Walking around U.S. cities, one is amazed at how many mobile phone stores occupy the most expensive retail space. How can Sprint, T-Mobile, AT&T, and Verizon afford to waste so much money on retail stores? Wouldn’t they be better off using the money to add some towers to provide more coverage, e.g., at the JFK airport?

The most thought-provoking economics book of recent times, A Farewell to Alms, has an answer to this on page 288:

The increasing returns to scale inherent in most modern production processes imply that for the typical transaction the price is much greater than the marginal cost … That means that modern markets for industrial products … are imperfectly competitive. … The difference between price and marginal cost means that producers have an incentive to spend resources in trying to sell more product at the current price, through trying to get customers to choose their products rather than the nearly identical products of their competitors. Selling is a huge part of modern economies…

Mobile phone service is the ultimate in discrepancy between marginal cost and price. The cost of serving one additional user on an existing network is just about zero; the price collected from that user is $50 per month.

This is the least interesting insight from the book, but it is one of the simplest to relate in a Weblog.