American Mittlestand: The Curious Case of Hot Topic

American Mittelstand: The Curious Case of Hot Topic

A German friend of mine recently asked me about this unique German word, Mittelstand. Roughly translated, the word is a noun referring to a singular firm that endures through multiple economic hardships.

Those of you who know me understand that I am an economist. So, this word interested me, and I looked for any example. Of course, I found one!

Despite there not being an equivalent word in English, there does exist an American example. Since the late 1980s, Hot Topic has endured. While this might seem unworthy of our examination, considering its business is mainly clothes and its clientele teenagers, it actually can offer us some important lessons in how any given firm can make itself into a mittelstand.

The Basics of Hot Topic

Hot Topic did not start as the store it is today. It sold nothing in line with dark-aura subcultures or anime. It had nothing to do with hair dye or edgy emotional music. Rather, it sold fashion accessories for men.

The store first marketed itself towards grown men who wanted to give some accent and flare to their appearance. Masculine necklaces, uniquely framed shades, and subtle bracelets were the primary source of revenue for Hot Topic. It was not a place where one would expect to find a teenager, and certainly not one ranting about noncomformity and antiestablishmentarianism. 

However, this business model did not garner much profit. As it turns out, even in the colorful Reagenesque decade that brought us bleak visions of a machine dominated future and the music video, men still did not concern themselves too much with fashion. The suit and tie remained all that the typical man needed.

However, one particular kind of item did sell. In fact, quite often, the owner of this store, a man who bet it all on his entrepreneurial spirit and thinking grown men cared what others thought of their clothes, noticed that there was only one type item he could count on to require restocking.

Silver studded black leather bracelets kept his failing business from closing.

These items were a heavy metal fashion statement, particularly popularized by Judas Priest frontman Rob Halford. Originally meant to distinguish homosexual men to potential lovers, the symbolic bracelet jumped subcultures. It became a symbol of the headbanger, due in so small part to its resemblance to armor and thus relating it to violence. The bracelet even had variations that were explicitly armor, replacing silver studs with actual spikes which have endured to this day in the Norwegian Black Metal Community (more on this later).

So, in an attempt to save his drowning dream, the owner and founder of Hot Topic shifted his targeted consumer. Rather than continuing to sell to grown men, the new target demographic of hot topic became teenagers. However, he did not just sell to any teenager; he marketed towards teenagers who were into heavy metal. Despite the Nineteen-Eighties being considered the metal decade, the popular music scene of that decade was dominated more by the likes of Michael Jackson, Cindy Lauper, and Flock of Seagulls. This is evidence of two facts.

The first one being that teenagers in the nineteen-eighties who considered themselves acolytes to Heavy Metal would have very much considered themselves ignored by popular culture. This is especially true in regards to the Satanic Panic, and cases not unlike the West Memphis Three litter the later half of that decade. Combined with the heavier marketing done for softer music, which was infecting even their own scene with the push for the power ballad and acoustic songs, teenagers in the Heavy Metal community would have described their culture as persecuted.

However, the fact that the genre has more subgenres than any other form of music is no accident. This is the result of the wide audience to which Heavy Metal appeals. Since the Nineteen-Eighties is remembered not for techno dance music as much as it is for the tapping guitar solo, characterized in modern memory not by the colorful clothing of the decade but by the dark grit of its movies, the ambience of which was captured best by the angry lyrics and aggressive melodies of bands like Slayer, Metallica, and Megadeth. This has not even taken into account the extreme popularity in this decade of heavy metal icons like Alice Cooper, Ronnie James Dio, and, towering above them all, Ozzy Osborne. This means one thing: despite their self-identification as persecuted outcasts, teenage headbangers were a sizeable portion of the teenage population.

In short, Hot Topic began to market itself to a large population of edgy teenagers. These edgy teenagers undoubtedly felt they had nowhere else outside of concerts to buy clothes with which to identify themselves to fellow headbangers. In other words, Hot Topic took advantage of monopolistic competition and cornered a market. It would not be too far off target to say they earned an advantage of edge.

The decade ended and with it, the Cold War. The Soviet Union collapsed and the looming threat of a nuclear third world war became nothing but last night’s fever dream. The angry men for whom inflation was their childhood and and the arms race the background for their puberty became adults. The relics of their youth were relegate to dusty attics, damp basements, and forgotten storage units. They no longer shopped at Hot Topic.

The end of the Cold War brought with it a drop in the levels of testosterone in men. This can be evidenced by the outrage some had over the President getting a blowjob, or the outrage others had about the violence of a war thousands of miles away in the Balkans. An aversion to sex and violence has always been the hallmarks of feminized men. With this pussification of the American male (as George Carlin bluntly put it), a new form of edgy music came forward. Gone were the violent lyrics of Slayer and the individualism of Metallica. Instead, socially conscious, woman-worshipping bands like Nirvana became the majority of outcasts’ music of choice. Nothing demonstrates this more than the fact that what prevented Death Metal band Morbid Angel from entering the mainstream was an album devoted to glorifying genocide, not all to different from Slayer’s album Reign In Blood. 

Hot Topic’s owners and operators noted this shift, and quickly changed their tactic. Rather than offer the same clothes worn by death metal and black metal bands, they sold heavy plaid shirts and other articles of clothing one would likely have seen Kurt Cobain and ilk in.

