⭐️⭐️⭐️ Newsletter

If the Michelin Group begins rating newsletters, I think they would classify Monday Morning Economist as an exceptional newsletter that is worthy of a subscription.

This may not come as a surprise to many of you, but State College does not have a Michelin-starred restaurant. Don’t get me wrong, there are some great places to eat in town, but none of them meet the standards to receive even the lowest rating, which Michelin defines as “a very good restaurant in its category.” I can, however, purchase Michelin tires at eight different locations in State College alone.

Yes, the French tire company also publishes a guide to the world’s best restaurants and has been doing so since 1900. While it may seem incredibly strange at first, the economics behind it actually makes a lot of sense. When the Michelin brothers developed their design for a new car tire that could be filled with air, there were less than 3,000 cars in all of France. At the time, cars were a luxury of the ultra-rich, and in order to sell more tires, the brothers had to convince more people to purchase cars. One strategy was the creation of Bibendum in 1898, more widely known as the Michelin Man:

An early advertising campaign featuring the Michelin man, written in Latin and French. "Now is the time for drinking" "Now we must drink." (Latin)   "That is to say"   "To your health"   "Michelin tires"   "Drink the obstacle" (French)
An early advertisement for the Bibendum. The top portion is in Latin and says: "Now is the time for drinking. Now we must drink." The lower portion translates to “That is to say, to your health, Michelin tires, drunk the obstacle.” (Flickr)

The brothers realized that French drivers didn’t have much of a demand for their car tires. The company was already a successful tire company among cyclists, but they needed to increase demand for cars so that they could sell more car tires. According to Say’s Law, the production of a product (like car tires) would naturally create a market for the product, but the Michelin brothers had an idea to help grow the tire market even quicker.

In 1900, the Michelin Group published their first guide, which was a pocket-sized, alphabetical listing of French towns of interest. The guide was designed to help drivers better plan their trips, thereby boosting car and tire sales. The guides included directions for changing tires, local maps, and locations of fuel stations and hotels. For the first twenty years, the guides were free, but in 1920 they began charging 7 francs each (about $2). Today they cost around $20.

Tires are a great example of derived demand. No one really wants to buy tires by themselves. I don’t think I’ve ever been inside a tire shop (even one that sells Michelin tires) and seen people who were happy to purchase new tires. People demand leisure activities (and income at work) and thus demand transportation to their destination. A subset of people demand public transportation, like trains or busses, but others demand personal transportation, like cars. Those that demand cars will demand other inputs like fuel and tires. These linkages are the basis for the concept of derived demand. The demand for tires is derived from the demand for travel.

Early strategic moves of the Michelin brothers focused on increasing the demand for cars by encouraging hoteliers to offer free parking and lobbying the Fench government to put up road signs. The brothers knew that if they could increase the demand for cars, the demand for tires would increase as well. The Michelin Group began rating restaurants in 1926 and started with only one star. A few years later they would begin their three-star system:

  • One star: a very good restaurant

  • Two stars: excellent cooking that is worth a detour

  • Three stars: exceptional cuisine that is worth a special journey

The Michelin stars are much less star-like than you might imagine:

Michelin would eventually publish regional guides for nearby countries, the first being Belgium in 1904. The United States didn’t receive their own regional guide until 2005, and the only establishments were in New York City! Their guide has historically focused only on French cuisine, but they have worked to broaden their reach and include a wider variety of cuisines. Michelin has traditionally only reviewed five cities in the United States: New York City, Chicago, Washington DC, Los Angeles, and San Francisco.

The financial impact of receiving a Michelin star is significant. Restaurants and diners face an information asymmetry problem that the Michelin Group aims to fix: chefs know more about the quality of their food than their potential diners know. When information asymmetries exist, consumers often turn to expert opinions to make decisions. Researchers estimate that restaurants receiving a single star see an increase in activity by 20%. A restaurant receiving three stars can double its activity. In addition to an increase in customers, restaurants also raise their prices by approximately 15% (one star), 55% (two stars), and 80% (three stars). When a restaurant loses a star, the results can be devasting.

Want to learn more about the Michelin Guide? Check out some of these additional sources:

We have finished Week 15 of 2021 and I’ve checked in 20 books so far. Last week I finished an interesting book on what it’s like to drive the Oscar Mayer Weinermobile thanks to a recommendation by a former student who is currently a Hotdogger. Her experience has been incredibly fun to follow along with on Instagram.

A post shared by @wootenomics

The other book I finished was posted by Matt Kahn on his Twitter account. His new book, Unlocking the Potential of Post-Industrial Cities, was a fascinating look at how former manufacturing hubs in the US have been impacted by effective government policy (or lack thereof) over the past few decades. The entire time I was reading it I was thinking about how great of a course it would be to teach.