Friday, April 13, 2007

The Cost of Regulation

My previous post reported on my experience buying prescription eyeglasses online and raised the puzzle of why they cost five or ten times as much from a store. One commenter provided enough information so that I was able to locate the relevant California regulations.(specifically paragraphs 2559.1 and 2559.2 on pages 163-4). In order to dispense eyeglasses you must employ a registered spectacle lens dispenser and in order to be a registered spectacle lens dispenser you must pass an exam provided by the American Board of Opticianry (I'm leaving out some detailed exceptions and qualifications).

That means that the profession of eyeglass sellers is in a position, like other licensed professions, to control entry, to make it hard for people to join the profession in order to hold up the income of those already in. I have no data on how restrictive they actually are; perhaps someone else does.

But I do have some data on the outcome. Prescription eyeglasses, in my experience, cost from about $100 to $300 in stores in California. Online they cost about $20. If we take the bottom of the range for comparison, on the theory that the higher prices may represent either higher quality or additional services, and if we assume that the cost of selling online is only half the cost of selling in a store, that suggests that the effect of the regulatory restrictions is to make the cost of eyeglasses about two and a half times what it would otherwise be.

A little googling turns up a figure of 15.8 billion for optical retail sales in 2001. 1.9 billion of that was contact lenses. Combining this information, it looks as though restrictions on competition in the eyeglass industry cost consumers about ten billion dollars a year.

This is, of course, only a very rough estimate, but still an interesting figure. There is apparently an old literature that looked in more detail at the consequences of particular restrictions, and found large effects.


At 4:34 PM, April 13, 2007, Anonymous Dave Orr said...

It seems like this analysis lives or dies on the numbers -- in particular, your estimate that "the cost of selling online is only half the cost of selling in a store."

One explanation for the large price difference could be that the cost of selling in a store is much higher. Renting real estate, carrying inventory, paying sales staff -- all of that is very expensive compared to running a website. I would frankly be a bit surprised if stores could make money selling at $40 per.

Also, I recently bought glasses at Lenscrafters (before noticing that the prices were much cheaper online, oops). They made a big deal out of measuring the focal point of my eye relative to the frames I picked out to make sure the lenses were exactly right. It seems like that would be impossible for a website, so perhaps there is an inherent quality advantage for in-store glasses that the higher price partially reflects.

Of course, I would certainly have bought the $40 online glasses had I known about them, so my perception of the quality difference isn't very large.

At 9:55 PM, April 13, 2007, Blogger David Friedman said...

I'm not sure what Lenscrafters was measuring. The web site has you measure the distance between your pupils, which is quite easy to do, and include that information along with your prescription.

At 8:23 AM, April 14, 2007, Blogger Robert said...

I think another contributing factor to the high prices is that glasses are often included in peoples' insurance plans.

At 10:43 AM, April 14, 2007, Blogger Matt said...

There is a huge range of prices in eyeglasses.

I live in Kansas. At the little franchise inside Wal-Mart you can get new eyeglasses for around $50 a pair. Most stores have their cheapest pair for closer to $100. All the stores have $300 eyeglasses for sale if you want them.

Regulation is probably part of it, but I think this market is just not that price sensitive, perhaps because of insurance as Robert pointed out.

$20 a pair is even better, of course. I wonder what other markets are getting razed by the internet that I don't know about. Might be worth a thread of it's own...

At 6:52 AM, April 15, 2007, Blogger Mike Huben said...

"The surprisingly low penetration of glasses on a global basis is a result of the fundamental structure of the eye care industry. The current commercial eye care system is designed for the wealthy, first world customer, and espouses its customers' values. The system is characterized by extreme product diversity, customized product combinations, highly trained specialists, and a fashion focused product design and buying processes. As a result, prescription glasses are unaffordable by the majority of people in the world, and access is severely limited. In most developing nations, there are few optometrists, and those that are present live primarily in capitol cities."

So it seems the high costs are partly due to fashion choices: much as in the sneaker industry.

A couple of years ago, I was teaching the Museum Of Science "Engineering The Future" course, and they had a chapter on Saul Griffith and his attack on the problem. There are several major issues. A complete lense inventory requires close to 20,000 lenses because there are so many different refractive errors. Diagnosis of which corrective lense is needed requires expensive equipment and training. Griffith invented a brilliant machine that could cast lenses of any prescription one at a time in a few minutes each. He invented a device that could measure refractive errors of the human lense passively, without a trained operator.

Griffith is a brilliant inventor, but a classic example of how skipping steps of the engineering design process leads to much wasted time and effort. His lense casting machine is a classic example of inappropriate technology created for a region that needs appropriate technology. It made for a really good lesson critiquing his methodology and finding alternative, appropriate technology strategies to get glasses to the third world poor.

At 10:34 AM, August 05, 2008, Anonymous Anonymous said...

By any chance do you know if this apply to pinhole glasses too?


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