This means they were carefully watching what teenagers preferred. However, they did not pay attention to the popular crowds in high schools. Instead, they kept their marketer’s eyes on the other tables in the school cafeterias. Every few years, as the students graduated and new kids replaced them bringing with them shifts in culture, Hot Topic moved to meet this shift in demand. They would liquidate what stocks they had of the old counter culture. They relegated yesteryear’s customer to the rank of old men, boring women, and the generally lame members of popular society. They embraced whatever large group of teenagers considered themselves unembraceable. 

This strategy is actually quite genius. The targeting of teenagers guarantees the most impulsive of customer bases. The targeting of counterculture teenagers, or, if not particularly counterculture, than some supposedly unpopular subculture (considered unpopular by its own members, mind you), which nearly nobody else does on, especially on a national scale, gives them what could considered be the power of the monopolist in a competitive market. Such things happen in monopolistic markets, but usually not to such resounding success. Their typical customer base comes to view this store, the retail outlet of an otherwise mechanical corporation no different than Sears or Men’s Wearhouse, as an anitcultural symbol, a base for their revolution, an oasis of uniqueness in a world otherwise populated by unaware squares. They are reliable to pay high prices for the goods they buy. They are loyal, until they are replaced by the next counterculture fad. 

To summarize, Hot Topic markets not to everybody, but to large populations of teenagers who are members of the largest subculture, usually an identifiable counterculture. They do not sell just clothes, they sell an identity. If the clothes of the cheerleader and the football star are the mainstream, then Hot Topic sells what they would never wear. The black clothes, the dark colors, the band shirts and the bullet belts mark them. In the prison that adults call school, they can now fly the flag so potential friends can see. Hot Topic sells community.

Then, they liquidate this identity once the yesterday’s teenagers become adults and sell whatever edgy shit a new group of teens consider to be more important than life itself. They are careful to always sell to some subculture, almost exclusively, but never to market to subcultures so niche that the market would be too anticonformist, too small, that they would both not promise large revenues but they would scare off wider community seeking teenagers convinced that by wearing black, they are self-actualizing.

This explains Hot Topic’s lack of catering to fans of Norwegian Black Metal, since what is more rebel rebel these days than Fascism and Nazism. This also explains their lack of marketing to predominantly black subcultures, since blacks are too small a portion of the US population already to be relied on for the revenues Hot Topic has come to expect.

American Eagle, Hollister, Ambercrombie and Fitch, Forever 21, Aeropostale, Urban Outfitters, Old Navy, and Ice Cream on the Beach

Anyone who has ever considered the military as a career to the point of visiting a recruiting station has more than likely noticed the location is marked as “Armed Forces Recruiting Center” or “Military Recruitment Station”, instead of the title of some individual branch displayed to attract passers by. Entering the office one then is presented with each branch’s separate office to choose from; this is certainly providing greater choice than if each branch were establishing separate and distant recruitment offices at various locations in every township and city. 

Drug stores will often do the same thing, with large chains setting up shop down the road from each other or, in some cases, right next door to one another. This can be seen with restaurants, who often operate in one another’s vicinity. Even cable TV has begun doing this, with various channels airing their most popular programs in direct competition with the most viewed shows of their competitors. If I am not mistaken on my program times, Tucker Carlson competes for viewers directly with Rachel Maddow, both occupying the eight o’clock p.m. time slot.

Dear Reader this is called Hotelling’s Line, popularized with the metaphorical example known as ice cream on the beach. Here is the metaphor briefly and haphazardly explained:

There are two vendors on a beach. Both vendors sell ice cream, and beyond cone styles and brand names provided, there is nothing different between them. The flavors offered are the same, and both sell waffle cones. The stretch of beach on which they operate is exactly one mile in length, and a quarter mile deep from the ocean to the city boardwalk. The rhetorical question simply asked is where, on this rectangle of sandy, sunny beach, is the best location for each ice cream vendor to set up shop?

The answer is next to one another. By doing this, they guarantee that neither stand will gain, on any given day, a monopoly because beach goers gather in their particular section of the beach. Rather, this location strategy guarantees that they will, over the course of their ventures, assuming both firms remain, in all important aspects relating to ice cream, identical. 

This runs contrary to another method known as cartel theory. In cartel theory, firms actively set prices by agreeing to limit supply. In this method, numerous firms (usually a relatively small number) behave a single firm, fairly dividing the market to guarantee each member of the cartel monopoly profits.

Unlike cartel theory, Hotelling’s Line does not guarantee participants monopoly profits, or limit supply or some other market manipulation mechanics. In fact, there is no actual coordination between firms, as this is not a cooperative strategy, but a competitive one. The result, as said above, between our two fictitious ice cream firms is that revenues, and thus profits, are evenly split. 

The close proximity of competition prevents firms operating on Hotelling’s Line from raising prices in order to reinvest, thus improving the product or production methods (the former would give a reason for the price increase and the latter promise a future decrease in price, theoretically). So, this strategy not only promises some equitable distribution of total market revenue among sellers in a given market, it also keeps prices from rising. In modern capitalistic markets, most goods are traded in what are called monopolistically competitive markets. This means that though the products sold are the same functionally, and in a good many other ways, there is some differentiation among them which makes them unique in the market. Most importantly, this marks goods sold with some identifier so a consumer can know the supplier. Brand names, colors (such as red Coca Cola and blue Pepsi), size and shape differences, and an increasing list of arbitrary differences compose products in a monopolistically competitve markets. Quality changes can also appear in product differentiation, but this goes outside of the scope of this particular essay.

