And another way to offset inflation

There is a very interesting piece in the Mach 19, 2008 Wall Street Journal on toy industry costs. The article by Nicholas Casey, “How Child’s Play Got a Little Cheaper,” looks into the cost advantage that those selling technology based toys have over those who sell traditional toys.   

I have, in the past, written at length about the upward pressure on prices in China due to the rising costs of raw materials and labor.   I have also written about the wisdom of including more virtual play value (value that is not dependent upon raw materials or labor) as a means of hedging some of those costs. 

Well, it appears that technology may also offer an inflation hedge in another area: toys based upon technology used in personal electronics like cell phones and cameras.  It appears that the sheer volume of these products has driven down the costs for optical components used in making them. According to the article: “Riding on what engineers call the ‘trailing edge’ for components, toy companies have been able to use second- and third-generation parts from other industries to vamp up their lines or create new ones without upping prices.” 

As a result, toy companies can produce products that would have costs hundreds of dollars just last year for less than $100 and as low as $30. 

The lesson is that smart companies faced with price increases are going to want to continually reconsider the products they make and how they make them. By choosing technological components like the aforementioned optical technology and / or play concepts like virtual play they can beat or even mitigate inflation.