Thursday, October 04, 2007

Waldfogel's Wiffle Bat

Joel Waldfogel criticizes the market because it doesn’t produce enough diversity. “For small groups with preferences outside the norm, the market often fails to deliver.” The argument is simple enough: some goods have large set-up costs or fixed costs of production, which means you need a large group of customers to justify incurring them.

I have several reactions.

1. While Waldfogel is criticizing the market for producing too little product diversity, Barry Schwartz is criticizing it for producing too much. Can’t we throw these two arguments together and watch them explode? Or will market critics find a way to embrace them both?

2. As far as I can tell (admittedly, I haven't read Waldfogel's book yet, so I'm going on his Slate column), Waldfogel does not demonstrate any kind of market failure as economists understand that term. For it to make sense to produce any product, people must value it enough to cover the fixed costs. Otherwise, it’s inefficient to make it; the costs of making it would exceed the benefits. That products desired by too few people don’t get produced is a success of markets, not a failure.

3. A system that forced us to satisfy all preferences, however rare, would be impossibly expensive. There are increasing costs and diminishing gains to satisfying ever more idiosyncratic preferences, so the line must be drawn somewhere. So how should the line be drawn? Seems to me that weighing fixed costs against the strength of preferences, in the form of willingness to pay, is the logical principle – and that is the market principle.

4. Talk about glass-half-empty thinking. For the most part, the market produces an incredible array of products catering to shockingly narrow preferences. For instance, I presume – and hope – that the fraction of the public interested in incest-fantasy pornography is exceedingly small. Yet the market provides; do a quick Google search for “incest porn” if you doubt me (and if you dare). You can criticize that outcome on other grounds, but don’t call it tyranny of the majority!

5. As Adam Smith observed, specialization is limited by the extent of the market. The more well developed markets become, and the more people and societies who participate in them, the greater are the opportunities for satisfying idiosyncratic tastes. Entrepreneurs, driven by the profit motive, have an incentive to exploit each niche as soon as there are enough potential customers to justify satisfying their preferences. A preference shared by only 0.01% of the population might initially go unsatisfied in a small market order, but as the population expands, it becomes ever more likely the preference will be satisfied. Isn’t this an argument for expanding the market order?

6. Waldfogel is committing the Nirvana fallacy – that is, condemning the market because it falls short of perfection. In this case, Nirvana is apparently a state in which all preferences are perfectly satisfied. That option is not on the table. So what institutional arrangement would do a better job? Would Waldfogel advocate having the government force firms to provide more options, despite the inefficiency of doing so (see #2 above)? Interestingly, Waldfogel blasts some market outcomes for how similar they are to the results of the political process! So the argument is that sometimes markets are almost as bad as government? Is this a serious criticism of markets, really?

UPDATE: Tyler Cowen likes the book despite disagreeing with its central thesis. I'll have to read the book just to find out what redeems it. For now, the positive claim seems true but unremarkable, and the normative claim seems silly. Maybe the book has lots of cool examples.

5 comments:

Gil said...

I'm with you and #6. I kept wondering what alternative he has in mind that would be better. It isn't really a criticism if you don't have a realistic, better, alternative in mind. Magical wish fulfillment isn't an option.

And, as technology improves, more and more can be done with lower and lower set-up costs, so the trend is to satisfy even more niche demands. Lots of media, and software, is already being created for free (to consumers), satisfying all sorts of idiosyncratic tastes.

Also, many of the sad cases (like drugs for rare diseases) are made worse by burdensome government regulations that make it prohibitively expensive to target small markets. It's hardly fair to blame markets for that.

Markets allocate resources better than any other system I know of. It's not the fault of markets that resources are finite.

What's next? The tyranny of physics?

Lucas said...

This Native American footwear story has been running through economist blogs all over the internet. What about New Balance, which has been making larger size and width shoes for a long time? I find it hard to believe that Native Americans have been totally unable to find shoes until Nike came in and saved them. Perhaps the Nike's are cheaper or better than previously available shoes, but me and my friends with big feet have tried and rejected Nike's shoes a long time ago.

Steve said...

He needs to read The Long Tail.

Dave said...

Evidently they were either going barefoot or wearing moccasins. Seems racist to me. Most of the Indians I see and know (some in-laws, especiall) seem to wear a lot of cowboy boots for some reason. Those don't seem to be all that wide.

Anyway, evidently both Waldfogel and Schwartz prefer the Stalinist production method which, iirc, once had a shoe factory in which the machine for cutting left soles broke down and couldn't be repaired. In order to not miss quota, they just doubled the capacity of right soles and sent out a million or so pairs of all right shoes.

John Fast said...

"I make now a standing offer: any individual who feels too burdened by all his or her choices can give them to me. I'll take them off your hands, free of charge. You're welcome."

http://newmarksdoor.typepad.com/mainblog/2006/07/again_the_dopey.html