It must be noted that the more manufactured a product, the more likely it is to be sold in a monopolistically competitve market as opposed to a perfectly competitive one. A car needs iron refined from ore, fiberglass, melted sand for windows, various chemicals and plastics, and other input produced only by human interaction with some raw material inputs to be made in order to brought to market. In contrast, corn needs only be grown and harvested to make its way to a market. Corn is rarely, if ever, labeled before it makes its way to market (I am not considering shucked corn as this is one more step in the production process). Cars all bear the mark of their manufacturer, another mark identifying the model, and often even some additional insignia representing the dealership from which they were purchased.

One product which, with technological improvements over the centuries that mankind has produced it for market, has moved from perfectly competitive markets to monopolistically competitve markets is clothing. Every article of clothing in virtually every wardrobe bears some mark of its maker. Even customized clothing will have some symbol to identify the tailor.

Many low end designer clothing retailers place their brand name prominently on the wares they sell. The term “low end” should not be taken as derogatory, but as just another adjective. These sellers operate in a market not too different from Hot Topic, and in fact, if we consider markets as aggregates and disaggregates of one another, they operate in the same market as this mittelstand competitor. This market is clothing for teenagers.

Just as some teenagers seek to broadcast their identity as rebels by wearing the clothing purchased at Hot Topic, others wish to broadcast their identified status by wearing the relatively expensive clothing sold at retailers like American Eagle, Hollister, Aeropastle, and other such clothing retail outlets.

Normally, economists don’t consider markets to be tangible locations. The market for food consists of grocery stores, restaurants, and ice cream stands. However, apart form Hotelling’s Line, there is no distinct location where grocery stores will set up shop.

This is not true for those firms which market primarily to teenagers. Clothing stores such as Hot Topic, American Eagle, and the like set up shop in a tangible market. In shopping malls, these firms make their homes and operate. In the later years of the first decade of the Twenty First Century, it was quite common to go into any shopping mall in America and see clothing store after clothing store, notably ones which specifically marketed towards teenagers and college students just entering their twenties (so, mental teenagers). The whole of the shopping mall became Hotelling’s Line. 

There are certainly good reasons for this.

Shopping malls are not just places to buy things. They are social destinations complete not only with stores and shops, but food courts, rest areas, and some even have open public lounges. Juice stands, peculiar benches, and popular stores become not just landmarks, but meeting places.

Teenagers are most likely to utilize the social aspects provided by any shopping mall for multiple reasons. The public nature provides a safe yet independent atmosphere. Many of them have plenty of pocket money and, being impulsive teens, they are looking to spend it. So, selling high priced clothing to such teenagers becomes an excellent business idea.

These outlets operating in this two or three stored three dimensional line had a large total market revenue which they were dividing equally among themselves. Brand name clothing like Hollister is more desired than the cheaper, hidden labeled shirts sold at the large anchor stores like Sears or Kohl’s. These shirts are status symbols, as relatively expensive clothing has always been.

For those seeking to assert some high position in the strict social hierarchy of any high school’s caste system, a fifty dollar shirt and a one hundred dollar pair of jeans is better than a whole outfit costing a total of twenty five bucks.

However, too many of these clothing retailers had the excellent idea to sell high priced clothing to teenagers. The number of teenagers in any given area remains relatively constant, uninfluenced by the number of clothing stores operating in local shopping malls. This attribute of the customer base means there is a finite limit to the amount of money they will spend as a whole and in total on clothing in any business cycle. 

Say’s Law does dictate that supply creates its own demand. However, that created demand is not somehow obligated to support all firms engaged in supply. When this happens, we call it a surplus. 
Even if the clothing retailers hired teenagers (which most of them did and still do), this does not guarantee them profits. Taking an extreme example that every teenager wants brand name designer clothing like the firms in this section’s title, they would still need the money. The firms cannot hire the entire customer base, because then the business model resembles a snake eating itself. 

Yet not every teenager desires brand name designer clothing. So if the teenage customer base is X, then those shopping at Hollister, American Eagle, and their direct competitors are some fraction of X. The number of employees hired to work these firms (assuming they are all teenagers themselves) are an even smaller portion (they were, in many cases, obligated to purchase the latest trends sold by their employer, albeit with an employee discount).

Imagine our two ice cream vendors on the beach again. The beach has not changed, neither has the number of beach goers. But, another vendor appears. He, too, sells ice cream of the same flavors and in waffle cones. Now, total market revenue is not divided in halves, but into thirds. Should another vendor appear, the revenue share for each firm is quartered. A fifth and again the revenue, and profits, of each vendor is decreased by another portion.

It is obvious that every firm has costs. These ice cream vendors must buy the ice cream, maintain their freezers and stands, and still have enough to pocket for themselves. When the market share becomes too small for them to pocket enough to meet both their professional and personal costs, these vendors exit the market. They do not shut down, which is to say put the stand in storage and reemerge next summer hoping for better times. Rather, they sell the stand and seek their personal income elsewhere.

This is the basic market mechanism by which prices are kept at a market equilibrium: too many firms and prices fall, so firms exit the market causing prices to rise again. The reverse is true for shortages, where too few firms result in high prices, so firms enter the market causing prices to fall again.

The shopping malls operate in the same way as our imaginary perfectly rectangular beach. Too many clothing retailers had entered the market. The total market revenue was still being shared equally among them, but in decreasing amounts. Every new similar outlet opened, the less profits each store would see. This, of course, does not even take into account any macroeconomic shocks which might further decrease profits, such as the market crash of 2008.

