Author: François Lévêque, Professeur d’économie, Mines ParisTech – PSL Here’s a little puzzle: an industry dominated by two European conglomerates, one French, the other Italian; a global market worth nearly $100 billion; a good needed by two in three people on Earth; once objects of shame these products are now items of fashion; the range is so broad almost no one buys the same thing. One last clue to put you on the right track: even the rockstar Bruce Springsteen wears them
Author: François Lévêque, Professeur d’économie, Mines ParisTech – PSLHere’s a little puzzle: an industry dominated by two European conglomerates, one French, the other Italian; a global market worth nearly $100 billion; a good needed by two in three people on Earth; once objects of shame these products are now items of fashion; the range is so broad almost no one buys the same thing. One last clue to put you on the right track: even the rockstar Bruce Springsteen wears them. So what are they? Spectacles. Why do they fetch such a high price the world over, particularly in France? A short question, but the answer below is rather more involved.Apparent variety that’s an optical illusionIf you are far or near-sighted you have already been to an optician. You will be familiar with the huge choice of frames, some conventional, others extravagant, made of synthetic tortoise-shell, acetate or titanium, round, oval or butterfly-shaped, with ornate or branded arms. They can be matt black, pastel-coloured or boldly two-toned. Things are a little more straightforward when it comes to the lenses, because the prescription specifies the degree of correction, though of course there are additional options for combating glare, fogging, ultraviolet rays and dirt, among others. Lenses can also be extra-thin and self-tinting. In short, eyeglasses are a highly personalized product with a wide range of choice.However, if we look a little closer the picture is rather different. First, fashion trends in recent years have prompted consumers to opt for frames that hide half their face. Ideally the frame is black and adorned with a luxury brand.Above all, the apparent variety conceals just two giant manufacturers. Nearly half a billion frames worn worldwide were produced by Luxottica, an Italian family-owned firm that sells about 100 million units annually. Buy a pair of Ray-Ban, Oakley, Persol or indeed Alain Mikli shades and you are actually purchasing Luxottica glasses. The same is true of Prada, Chanel, Burberry and Ralph Lauren, though these brands are produced under licence and not in the firm’s own name.If you live in the United States you may well have dropped into a retail outlet operated by one of the chains owned by the Italian company, such as Sunglasses Hut or Pearle Vision. You may also have a plan with the country’s second largest managed vision care company, Eyemed, a Luxottica subsidiary. The firm’s powerful position in the US market has come to public attention thanks to a funny, but pointed video.Welcome to Luxottica and EssilorBut Luxottica is no Google, as it holds roughly half of the US market for frames and sunglasses, 25 per cent in France and 10 per cent globally.Launched in 1961 by Leonardo Del Vecchio, who still heads the firm, Luxottica helped turn glasses into fashion accessories. Long-gone the days of “four-eyed” geeks and women who would – it was threatened – never find a husband if they were caught wearing specs. “As much to see as to be seen” in the words of a slogan hatched by a contemporary optician in Saint-Germain-des-Prés, Paris.Essilor is probably a more familiar name than Luxottica, at least for French readers; its Varilux brand of varifocal lenses, invented nearly half a century ago, perhaps even more so. The French firm primarily manufactures corrective lenses. It has cornered three-quarters of this market in mainland France and just over 40 per cent worldwide. Essilor has achieved this position thanks to its remarkable capacity for innovation coupled with a policy of steadily taking over other companies.It has diversified a relatively small proportion of its revenue into frames and sunglasses, so it is only marginally in competition with its Italian cousin. The stock markets frequently buzz with rumours the two European moguls may be merging – a success story sufficiently unusual to be noteworthy.On January 16 the rumour became reality when the two firms announced plans to merge.More or less choice with stiffer competition?Let’s look downstream now, at the distribution of glasses. Competition between retailers – be they independent or part of a chain or franchise – is quite different, because it is by nature local. One marketing ploy is to offer a broad range of frames in each shop, on the assumption that consumers have no prior idea of which spectacles would suit them nor how much they cost. Furthermore they all have different preferences and tastes.It is in the interests of the optician to stock the largest possible variety of models, thus increasing the likelihood of making a sale when a potential buyer enters the shop. On the other hand showroom and storage space is expensive. If the optician has a monopoly in their home town they can stop increasing the number of variants in stock when the cost of holding an additional model exceeds the expectation of revenue growth it yields.But how will the optician adjust their range if a competitor opens a shop next door? Three effects will operate in conjunction:First, they will lose part of their potential customer base, so they will have to reduce their range of glasses. But why is this the case? Because for each customer no longer entering the shop the likelihood of selling each variant in stock is correspondingly lower, as is the expectation of marginal revenue, whereas there has been no reduction in the marginal cost of floorspace and inventory.Second, customers coming into the shop will be more demanding, for only a step away they can see whether the neighbouring competitor has models better suited to their needs. So it is in the interests of the incumbent to increase the number of variants they stock.Third, with two shops the area becomes more attractive to shoppers. This concentration effect disadvantages more remote, widely scattered shops. When several opticians are located on the same shopping street consumers can expect a larger aggregate supply of variants and lower prices. The increase in the potential customer base prompts each retail outlet in the area to stock more items.The outcome of these effects depends on local conditions. A 2009 study from a University of Texas scholar looked at the eyeglasses offered in 40 medium-sized towns in the Midwest. It found that the number of models in eyewear stores increased in line with competition, up to three rivals in the neighborhood, only to decrease beyond this number.Is advertising effective?In many countries the sale of eyeglasses is regulated. In the United States the situation differs from one state to the next. Such diversity is an opportunity to carry out a form of natural experiment to gauge the effect of various legislative and regulatory frameworks.In the early 1970s, pioneering research along these lines was carried out to see how restricting advertising affected eyewear prices. Some US states banned publicity completely, others simply stopped any mention of prices, and some made no restrictions. In the first group the average price of spectacles was 25 per cent higher than in the third group, whereas prices in the second group we in-between. Other studies confirmed this result, but also showed that the quality of service was not noticeably worse in states where advertising was allowed, and prices were consequently lower.A word of caution: It would be a mistake to conclude that advertising always benefits the consumer, less still that eyewear publicity is always in their interest. In simple terms, advertising may have two contrary effects. On the one hand, by supplying information on goods it fuels competition, which in turn pushes prices down. On the other hand it changes consumer preferences, in particular by accentuating the perceived differentiation of products and brands. So it increases the market power of sellers and, as a result, prices. There is no reason why the outcome should be exactly the same for all consumer goods and at every point in time. We may simply note that from the 1970s to the 1990s, the first effect was more powerful than the second one in the US.You may well have read this piece on a screen. It might interest you to know that optical engineers are hard at work to protect the users of digital devices from the blue light they produce. If you’re into the geeky, West Coast style you should rush to get a pair of Gunnars with amber lenses, online or from selected opticians. They are set to become very fashionable. If on the other hand you are allergic to eyewear brands, marketing and ads, you can always opt for contact lenses or corrective surgery. Oh, what a wonderful world…