The Rising Cost of Death

Hmm ok before I shelf the previous copy of Newsweek, let me quickly share an interesting article... which examined the economics in death!

This article 'Where Death Comes Cheap' is found on pg 22 of the March 16 issue of Newsweek, but for everyone's convenience, here is the link for the online version of the article :

http://www.newsweek.com/id/188139/page/1

I shall post some important excerpts here, for easy reference:

'With its revenue directly tied to the death rate, the $15 billion funeral industry has always been seen as recession-proof. No matter how bad the economy, people always die and families always spend money memorializing them, often equating dollars spent with respect paid, and rarely shopping around. Funeral homes tend to be the oldest businesses in town and generally earn solid profits...'

[In the past, the demand for funeral services was price inelastic. There were also very few close substitutes for funeral services, and funerals could be considered as necessities, hence accounting for the price and income inelasticities of its demand. As a result, suppliers could raise the prices of funeral services easily and there would be a less than proportionate fall in quantity demanded of the services. The area under the demand curve at the higher price was larger than that before the price hike, hence allowing suppliers to get an increased revenue and in turn earn huge profits (assuming ceteris paribus).]

'But this recession is proving different—and as it deepens, families are beginning to seek ways to cut bills that were once seen as sacrosanct. Long-term trends (like the growing acceptance of cremation) are coalescing with the down economy to lead some industry veterans to sense a shift. "There's a major movement toward low-cost options right now," says R. Brian Burkhardt, a funeral director in Wheaton, Ill., who writes an industry blog called Your Funeral Guy. "Those businesses that adjust will do fine—and those that don't will be gone."'

'Now it's cultural shifts that are allowing some of these discount options to thrive. Chief among them is the growing acceptance of cremation, which accounted for less than 4 percent of funerals in the mid-1960s, but more than one third of them last year. (Some observers expect the cremation rate to hit 60 percent by 2025.)'

[However, in the economic crisis now, consumers' income are falling and consumers are trying to increase personal savings in all ways possible, turning to cheaper alternatives instead of the traditional casket-service burial. This is equivalent to a change in consumer preferences, as more people start to accept cremation (which is much cheaper) instead of the traditional funeral. The change in consumer preference means that consumers now view cremation as a close substitute for tradition funerals, so traditional funerals are no longer deemed as necessities. Thus in this current situation, the demand for proper funeral services falls more than proportionately with the fall in income, making funeral services income elastic, Ey > 1. Hence firms need to come up with ways to cope with this new situation, for example offering no-frills cremation services to cater to those customers looking for cheaper alternatives.
The availability of cremation as a close substitute to the traditional funeral service also means that the demand for traditional funeral services is now more elastic than before.]

'Cremation cuts out the three most expensive pieces of a funeral: the casket, the embalming process and the grave plot. Industry critics say that as consumer preference has shifted toward cremation, funeral homes are jacking up prices in an attempt to preserve profits in a declining market... The numbers suggest that's true: from 2000 to 2008, the price of a casketed funeral rose 30 percent, according to the National Funeral Directors Association, whose members claim the spiking costs of raw materials that go into caskets, like steel and copper, are largely to blame.'

[The fall in demand for traditional funeral services - leftward shift of demand curve - causes the new equilibrium price (and quantity) to be lower, so the area under the demand curve at the new equilibrium price is smaller than before. This means that the total revenue for the firms have decreased, hence lowering the firms' profits, or even causing them to make a loss. As a result, the suppliers are trying to raise prices so as to 'preserve profits in a declining market'. They claim that the rise in prices are due to the increase in prices of raw materials, which increases their costs of production. In other words, the rise in prices of funeral services are supposedly due to the leftward shift of the supply curve, which means the leftward shift of the supply curve is more than the leftward shift of the demand curve. However, whether the firms will make more profit by raising prices remains to be seen as it is dependent on the new price elasticity of demand for funeral services, which is definitely more elastic than before, as mentioned above. Hence the firms may end up not making more profits either.]

'In fact, he (Tom Macksoud, who runs a no-frills cremation business called Simple Funerals) recently trademarked the name Simple Funerals to head off competition. Business is already significantly exceeding his expectations... as more clients opt for a quieter, thriftier way of death.'

[There is a high possibility that more such businesses will enter the market due to the high demand of no-frills cremation services. For such potential rival firms, the cross-elasticity of demand is > 1. Trademarking the firm's name is a way of service differentiation and to create customer loyalty and reputation. If Simple Funerals has a better quality of service, customers will prefer to get its services and recommend it to others. So if rival firms slash prices, the effect on the demand for services from Simple Funerals will not be too great, so that Simple Funerals will not need to slash prices by too much. Hence, trademarking the name of the business is a way of staying competitive in the market.]

Hope my rambling is understandable! Comments are welcome :)

Cheers!

yingda