The Retail Apocalypse Described By Hotelling’s Line

I posit the end of the retail era, that is the shuttering of doors of multiple outlets across the United States, had less to do with online retailers like Amazon and their superstore brick and mortar equivalents like Wal-Mart or Target and much more to do with Hotelling’s Line.

Many outside observers will say that American culture is synonymous with consumer culture. Retail space has been steadily growing in the United States until the capital flight from cities to suburban towns occurred in the later half of the Twentieth Century. Now demand for retail space grew rapidly, and with the introduction of the shopping mall, one could contend that demand for retail space was greater than demand for aggregate retail itself. The evidence is greater as time passes. Many towns which once would have had two, maybe three, competing stores in a given market, and each store having but one location, now have two or three national chains competing, and each chain having several outlets within that town. 

This strategy has nothing to do with Hotelling’s Line, but rather simply corporations deciding to offer numerous locations for their particular brand in an attempt to satisfy the growing demand that comes with a wealthier population. This is especially true of grocery stores, with many large towns in the wealthier suburban pockets of the United States boasting two or three locations for every national chain represented there.

Grocery stores, appropriately called supermarkets due to the wide variety of goods sold to end users, are a necessity for the well-being of any town. There are really only five things the human organism needs: food, shelter, clothing, clean water, and sanitation (by which I mean keeping the activities of the latrine separate from where one eats or sleeps). If any American was to look around his domicile this instant, the majority of goods possessed, and indeed many of those most currently desired, do not fall into one of these five categories. Most possessions in America now are valued for their qualities of entertainment of the degree to which they make life easier.

The computer on which I am typing is an excellent example. It provides me access to various forms of entertainment, ranging from the baseness of pornography to instant access to university research. It also makes writing easier, allowing me to backspace instead of scratch out and digital organization to prevent any conflict regarding the usage of space within my own living area.

However, it is not a necessity. Neither are my books, my guitars, my booze, even my workout equipment is not necessary. It has made my life easier, but I would not die without it. And though instant access to the internet, which has become important (albeit not fundamental to living) in the modern age, that can still be procured through several public avenues. There are some who even bemoan this technological age, saying it does more damage to the human animal, both physically and psychologically, than good. This sentiment can be summed up simply as “what would people do with their time if they had never invented smartphones?”.

But I am not writing on the merits of the Luddites. Instead, I think it is important to discuss value. The value which consumers place on goods is measurable using a quality known as price elasticity of demand, which I will simply call price elasticity. This quality simply denotes the effect of a price change on the quantity demanded by the market. It is the mechanism allowing the fundamental law of demand to work: as price goes up, quantity demanded falls, and the reverse is true as well.

Should the value of price elasticity be equal to exactly 1, this denotes a perfect elasticity. Perfect Elasticity means that for every unit of monetary value (or whatever is traded) in the direction of change, the quantity demanded changes the same amount in the opposite direction. So, a one dollar increase in price should mean one less unit demanded in the market and a twelve dollar decrease in the price results in twelve additional units demanded in the market. 

If the price elasticity be found to be less than one, this means that the change in quantity demanded will always be less than the change in price. If the price elasticity is greater than one, than a change in price is met with a greater change in the quantity demanded. Goods with a price elasticity less than one are simply called inelastic, and these are necessities. The closer this elasticity comes to zero, the more necessary the good. 

Before continuing, I would like to elaborate a bit further on elasticity. Those goods with an elasticity greater than 2 are called luxury goods. These are goods that usually sell for a high price, but are quickly abandoned by potential customers when price increases. Since luxury goods are never necessities, there are plenty of cheaper substitutes one can find. It follows luxury goods compete not only with other goods in their market, but also with all other goods that could replace them. A Ferrari not only competes with other luxury cars, but with decent model cars like Honda and Toyota. It also competes with American junk cars. Finally, the Ferrari competes also with bicycles and even with taxi services like Uber and Lyft.

If price elasticity for a good is calculated to be less than zero, this is referred to as a Giffen good. A Giffen good is, by definition, an inferior good. To define an inferior good, we must consider a new kind of elasticity known as income elasticity of demand, shortened for the rest of this piece to income elasticity. Income elasticity simply measures the change in quantity demanded of any given good as the consumer base’s income rises. To say in a more laymen’s terms: should one’s income double, how much more of all currently consumed goods will one consume. For all normal goods (and luxury goods are considered to be normal goods), income and quantity demanded are positively correlated. This makes quite a bit of sense: make more money and buy more things. 

However, for inferior goods, as income increases among the consumer population, demand for these goods decreases. This is to say that consumers, when their purchasing power increases to a certain point, they begin buying a higher quality and more diverse bundle of products for which a previously purchased inferior good was a substitute. This is due to the fact that inferior goods only really exist for perceived necessities. In the current year, one may still buy a decades old flip phone to maintain the ability to call and text, forgoing the luxuries of games and instant internet offered by a smartphone. Instant noodles are purchased instead of Italian varieties in times of low income. Spam and other canned meats are purchased instead of butcher’s meat in these times, as well. It comes as no surprise that in poorer parts of the world, Spam is considered a cornerstone of many diets though it is frowned upon as overly processed in its country of origin. 

