Why Central Banks should encourage shoplifting

The European Commission reported earlier today that the Eurozone faced deflation of 0.2% in the year to February. Situation is hardly more positive in the UK, with the Consumer Price Index (CPI) only up by 0.3% in the year to January. And yet, as Central Banks are struggling to make ‘unconventional monetary policy’ work, there is one lever they have not resorted to yet: favouring shoplifting.

'Officer! Quick! A shoplifter!!'
Credits: www.jantoo.com

Shoplifting cost UK retailers an estimated £335m in 2013-14, according to the Financial Times. This excludes prevention costs such as hiring security guards, installing detectors at the entrance or fitting items with individual security wrapping – razor blades and smartphones are the usual candidates for the latter. This cost is borne by the whole community: retailers have to indistinctly increase public prices to offset for the revenues losses implied by shoplifting.

More precisely, retailers increase prices a priori based on the expected share of items which will be stolen. For instance, a retailer can plan to generate £1,000 of revenues by selling 10 copies of an item priced at £100 each. However, if he expects expects 1 out of the 10 copies to be stolen (and therefore not paid for), the ‘theft-adjusted’ price will be £111, so that revenues coming from the 9 ‘paid-for’ items (9 * £111 = £999) are equivalent.

The ‘theft-adjusted’ price evolves in a dynamic manner, based not only on the price of the underlying widget, but also on the evolution of the probability of theft. Price will increase if this probability goes up. As an example, if we raise the ratio from 1/10 (10%) to 2/10 (20%), the new adjusted price becomes £125, as the retailer will only receive payment for 8 widgets. That is an increase of 12.6% compared with the ‘10%-theft rate’ scenario.

Although completely immoral (and, to be fully clear, I do not seriously encourage this practice at all), favouring shoplifting would consequently lead prices to mechanically increase and ultimately raise inflation – which is defined as “the rate at which the general level of prices for goods and services is rising”. The bar would have to be raised quite a lot though, since the £335m mentioned earlier barely represent 0.01% of UK GDP in 2014…

In a later post I will address this topic from the angle of game theory, framing the issue as a game between the shoplifter and the shop itself. One of the rather obvious conclusions of this exercise is that excessive expected shoplifting will lead the shop to take drastic preventive measures which will fully deter shoplifters – there is therefore a ‘ceiling effect’ and a limit to this policy.

P.S.: Readers interested by this kind of ‘outside-the-box’ economic thinking may be interested in having a look at Levitt’s and Dubner’s famous Freakonomics blog.