A curious thing happened last Friday in my intro class. We have been studying the theory of the Firm and one of the themes I emphasis (which gets short shrift in the textbooks) is that successful firms are profitable precisely because they create products that consumers value; that is, firms create value that didn’t exist before. We started this study almost a month ago with a case study on the Apple iPod, which the students could readily identify with and see how it was consistent with the value creation theme. Friday as we brought the study to a close, I spent the first 10 minutes doing another brief case study focusing on the coffee cup sleeve that came along with the coffee I had purchased at Einstein’s that morning. While a rather trivial product, it provides a robust example to illustrate many behaviors of firms we have studied over the last month.
Does the invention of the coffee sleeve provide value that didn’t exist before? Yes, the group agreed. Who captures the majority of that value? Is it the entrepreneur who invented the sleeve and produces it now? Is it the coffee shop? Is it the coffee customer? How much does the coffee shop raise the price of a cup of coffee to account for the cost of the sleeves? Probably little or nothing, we concluded, since the sleeves are likely very inexpensive per cup. This suggests much of the value goes to the customers. How profitable are the sleeves to their producer? That depends on several issues. Since a lot of people buy cups of coffee, even if the price per sleeve to Starbucks is low, the sleeve producer probably makes a good profit on the volume. Are the sleeves difficult to produce? No. Then have other producers begun to produce their own sleeves, thereby taking away the profits of the inventor/original producer. We had several examples of the sleeves in the classroom, one I brought and a couple students had with the coffee they brought to class. The students thought to look at the sleeves and found patent and patent-pending numbers. This suggests that the investor is being rewarded through higher than normal profits, and that those profits haven’t been bid away by competitors.
Now to my point. The students were highly engaged by this discussion—not only that, but they were getting it. About three quarters through though, I noticed that no one appeared to be taking any notes.
This caught my attention because at the beginning of class I saw a student in attendance who had not been in class all week due to illness, and she was clearly still not feeling 100%. I asked her why she was there and she said she didn’t want to miss any more class sessions because copying a classmate’s notes wasn’t an adequate substitute. So when I saw that students weren’t taking notes on the discussion, I realized that anyone who missed Friday’s class would likely not have any knowledge of the coffee sleeve discussion.
At the end of the discussion, I asked why no one had taken notes, and the response surprised me: “We didn’t think this was part of the lecture,” they said, “because you were just telling us a story about something random.” I related the episode in my senior seminar later in the day and a good student said, “They didn’t think to take notes because the discussion was fun, rather than work.” Wow!