And it is this sentiment that brings us back to the Giffen good. As stated above, inferior goods are substitutes for normal (and, often, more desirable) counterparts. Normally, inferior goods are subject to the Fundamental Law of Demand: price and quantity demanded are negatively correlated. However, some inferior goods compose such a substantial portion of the diet of the poor, or their wardrobe, or their hygiene, or their housing, that should price increase, the quantity demanded increases. 

In the Philippines, for example, where Spam is a major portion of the diet for the overwhelmingly poor population, to remove or even reduce it in some amount on the plate would be to significantly reduce the meal in both substance and quality. This suggests that the other elements on the plate are of a secondary nature nutritionally or in terms of taste. In other words, these other things are perceived as less important, and not considered as necessary. Prices of Spam rising might happen due to some increased demand for that product in particular, or a reduced supply; but, barring Malthusian macroeconomic events, this is not likely the case. Rather, a price increase in Spam is caused by some macroeconomic spike in inputs. Pork, feed for pork, and canning materials could be considered. However, usually this macroeconomic shock is often due to some increase in energy, which is the most variable factor of inputs into any market.

It follows that should the price of Spam increase due to some macroeconomic shock, especially one due to rising costs for energy inputs, the prices for other goods would also increase. Since Spam is considered so important to the diet of our considered population, it is logical that instead of buying less of everything proportionally, consumers will actually increase their purchasing of Spam and compensate financially by decreasing their consumption of other goods. This is to prevent the meal from losing quality, in this particular case. 

The example above is fictitious, but based on the original identification of Giffen goods. The economist who identified them, one Sir Robert Giffen, saw that the poor in late 19th Century England would increase their consumption of potatoes as the price of this particular vegetable increased. It may be taken from this that as the price of any Giffen good falls, consumers may also decrease their consumption of this good to diversify their diets.

It is the mechanics that make the Giffen good possible which explain the theory of how Hotelling’s Line was responsible for the Retail Apocalypse in America, and not the rise of online shopping (which, by that point, had existed for a decade and a half).

The vast majority of retail outlets did not sell necessities, not even modern societal ones. Many outlets which were opening in the rapidly expanding suburbs and taking over revitalized urban settings were craft stores, musical instrument retailers, media shops with popular movies and music, sports equipment outlets, and other places aimed at specific hobbies. The diversification of kinds of shops guaranteed, to a degree, a lack of direct competition. Some one looking to build a home gym is not perusing guitars just as some one trying to develop their music room at home is not browsing through different paper materials.

However, they did still compete for that only good considered in macroeconomic study: the dollar. Any given location is a market in itself, and thus all goods, in aggregate, compete in that market. In other words, there is only so much disposable income among a localized populace. The finite amount of expendable dollars is distributed in some manner between various niche outlets, in proportion to the local population’s demand for various goods.

It has been said by many economists that as society progresses macroeconomically (the number of industries grows and with it the opportunities for employment of the diverse individuals making up any given social population), that what once would have been considered luxuries become commonplace, and commonplace things become necessities. Books used to belong only to the noble classes, due to the difficulty of copying and binding any given text. Now, nearly every household, no matter their economic status, has some books in it. Likewise, the cell phone was once the hallmark of a wealthy businessman involved in the higher decisions of his company. His skills were highly valued, requiring him to be easily and instantly contacted at any point in time. Yet today, the cell phone owned by a welfare recipient is capable of so much more that Donald Trump’s cell phone from 1991. 

Since the macroeconomy and the individual’s quality of life are positively correlated, it is understood that just as economic expansions result in better lifestyles for the populace, economic contractions bring worse lifestyles for the same populace.

Macroeconomic booms and busts affect not just high finance and the incomes of executive officers, but also the purchasing power of the laboring classes. Regardless of positive fluctuations in the nominal wage (that is, the number of dollars taken home in each paycheck), if prices rise at a greater percentage then it is said that the real wage diminishes. The term for this is inflation. Since macroeconomic busts affect employers, it is logical that macroeconomic busts also affect employees. Shit rolls downhill.

As consumers see their income become able to purchase less and less during any economic crisis, they devote greater portions of their income to necessities. This is the mechanic described above, that makes the paradoxical anomaly of the Giffen good possible. Increasing the amount they spend on foods, housing, energy, and other truly necessary goods and services, consumers in local areas reduce their consumption of luxurious goods, such as instruments, weights, and media entertainment.

I posit the 2008 mortgage crisis was the cause of the retail apocalypse which soon followed, not the existence of Amazon.

The decreasing amount of disposable income available to a local population meant less revenue generated by local retailers. Decreasing revenues mean decreasing profits, and decreasing profits means the outlet comes closer to closure. The vast majority of retailers operate on actually very small profit margins. They must pay wholesalers and by paying wholesalers, they are also paying manufacturers. This often constitutes the bulk of the price the consumer pays. Then they must pay rent on the location and the wages of the employees working there. The costs of land and labor decrease the remains of revenue even more. As profits near zero, an investor may consider liquidation and exiting the market. They choose to quit while they’re ahead. Should they opt not to exit the market, and profits continue to fall as the macroeconomic crisis continues. Should profits become negative, and the investor can no longer pay wages and rent – or, perhaps they’ve fallen to the point the investor can no longer replenish stock – he must liquidate to pay his debts, and leave with whatever is left to him. 

As more retailers found this to be their fate, consumers still with disposable income found they had no employment for it locally. Either they save it, or they look elsewhere to spend. Considering that many people facing economic hardships devote a larger portion of their income to the purchasing of necessities, it is permissible here to assume that we should disregard those that save some portion of their income, since we can consider delaying consumption to be, in and of itself, a form of consumption. However, this topic will be discussed shortly.

