I.

A Brief History

The Lego Group began in the workshop of Ole Kirk Christiansen (1891-1958), a

carpenter from Billund, Denmark, who began making wooden toys in 1932. In 1934, his

company came to be called Lego, derived from the Danish phrase leg godt, which means

play well. In 1947, Lego expanded to begin producing plastic toys. A few years later, in 1950,

Lego began manufacturing interlocking toy bricks and ever since, Lego has built its own

subculture all over the globe (Lego.com). The Lego Groups motto is det bedste er ikke for

godt, which roughly translates to only the best is the best. This motto was created to encourage

the employees to never drop in quality and is still used today. Over time, Lego surpassed many

companies in the childrens toy industry and is still at the top. In February 2015, Lego replaced

Ferrari as the Worlds Most Powerful Brand. The reason for Legos huge success is because

the interlocking brick design is appealing to people of all ages and capacity. For example, a child

enjoys playing with them because theyre easy to use and colorful. Older people enjoy playing

with them because there is an endless possibility to what somebody can make with the bricks.

People have gone as far as making a full scale, 1:1 ratio, x-wing fighter amassing over 5 million

bricks. In addition to that, people have been able to build 100-foot towers and 2.5-mile long

railways using only Lego products. Not only has the Lego product become a cornerstone of

success but it has also branded much of the entertainment business as well. For example, many

movies, games, and competitions have supported this brand and even six Legoland amusement

parks have been built strictly to show-off this specific product. Almost 600 billion Lego parts

have been produced to date.

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 II. Demand and Supply

The concept of price elasticity is an over-simplification of what applies to the

everyday environment. When it comes to the elasticity of an individual toy in the market, if the

price for that toy goes up, like any other normal good, the demand would drop and vice-versa. If

the money spent on toys as a whole rises, there would be no change in the demand because its

the same across the board. In Legos case, if the industry of childrens toys starts to decline,

Lego seemingly is invincible to the negative market aspects. How is this possible? Well its

simpler than most think. Lego has bought the exclusive rights to Star Wars. If you wanted to

build the Death Star out of plastic blocks, Lego is now your only option. The Star Wars blocks

were wildly successful. So, Lego kept going it licensed Indiana Jones, Winnie the Pooh, Toy

Story and Harry Potter. Sales of these products have been huge and, more importantly, the

experience has taught the company what kids want to do with the blocks is to tell stories and

make memories (Joffe-Walt). Lego was able to do what no other childrens toy company was

able to do, make a product that tells stories, and make an experience that last a lifetime. Elasticity

is defined as a proportionate change in one variable over the proportionate change in another or

%change in quantity/ %change in price. The impact that price has on the elasticity of supply

directly impacts the elasticity of demand. Because Lego is a luxury item and not a need item, the

product is an elastic good. Lego products would be labeled as unit elastic because the percent

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change in quantity demanded is equal to that of the percent change in price. The nature of these

elasticities is because, like mentioned before, Lego has a tight grip on the Childrens toy industry

as a whole because of how strict the licensing is and how much they produce as a company.

Another factor is because of how popular the brand itself is.

III. Government Policies

According to the Toy Industry Association Inc. All toys in the U.S., regardless of

where they are made, must be tested to verify compliance with rigorous U.S. toy safety

requirements, including more than 100 safety tests and standards. These standards are

shaped by a variety of considerations, including research on child development, dynamic

safety testing, and risk analysis. U.S. toy safety requirements are among the most

stringent in the world and are widely emulated in other markets around the globe (TIA).

In addition to the rigorous testing done on each toy, any product intended for use by

children 12 years of age and under must be third party tested and be certified in a

Childrens Product Certificate as compliant to the federal toy safety standard enacted

by congress. According to the Toy Industry Association, the average price of a toy is

around $10, but the estimated 3 billion units sold across the nation each year generates

approximately $22 billion in direct toy sales. The Toy industry also generates nearly $10

billion in tax revenue each year.

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 The reason these policies exist is because the toy industry is one of the only

industries that directly deal with children. With this being said, many precautions must be

made by businesses, manufacturers, and even the government to ensure maximum safety

for the users of the products. Also, products in the toy industry are generally inexpensive

to both produce and to sell through manufacturers and consumers respectively. The taxes

mandated on such products are normal with many other products in other industries

because of the luxury factor.

IV. International Trade

The Toy Industry is very much an international trade highlight. According to

Statista.com, The global toy industry is a billion-dollar industry dominated by five main

players: Mattel, Namco Bandai, Hasbro, Jakks Pacific, and of course, Lego. American

Toy Manufacturing company Mattel is the industry leader with the highest revenue

amongst the major competitors in 2015 with Lego following in second with about $5.2

billion in U.S. Revenue.

