same whateverthe
agency
for
selling
employed. Selling s accomplished y communicating
to
the
possible purchaser
deas about
the
goods
calcu-
lated to build
up
in
him
a
demand
for the
goods.
These ideas
may
be communicated
hroughmiddlemen,
salesmen,
general
advertising
or
direct
advertising.
Since the
ideas are the
same,
whatever he
agency
for
communication,
he business
man
can
determine
n
his directselling aboratory,what ideas and in what
combination
re
the most effective
elling
material.
He can then
carry
over to
selling
by
other
agencies
the results here
btained.
Suppose
an
extensive
periodical campaign
s
under
consideration.
The distributer
ontemplates
pending
perhaps
hundreds
f
thousands
f
dollars
upon
advertis-
ing
in
certain
periodicals.
What
can
the
"distribu-
tion
laboratory"
do
to
determine
he ideas
to
be
conveyed
and
the
forms
of
expression
o
be
used to
create
the
desired
demand
?
Now the
circulation f
a
periodical
to be used
may
run
into the
hundreds
of
thousands
or
even
into the
millions.
The
business
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 60/64
SOME PROBLEMS
IN
MARKET
DISTRIBUTION 761
man wishesto test the responsethat will resultfrom
the
communication
o this enormous
body
of sub-
scribers
of
certain
ideas
expressed
n certain forms.
Not
only
can
he work
out
the
most effective
deas,
the most effective
rrangement,
nd
the
most effective
forms
f
expression hrough
he
agency
of
direct
mail-
ing,
but
he can
even
test the
final
copy
"
itself, ust
as it willappearin theperiodical, ymailingt directly
to
relatively
small
groups.
Moreover,
he
can
test
the
response
to
it found
n
differing
trata of
society.
Ideas
adapted
to
build
up
a demand
for
a
commodity
in
one economic
and
social stratum
may
prove
inef-
fective
when
dealing
with
another.
The
importance
of this method ies
in the
fact
that most
periodicals
circulate
within certain
fairly
well definedeconomic
and social strata. The ideas and forms f expression
that are most effective
n
one
periodical
hence
may
be
relatively
neffective
f
used
in
another
that reaches
a differenttratum.
Equally important
s the
application
f the
suggested
method of
study
to
selling through
salesmen. The
more
progressive
usiness
men
today
train the
sales-
men n a certainbasic " selling alk." That is, certain
ideas,
in
a certain
rder,
nd in certain
orms
f
expres-
sion,
are
impressed
upon
them
as
likely
to build
up
a
demand
for the article on the
part
of
possible pur-
chasers. The basic
"
selling
talk"
is
not,
of
course,
repeated
parrot-like
y
the
salesman,
but does serve
as
a
foundation or
his
talks
to
possible
buyers.
Here
again
the
aboratory
dea
can
be
applied.
The
whole structure f the
selling
talk can be built
up
on
the
deas,
order
f
arrangement,
nd forms
f
expression
established as the most efficient
n
creating
demand
through
he
medium of direct
advertising.
One
need
but
appreciate
the fundamental
dentity
f
the
selling
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 61/64
762 QUARTERLY
JOURNAL
OF
ECONOMICS
function, through whatever agency exercised, to
realize
that the results
obtained
in
experiments
n
direct
advertising
an be
carried over to
selling
by
salesmen.
Note, too,
that
the
general principles
upon
which
the
"
testing"
method
depends,
apply
when
we seek
to
study
the
possibilities
f the whole
market
by
the
intensivecultivation f one sectionof it. A localized
selling
ampaign,
narrow
n
extent,
will
give
relatively
exact
data
from
which
the
possibilities
f a nation-
wide
campaign
of like character
may
be
judged.
Obviously,
f
our
law of
averages
holds
good,
we
may
carry
over the results
obtained
n one section
to other
sections,
nd
hence
at small
cost
guide
a
widespread
campaign.The exact data that can be obtained
through
uch
"testing
"
methods
permit
morescientific
onsidera-
tion of the
decreasing
eturns
btained
f
one
agency
is
used
beyond
a
certain
point.
Hence
a
better
combination f
agencies
s
possible,
with
a
view
to
the
greatest
ggregate
fficiency.
When
a
business
man
contemplates utting
a new
producton themarket, seriousproblem s the price
at
which
t shall
be sold.
Take the
case
of
the intro-
duction
of a
product
like the
safety
razor,
at
what
price
is the
product
to
be
sold
? In
such
case
the
business
man
seeks
to
determine
what
price
will
give
him
the best
net
return,
ll
things
considered.
Now
the method
of
study developed
above
will
permit
he
businessman to determine y actual testthe effective
demand that can
be built
up
at different
rice
levels
in
different conomic
and
social
strata.
Hence
he
can fix
the
price
on
the
basis
of
relatively
xact
data,
rather han
on
a
mere
guess.
Again,
the
laboratory
methodhere
suggested
ends
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 62/64
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 63/64
764
QUARTERLY
JOURNAL OF
ECONOMICS
in solving definite elling problems. The difficulty
has
been
that
the
laboratory
worker does
not
have
brought
to his
attention
he
specific
problems
of
the
business
man.
Similarly,
the
universities, hrough investigators
trained
in
economics,
can
gather
and
correlate
data
upon
distribution hat
will be of enormous
practical
value. They should,through esearchbureaus,study
such
problems
s
the cost of
distribution
n
the
various
industries t
different
tages.
And
gradually
a
body
of
organizedknowledge
f the
actual facts of
business
will arise. It is
by development
along
such
lines
that future
mprovements
n
the
system
f distribution
will be
made
possible.
CONCLUSION
Distribution s one of
the two
great departments
f
business.
Industry
s concernedwith
the
application
of motion to
matter to
change
its
form
and
place.
The
change
n
form
we term
production;
the
change
in
place,
distribution.
The end n each case is
the same:
a better djustment fmatter o thewantsof man.
For centurieswe have been
concentrating
ur atten-
tion
on
production;
distribution
as
been,
until of
late,
a
neglected
field. Hence
distribution
ffers he
most
pressing
roblems
f the
day.
An
attempt
has
here been made
to
outline,
rom
he
standpoint
of
the business
man,
the
pressing
roblems
of
distribution,
nd to
urge
a
scientific
tudy, eading
to
a
better
rganization.
That the ndicated
method
f
approach
is
practical
has been
shown
by presenting
as an
illustrationhe
actual
results fone such ntensive
study.
It
must
be
remembered,
owever,
that
this
is
only
an
example,
ntended
o
indicate
the
point
of
This content downloaded from 190.234.106.164 on Tue, 11 Nov 2014 18:35:22 PMAll use subject to JSTOR Terms and Conditions
8/10/2019 Problems Market Distributin
http://slidepdf.com/reader/full/problems-market-distributin 64/64
SOME
PROBLEMS
IN
MARKET
DISTRIBUTION
765
view and generalmethod of approach. It does not
purport
o offer solution f the intricate
roblems
f
distribution.
The aim here is
not
only
to
lead
business
men to
turn
o their
ndividual
problems
f
distribution
itha
new
point
of
view
and
with
a
new
method
of
study,
but also
to
lead
economists
o
give
to much
neglected
problems he benefit f trained ntelligencend scien-
tific
methods.
A.
W. SHAW.
HARVARD
NmVERSrrY.