Assuming a given consumer strives to spend all of his monthly income in the same month in which he earns it, and he finds the number of local retailers capable of peaking his interest greatly reduced, he has no choice but to look elsewhere for those commodities he seeks beyond those which are truly necessary.

Because of the closure of stores around him, he goes online to fill his basket of goods. In 2008, that meant going online. This means the retail domination of Amazon is not the cause of the retail apocalypse, as many say, but is in fact the effect of it.

The Retail Apocalypse At America’s Malls

We have established that people facing economic difficulties will take measures to make their incomes stretch. The mechanism making Giffen goods possible, that in times of high inflation food and other necessities take up a greater fraction of an individual’s income, necessitates that people will spend less on normal and luxury goods. With this in mind, what happened at America’s Malls?

We must first consider something about the particular kind of good sold at the considered clothing retailers. The clothing sold at places such as a Hollister or an American Eagle or any other similar retailer is aimed at fashion-conscious teenagers and young adults. The products sold at these locations will, for the most part, conform to various trends with little obvious difference beyond the branding and its prominence. 

The consumers of these places are teenagers, concerned with looking presentable and attractive. This is what I mean by saying they are “fashion-conscious”. They are not totally concerned with fashion itself: they do not concern themselves with thread count, stitch count, and the exact measurement of a sleeve. These are things that the customers of high-end designers would consider, and these high-end designers price themselves far outside of the market for teenagers and college students.

That the items themselves are relatively indistinguishable (by which I mean, again, that a shirt bought from Hollister is not going to be too different from one purchased from American Eagle), and that the consumers considered in this market are not particularly concerned with those particulars which concern the manufacturers and quality control officials (such as thread count), leads one to conclude that the market is imperfect, but operates much more like a perfectly competitive market than it does a monopolistically competitive one. This is to say that although there exists a barrier to entry (the renting of retail space, the purchase and production of stock, the hiring of labor), there is too little differentiation among the products sold by various retailers for consumers to really prefer one to the others. In short, as long as the retailer is available to the teenage market, they are guaranteed some revenue.

The total market revenue is divided among the retailers operating in the Hotelling’s Line that is the shopping mall. Over a long enough timeline, say a fiscal quarter, this division of revenue should look relatively equal.

A firm may try to take the lion’s share of the revenue by enticing a greater portion of consumers to them. This can be done through various methods of price discrimination, or, in the terminology of the non-economist, sales. While decreasing the revenue done through the sale of every item by decreasing the price of every item, sales tend to increase the total number of transactions and foot-traffic. This serves to increase the aggregated revenue of all transactions during the period of this sale. This is why companies do such deals, in addition to the benefits of opening space for stock and such.

This tactic in the competitive atmosphere of the perfect competition into which these clothing stores placed themselves can cause fluctuations in the equal division of revenue. When one store begins a policy of price discrimination, thereby attracting a greater share of the total consumers to its own cash registers, and away from the registers of its competitors, the competition has only one option: to copy the pricing strategy. This is why firms operating in the same market selling nearly identical goods often offer similar deals, even if pricing otherwise varies.

When all firms mimic one another’s competitive pricing strategies, the distribution of revenue is again equalized, but its aggregate total is decreased. So, while profits still exist, and the firms manage to survive the selectivity of competition, each firm profits less. This means retailers are rendered less able to grow and invest in consumer attraction strategies unrelated to pricing. Instead, they find themselves dependent on their corporate headquarters’ marketing strategies. 

So, even with the ability to control their own pricing, a marker of monopolistic competition, these firms find themselves operating as though they were in perfect competition. Their consumer base is composed almost entirely of persons least concerned by the branding, and more concerned by the dominant fashion trends. Since all of these retailers mimic these same trends with little notable variation, they are left only their own pricing strategies and the corporate marketing over which they exert virtually no control. In short, they are left not to their own devices, or even to the mercy their competition, but to the cold unfeeling opinion of the consumers. 

The consumers are almost entirely indifferent. As stated above, some one who shops at American Eagle regularly is likely also a customer at Hollister, Old Navy, Ambercrombie and Fitch, and other such firms. Should one firm shutter their doors, the consumers will simply purchase their clothing from the other retailers. It would stir no remarkable sadness for one such shop to close while others remain open. The consumers are concerned with purchasing fashionable clothing, not with patronizing a particular store.

These same consumers are not only customers of clothing, but of other goods. The most reliable customers these particular retailers have are high school teenagers and some college students not because of clever marketing, but who else is willing to spend so much on a shirt but some one competing for a place high on the popularity totem pole?

Still, teenagers, even with their impulsivity and nearly totally disposable incomes, are subject to fluctuations in the macroeconomy. A rise in unemployment means less aggregate demand. Less aggregate demand means less income for all retailers, and less income for all retailers means less employment is made available for the kind of work ordinarily reserved for these up and coming adults. Without income, they cease to buy such expensive clothing.

Other teenagers see inflation of other goods, whether that be social experiences like concerts or movies, car maintenance and gasoline, or the cost of college rises as the interest rates decline. This forces them to into making a choice between fashionable and popular clothing, or spending their small and finite incomes elsewhere. 

Still others, who have been enjoying not the meager fruits of their own labor but an allowance provided by an affluent family, find their family’s finances gravely affected by the high unemployment and inflation characterizing recessions. The family, choosing the necessities over their child’s spending sprees, tightens the purse strings and these teenagers are also forced to consume less fashionable clothing.

