BUYING LOCALLY

• Published date: 01 November 2016
• Author: Andrew Postlewaite,George J. Mailath,Larry Samuelson
• DOI: http://doi.org/10.1111/iere.12194
• Date: 01 November 2016

INTERNATIONAL ECONOMIC REVIEW

Vol. 57, No. 4, November 2016

BUYING LOCALLY∗

BYGEORGE J. MAILATH,ANDREW POSTLEWAITE,AND LARRY SAMUELSON1

University of Pennsylvania, U.S.A. and Australian National University, Australia; University of

Pennsylvania, U.S.A.; Yale University, U.S.A.

‘‘Buy local” arrangements encourage members of a community or group to patronize one another instead of the

external economy. They range from formal mechanisms such as local currencies to informal “I’ll buy from you if

you buy from me” arrangements and are often championed on social or environmental grounds. We show that in a

monopolistically competitive economy, buy local arrangements can have salutary effects even for selfish agents immune

to social or environmental considerations. Buy local arrangements effectively allow firms to exploit the equilibrium

price–cost gap to profitably expand their sales at the going price.

1. INTRODUCTION

People often perceive gains from having members of a community “buy local.” At one end of

the scale are formal schemes such as local currencies (such as Ithaca hours; Good, 1998). In the

middle are organizations (such as the Business Alliance for Local Living Economics2) or norms

(such as a custom of “keeping the money at home” or a prescription that “you do business with

those who do business with you”) encouraging reciprocal buying habits. For example,3

“I make my money here, and people naturally expect me to spend it here. ... I’d be just as glad if you

dealt with Jenson or Ludelmeyer as much as you can, instead of Howland & Gould, who go to Dr.

Gould every last time. . .. I don’t see why I should be paying out my good money for groceries and

having them pass it on to Terry Gould!”

“I’ve gone to Howland & Gould because they’re better, and cleaner.”

“I know. ... Course Jenson is tricky—give you short weight—and Ludelmeyer is a shiftless old Dutch

hog. But same time, I mean let’s keep the trade in the family whenever it is convenient, see how I

mean?”

At the other end are reciprocal relationships of the form described in Ellickson (1991) in

which people informally provide goods and services to one another.

Why do people buy locally? The reciprocity built into buy local arrangements may bring

social benefits—supporters often refer to local buying arrangements as playing an important

role in building community spirit. Buy local arrangements are often championed for their

environmental benefits, typically in the form of lower transportation costs. Buying locally may

make it easier for consumers to monitor or influence conditions of production, from ensuring

that products are “natural” to seeing that workers are treated fairly. Buying locally may be a

way of providing public goods, perhaps in the form of a diverse or picturesque local business

district.

∗Manuscript received June 2015;

1We thank Kyle Bagwell for helpful comments and discussions and we thank Zehao Hu for excellent research assis-

tance. We thank the National Science Foundation (grants SES-1260753 and SES-1459158) for financial support. Please

address correspondence to: George Mailath, Department of Economics, University of Pennsylvania, Philadelphia, PA

19104, U.S.A. E-mail: gmailath@econ.upenn.edu.

2https://bealocalist.org/

3Sinclair Lewis, Main Street, International Collector’s Library, Garden City, NY, 1948; 95.

1179

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(2016) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social

and Economic Research Association

1180 MAILATH,POSTLEWAITE,AND SAMUELSON

We believe that the social factors, environmental considerations, quest for influence, and

externalities that lie behind the explanations of the preceding paragraph are often important.

However, we argue in this article that one need not appeal to such considerations to motivate

buy local relationships. Buying locally can be beneficial even when agents are motivated strictly

by selfish concerns.

A buy local arrangement is clearly in an agent’s best interest if the goods and services provided

by the partners in the arrangement are routinely better than any other on offer. But how do we

account for the behavior in the preceding excerpt, where this is not the case? The essence of a buy

local arrangement is its reciprocity—agent ibuys from another agent jwithin the arrangement

even when j’s price—quality package is not the best on offer because jwill similarly buy from

within the arrangement in similar circumstances. This reciprocity may be valuable in a world of

monopolistic competition. Each seller, facing a downward sloping demand function, sets price

above marginal cost and so receives a strictly positive profit from an additional sale. Agent j

may not have the optimal price–quality package, but if the utility iforgoes from purchasing from

jis less than j’s gain from the transaction, and isimilarly makes sales within the arrangement

that would not otherwise occur, the members of the arrangement are made better off by the

buy local arrangement.

Buy local arrangements involve trade-offs between agents-as-firms making additional prof-

itable sales and agents-as-consumers making suboptimal purchases. In order for a buy local

arrangement to be beneficial, the costs of making suboptimal purchases cannot be too large.

Equivalently, the goods available inside the buy local arrangement should be at least plausible

substitutes for the consumers’ most preferred choices. This is more likely if the members of

the buy local arrangement are “close” in some appropriate sense. This suggests that commu-

nities connected by common interests, culture, or physical proximity are ideal candidates for

successful buy local arrangements.

Our model of monopolistic competition is a special case of Hart (1985), in which we take

the number and composition of firms in the market as fixed. Agents act as both consumers

and firms. Firms post prices, and consumers, acting as price takers, then choose which firms to

patronize. Because the firms are monopolistically competitive and hence sell at prices higher

than marginal cost, each firm would like to sell more at its current price. We allow a subset

of agents to engage in a buy local relationship. This reciprocal patronage will often call for

consumers to settle for something less than their most-preferred good. The return for doing

so is that the buy local arrangement allows the agents’ firms to increase the quantity they sell

without reducing their price.

Because its participants sometimes forgo their most-preferred product, a buy local arrange-

ment requires monitoring and enforcement. We return to these considerations in Section 4,

noting here that the various types of buy local arrangements mentioned in our opening para-

graph solve these problems in different ways. Local currencies can serve as a monitoring device,

ensuring that one can reap the benefits of additional sales only if one accepts the local currency,

in much the same way that money can serve as memory (Kocherlakota, 1998).4The doctor in

the Main Street example may pay the same for his groceries as does the rest of the public, just as

the shopkeeper may pay for his office visits, each incurring costs (the purchaser will sometimes

prefer to buy elsewhere) to boost the demand of the other, with networks of gossip providing

the required monitoring and enforcement. The transactions in reciprocal conventions may take

place without transfers—Alice, the plumber, may fix Bob’s sink whenever needed, whereas

Bob, the roofer, takes care of Alice’s roof—with the monitoring and enforcement arising out

of the bilateral and repeated nature of the interaction.

We comment on the related literature in Section 4, mentioning here only that Bramoull ´

e and

Goyal (2013) study a related model of favoritism, or the practice of “offering jobs, contracts, and

resources preferentially to members of one’s own social group” (Bramoull´

e and Goyal, 2013,

p. 1). The mechanics of how interactions create and distribute value in Bramoull´

e and Goyal and

4In a similar spirit, Wolitzky (2015) examines a model in which networked agents use tokens to sustain cooperation.