Just how much does it cost to buy a Billy?

Not a "Billy goat" ... we did that in a previous post. Today we are talking about the staple in every young person's home ... the Billy bookcase from IKEA. The online catalogue lists the basic bookcase at $69.99 and we know a lot of accountants that will tell you that the cost of the bookcase is therefore $69.99 plus tax.

Of course, accountants never get the 'cost' thing right. We found an article in this morning's online version of the Globe and Mail explaining the apparent consumer infatuation with the big box retailer. Click here for the article. There is one paragraph, in particular, that caught our attention:

"The chain also offers unusual perks like a supervised kids’ play area and impossibly cheap specials (Swedish meatballs: $2.99!) in its cafeteria. Ikea customers understand the deal: Those treats are just a way of keeping them in the store longer. They save money at Ikea, but they have to go to work themselves to get the savings. Shoppers invest hours driving to the store, finding a parking spot, wandering the showroom, searching for staff, waiting at the cashier, hauling the flat-packs to the car and then, once home, mastering the art of the Allen key to assemble the stuff—only to discover that a part is missing." (How Ikea Seduces Us, Marina Strauss, Globe and Mail ROB Magazine, May 27, 2010 Accessed May 28,2010)

Let's assume that from home to IKEA and back, all tolled, is 2 hours. Add another hour to put the bookcase together. How much did the bookcase cost? Depends on the opportunity cost of time. (See chapter 1 of any economic principles book). If your time is worth $15 per hour, the $70 bookcase costs $115. If your time is worth $100 per hour, the $70 bookcase costs $370. We're not sure that $2.99 Swedish meatballs is enough compensation.

It would be interesting to see IKEA's data on revenues by postal code, information they collect at the checkouts. The further you have to travel to get to IKEA and the higher you value your time, the more expensive the bookcase becomes and the less likely you are to purchase it. Our guess is that customer visits decreases with the average income in the postal code (information available from the census) and also decreases with distance from the store. However, spending per customer visit likely increases with distance as consumers spread the fixed cost of travel over more goods.

Anyone surprised that income elasticity should be negative?