Such an event occurred in 2008, during the mortgage crisis.

Faced with the decrease in disposable income, consumers, still seeking the greatest bang for their buck, simply stopped shopping at these expensive clothing retailers. Instead, the inferior goods available at a JCPenny’s or a Sears or a Wal-Mart or a Target came to replace the better cut and more stylish designs offered at a Hollister, American Eagle, or Old Navy. So, the consumer base for clothing shifts overwhelmingly to cheaper, inferior goods sold at the anchor stores common located at the entrances of many shopping malls. 

This opting for inferior goods results in decreased foot traffic to our considered retailers. Firms like American Eagle, Hollister, and Ambercrombie & Fitch continue to compete in a market that ultimately divides relatively equally the total revenue. However, due to economic decisions made by consumers facing a recession, this total market revenue is drastically decreased from what it was before. Now, should any firm choose to engage in some pricing strategies such as third degree price discrimination, it can successfully drive a competitor out of business only because that competitor is operating on a margin of profit just above where it needs to shutter its doors. 

In short, the Retail Apocalypse hit fashionable places like these very hard. The product they sold was not specially distinguishable from their competitors, and once times get tough, people were only too eager to go for the inferior goods operating in the same market. Many of these retailers (each individual outlet being considered an individual retailer for these purposes) closed down. This was either a corporate decision to save money by eliminating poorly performing locations before they became financial liabilities or simply the place could not remain open on its own, making a financial liability.

If anything were to hurt these brand name clothing retailers, it was their mass appeal. This conformity to current fashion trends did nothing to set them apart, thereby generating some devotion from a segment of the consumer population. Though they branded their clothing, making each consumer an advertisement every time he or she wore these clothes to school, there remained no real culture around their brand specifically. A good looking young man wearing a new Hollister shirt on Monday might well come in on Tuesday with his favorite American Eagle hoodie on. The hot girl in the tight Ambercrombie & Fitch top on Wednesday might well wear a dress from Forever 21 on Thursday. 

The Culture in the Clothes

However, throughout these market fluctuations and macroeconomic booms and busts, Hot Topic just kept powering along. They would sell out of the stock from the last few years only to import shirts with logos totally unrelated to their previous customer base and accessories which customers from just six months prior wouldn’t have ever considered wearing.

T-shirts with the logos and designs invoking Metal bands from the 1980s and 1990s gave way to the depressed fashion of the Emo subculture. Within a couple years nothing Emo could be found, instead shirts with anime characters and icons from niche web-comics. The trend continues. Hot Topic would embrace a subculture of teenagers until that group became old and had to support themselves. Then the firm would liquidate the shirts and belts and accessories and anything else they had on hand to sell to those customers, only to replenish their stocks with shirts and belts and accessories and make-up belonging to a new and emerging subculture of teenagers. 

This economic strategy, a combination of market research, advertising, and speculative investments, has enabled Hot Topic to survive the microeconomic deaths of macroeconomic tumults. Unlike the aforementioned retailers, who all sell relatively the same products – branded clothing – to the effect that they end up behaving as firms do in perfect competition, Hot Topic exists in the same monopolistically competitive market, but behaves as though it were a monopoly (or, more precisely, a one-firm dominated oligopoly). 

Unlike its nearby competitors like Hollister or American Eagle, Hot Topic is able to act aloof of the marketplace that is the shopping malls swarmed by teenagers with expendable income. This is enabled by how it differentiates its products from its nearby competition.

Their consumer base is not interested in wearing the newest fashions, or the best looking clothes, but in advertising their own adherence to some prominent subculture running counter to the popular mainstream. This subculture must remain prominent and popular enough to guarantee Hot Topic a sizeable base, but be marginalized by the mainstream so as to appear to be an unfavored underdog. Not considering online retailers, there are no major national chains doing the same. This means Hot Topic attracts a consumer base necessarily loyal to them.

To understand what makes Hot Topic’s customers more loyal than the customers attending the many other branded clothing stores, we need not to examine how these two mostly teenage populations are different, but how they are the same.

Those shopping at a branded clothing store like a Hollister or an American Eagle or even Old Navy are concerned with several things. Most concerning to them would be the appearance of the clothing, especially on themselves in the fitting rooms. They are also concerned with how fashionable they look in these clothes. Least important, but still noteworthy, is how expensive and fine the clothing is, as a message of their social status within the hierarchical structures of high school and college society. 

On women, good looking clothes make her more attractive, elevating her status. On men, good looking clothes attract more women, making him more attractive, elevating his status. This importance of uniform is nothing new in human societies. But what about those persons who wish to express their self-described individualism, their opposition to the norm, and their desire to march to the beat of their own drum?

Are these teenagers really that much different from the peers they detest so much? The customers of Hot Topic are not buying ill-fitting and ugly outfits. Rather, they are buying t-shirts and jeans designed to conform to some counterculture to which they have sworn their teenage loyalty. In my teenage years, that counterculture was Heavy Metal. So Hot Topic’s walls were plastered with available shirts of various sizes, with designs from bands like Dio, Ozzy Osbourne, Black Sabbath, and even tangentially related bands like the Rolling Stone or Nirvana. 

