Problems Market Distributin

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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 .

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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








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








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








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.








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,








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








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."








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.








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








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.








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.








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.








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








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.








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."








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








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








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








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








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.








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.








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,








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








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.








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








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








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








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








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








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.








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








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








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.








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








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








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








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.








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








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








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








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








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.








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.








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.








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








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








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,








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








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








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,








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.








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








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.








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








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








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








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








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.

Problems Market Distributin

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