Facts on the Toy Industry

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 Global Toy Industry Values

Total revenue of global toy industry $84.1 billion

U.S. toy market size $21.18 billion
Amount spent per child on toys in the UK ~$499
Worldwide Revenue of Mattel $5,702.61

U.S. Toy Market Values

Toys retail sales revenue in the U.S. $19.48 billion

U.S. global annual imports of toys, dolls $19.13 billion
and games
U.S. global annual exports of toys, dolls $2.48 billion
and games

Toy Safety Values

Total recalls of childrens products in the 68

U.S.
Number of units of recalled childrens 5.5 million
products in the U.S.

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V. Externalities and Public Policies

Since 1999, Lego has been putting out toy sets that go along with the Star Wars

franchise, along with many other popular movie franchises. For Star Wars, Lego has made toy

sets that resemble things from the franchise such as all seven of the films, the comics, and the

television shows. Since its start, the Lego Star Wars company has sold more than 30 million

units world wide. Lego has made lots of profit for Lucasfilm Ltd. because of products like the

Lego Star Wars video games, and the toy sets, which in turn would make Star Wars an

externality for Lego.

Another externality for Lego would be Warner Bros. Pictures and Village Roadshow

Pictures because of the Lego Movie which was released by both of these production

companies in 2014. The movie grossed over $460 million, and produced two spin-off movies,

Lego Batman Movie and the upcoming film, The Lego Ninjago Movie scheduled for a

2017 release.

Lego Externality Contribution To

Externality

Lego Movie $469.2 Million

Lego Star Wars Over 30 Million Units Sold

Also LucasArt, Feral Interactive, and Warner Bros. Interactive Entertainment would also be an

externality for Lego because of the game Lego Star Wars. The graph below will show how

much each product grossed due to Lego involvement.

VI. Market Type

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 The building block industry is a very competitive market, the three biggest companies in

the industry are Lego, Lincoln Logs, and Tinkertoys. Lego would be considered a monopolistic

company because although Lincoln Logs and Tinkertoys are also big companies, Lego is by far

the most recognized world wide.

A monopolistic competitive company will achieve maximum profit where the difference

between total revenue and total cost is the greatest. This is also where marginal revenue equals

marginal cost (MR = MC), providing the maximum profit output (Q1). The price at this output

level will be higher than MC (P > MC), preventing productive and allocative efficiency from

being attained.

What makes Lego a monopolistic company, is the fact that, it has differentiated products,

some control over the pricing, has mass advertising, is a very well known brand name good, has

extensive knowledge in the field that it is in, and has free entry and exit of the fired that it is in.

VII. GDP and Employment

Lego is in the Industry Sector of the U.S. GDP. The toy industry as a whole contributes

about $21.8 billion to the U.S. GDP every year, with Lego contributing about $5.6 billion to that

every year. That is almost about a quarter of the toy industry that is contributed solely by Lego.

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 Lego has about 14,000 employees world wide compared to the number of employees that

Nintendo has which is a little over 5,000. Nintendo being the second best rated toy company in

the world. Having almost triple the amount of the next best rated toy company should show

exactly just how big of a company Lego is to not only the economy, but to the world as well.

IIX. How Our Industry Would Fare

Lego is a constantly growing company, in 2010 they reported annual sales of $2.3

billion and just five years later, reported revenue of about $5.2 billion (those figures were

converted from the Danish krone).

Tinkertoy had an estimated $120,000 in sales world wide in 2015 which has no

comparison to lego whatsoever, while Lincoln Logs had an annual revenue of about double that

at around$240,000, still not close to Lego at all.

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 It is easy to tell by the graph below that Lego doesn't really have to worry about to much

4.5

3
Lego TinkerToy Lincoln Log

1.5

0
2015
competition.

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Work Cited
Farnam Street. Why Legos Are So Expensive And So Popular, Chana Joffe-Walt.
FarnamStreetblog.com

Toy Industry Association. Laws, Regulations, & Legislation, ToyAssociation.org

Toy Industry Statistics and Facts. Toy-Industry, https://statista.com/topics.1108/toy-

industry

http://lego.wikia.com/wiki/Star_Wars

https://www.lego.com/en-us/

https://en.wikipedia.org/wiki/Toy_block

http://economicthoughtswithglenn.blogspot.com/2012/01/monopolistic-competition.html
http://www.hoovers.com/company-information/company-search.html?term=lincoln%20logs
http://statisticstimes.com/economy/countries-by-gdp-sector-composition.php

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