And these were very interesting designs. Consider a popular Iron Maiden shirt sold at Hot Topic, with the band’s mascot Eddie in every iteration of his appearences on their album covers. We can see with this, the shopper at Hot Topic is equally interested with attracting attention as the shopper at Hollister. And of course, the customer is concerned as well with the position the band occupies in his own counterculture. Long haired headbangers who wear Slayer and Ozzy shirts are not likely to also don a Poison t-shirt, due to the band’s notably soft and feminine image. And while some teenagers are concerned with advancing up the ranks of the social hierarchy in which they find themselves, there will be those who wish to show their lack of adherence to these norms by adopting some other conformity (which they unironically refer to as “nonconformist”).

In short, Hot Topic customers want attention and buy clothes to gain that attention. They also want to appear as keeping up and conforming to what is perceived as rebellious. Heavy Metal kids like myself would have not worn shirts depicting bands like My Chemical Romance, due to how unaggressive and apologetic the band, and the whole genre of emo, appeared. Thus, the shirts these teenagers purchase may not be purchased because of their appearance in some fashion designer’s approval list, but they are nontheless meticulously inspected and discriminately purchased. 

Most importantly, teenagers conforming to some counter culture in which they proudly eschew the social norms and mores of high school and college society in favor of their own chosen hierarchy. Hot Topic sells them the clothing that allows them to display their adherence to this rebellion. They supply the badges of the partisans, one could say. 

However, this subtle calculation of the consumer base takes a great deal of effort. Though they sell to those who stray off the beaten path, they cannot venture too far into the wilderness of subcultures. Bands like Nirvana and Dio are safe. Their messages are approved and their intent is ultimately socially accepted. Compare this with the Fascistic ideologies of many metal bands coming from Northern and Eastern Europe. One will not find Gorgoroth or Emperor t-shirts sold at Hot Topic, for fear of being associated with something as universally despised as Fascism.

By simultaneously appearing too niche for the mainstream and appearing to mainstream for the very niche, Hot Topic walks a thin but lucrative line. The consumer base is not so small that it does not generate large revenues, however it is not so easily satisfied that it will just run to anchor stores in the event of macroeconomic chaos.

Every few years, Hot Topic liquidates its stores of one counterculture, when that has proven to become either too mainstream or too niche, and becomes the den of another. In this way, they have managed to establish themselves as a destination for those who think themselves outcast and square pegs. Their merchandise is too unpopular for any competitors to try to move in on this market, and it is too niche for its teenage consumers to go elsewhere and feel satisfied with their purchases. It is also mainstream enough for these loyal and impulsive teenage consumers, with their disposable income and deep desire to appear different, to feel at ease shopping there. It is a safe rebellion, free from the nationalistic and supremacists of Black Metal, the extreme violent nature of Death Metal, but still offensive enough to, at least from the point of view of the consumers of Hot Topic, anger the customers of other clothing stores.

The changeover of merchandise allows them to market to a new rebellion every couple of years. My peers would have wanted to advertise their antipathy towards social niceties and our concern for more serious subjects, like music. Those who patronized Hot Topic in the years after I did would have wished to buy clothes advertising their allegiance to emo, showing their ability to grapple with self-defined traumas and thus their emotional maturity. After them the anime fandom, and then another, and then another. 

Conclusion: What Can We Learn From Hot Topic

Hot Topic does not really sell clothes; they sell identity. They sell culture. Though what they sell is aimed at teenagers, and we scoff at the adults who shop there regularly, we should not be willing to dismiss this business model altogether. In fact, this marketing strategy has been proven more powerful throughout human history than anything else. 

Hot Topic sells an opportunity to display one’s adherence to a culture, a chance for one to testify to one’s allegiances. Their customers, although notably young and dumb, will show vicious loyalty and a Fascistic conformity to their subculture that, even if it is only to anime or a music genre, does deserve some respect.

Throughout the centuries of mankind’s recorded history, ordinary men have been called to arms and accomplished magnificent deeds based on such adherence to their cultural identity. The rootword for the word “god” is derived from the word Goth, a people who until the 5th Century AD were largely unrecorded except maybe in some unimportant passage of a Roman historian. Their three generation long war with the Huns is known more to us through the legends of King Arthur and DC’s Starfire comics than any firsthand accounts. Yet, simply driven by the cultural identiy of being Goths, they are the one who can be credited with bringing the superpower of Rome to its knees and finally removing the crown of Caesar. 

Likewise, centuries later, bitter enemies would join forces to go fight nearly impossible wars in the desert heat only because of their shared identity as Christians. The English and French fought bitterly against one another for the entirety of the Middle Ages, yet fought side by side as though they were brothers against the Saracen and the Seljuk. Some more centuries later the people of France would conceive the idea of being French not as an accident of birth, but as a right to French citizenship. This mere identity as French drove not only to topple an ancient and powerful monarchy, but to go one to challenge the mighty House of Hapsburg, and ultimately replacing the more-than-millenium-old Holy Roman Empire with the First French Empire. It is said that Napoleon’s troops were among the poorest paid in their own times, and probably throughout history with the exception of enslaved soldiers. Yet their enemies feared them most. They fought not for plunder or pay, but for the glory of the Nation of France.

We see it even outside of the scope of war. People mobilize politically and socially for issues they can barely comprehend. They do so for cultural reasons. They do so to show their loyalty. Entire voting blocs are built on cultural identity, and can be determined to behave in a very predictable fashion based on that identity.

People are adherent to their cultural norms. The Hot Topic shopper, who calls himself a non-conformist, will wear all black all the time to display his conformity to non-conformity.