Russ Roberts

Waldfogel on Markets, Choice, and the Tyranny of the Market

EconTalk Episode with Joel Waldfogel
Hosted by Russ Roberts
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Waldfogel.jpgJoel Waldfogel of the Wharton School of Business talks about the idea in his new book, The Tyranny of Markets: Why You Can't Always Get What You Want. He argues that when fixed costs are large, markets don't necessarily give people what they want and that, analogous to the political process, you can be hurt as the number of people with preferences that differ from yours gets larger. Host Russ Roberts challenges Waldfogel's claim that these phenomena are widespread and argues that in many cases, markets ultimately solve these problems. They discuss the amount of variety in newspapers, radio, and airline travel, along with how economics generally looks at fixed costs and consumer sovereignty.

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0:36Intro. Markets versus the political process. Do markets work as well as people think? We can only get what we want if a lot of people want what we want. If you have unusual tastes, market doesn't provide the goods. By contrast, political process is subject to Mill's tyranny of the majority. But markets also are subject to a similar tyranny of the majority, though not for tie color. Fixed costs. For some goods, whatever level is provided is what is received by everyone. Only one level of army protection (whether privately or publicly supplied). Post office, by contrast, or public schools, are different kinds of goods and different levels can be received. Tyranny of the majority is a choice made by the government in those cases.
5:12Role of fixed cost. How many people out there affects choices. If fixed costs are large but not huge then it's not enough for me to want something for the market to supply it. Others with similar preferences to mine help me, but those who do not share my preferences don't hurt me. Radio industry, 20 stations on the dial, big enough city has lots of choices. In more extreme examples, like daily newspapers, maybe one in each major city. Abstraction, but that product has to choose how to target itself. Tyranny of the majority occurs. New York Times and USA Today are available nationally, though, and could compete with local papers. Natural solution to the tyranny problem is reducing the costs or reducing the market size. Trade increases the market size. In the trade example with newspapers, at first it looks like a new option. But as the NYT becomes available it causes the local papers to reposition toward the local clientele. Nothing wrong with that but it's not a smooth continuum of increase in products. Moving from small town, Fergus Falls, to big city Minneapolis, to very big city NYC, you get more restaurants and more diversity in restaurants. Larger cities have more choice. But it doesn't work that way for newspapers. Is it attributable though to fixed costs as the book says? Or is it that additional consumers are relatively cheap to service--economies of scale? Newspapers have high fixed costs. If people do not agree on the product, then a firm can make a product "better" with higher fixed costs but no higher marginal costs. John Sutton, in industries with fixed costs, they need not fragment as they get large.
14:26Quality. It's not that the marginal costs of quality are low. It's the marginal cost of producing another newspaper is low. In cities with only one newspaper, you get a better paper covering a wider array of stuff, but because the advertising revenue is high relative to subscription rate, paper's incentive is to widen their coverage. Washington Post has different sections for different neighborhoods. They do cater to individual audiences, but not the way we usually think of it. A newspaper is a bundle of articles. But take language--newspaper is written in a specific language. It is a complicated product. If you measure quality by number of newspapers it looks pretty thin, but if you measure it by quality of information available, say to the Hispanic or religious or other individual, the market has never had such a variety of information. Cable, non-local information, many languages and groups targeted. It's not the whole story, though. Local information versus national information. Ethnically targeted newspapers, tends to be weeklies rather than dailies. Hispanic consumer in Fergus Falls doesn't get same level of information, but is that the tyranny of the market? You do need to get to a critical mass if you are a small minority. But does adding people unlike you make your life harder? Look at African American newspapers, cross-effects are negative. High fixed cost product and more people of one type actually harm those of another type by pushing the newspapers out of providing information specific to the different groups.
22:37French movies. If you have Hollywood movies, it would be crazy for the French to restrict imports because it would restrict choices. But with big fixed costs it could displace French cinema. The usual explanation, though, for why the French restrict imported movies is protectionism, to enrich French filmmakers--rent-seeking. High fixed costs: there are high fixed costs of making a blockbuster. Requires big budget, so it had better attract a large audience. In books, Harry Potter; some publishers specialize in blockbusters. Yet there still seem to be plenty of books in small niche markets, directed at specialized markets. Movie costs have come down dramatically, financially viable to reach a small audience. Doesn't that cut into the French cinema argument? People's preferences over movies are very varied. Fragmentation around the fringes. Blockbuster end of the industry conforms to the fixed cost model but there is an explosion of movies at the other end. Chris Anderson on The Long Tail, technology has lowered even stocking choices. Digital divide affects African Americans, but technology of the internet is to the rescue.
29:42Role of fixed costs: they certainly can reduce consumer choice. Looking for an Afghan restaurant in Dayton, Ohio might disappoint. If you don't want a back seat with your car, you don't have that choice. Costly to tailor cars to individual consumers. Get more choices now, but don't get everything you want. But should we do something about it? Is it a problem? It could be efficient for people to be somewhat unhappy. What makes this more is that when fixed costs are big we don't expect markets to do all the things they ought to do. Markets accept products where revenue exceeds costs. If there is perfect price discrimination available, products will get tailored to everyone; but in reality that's not possible. So there may be a range of products where it's big enough that the value to society exceeds the cost but not big enough that the revenue exceeds the cost. Efficient, to economists, means there is a net benefit. (Several meanings for the term, this is one.) Deadweight loss, forgone net benefit is inefficient. You want to add up all the benefits, subtract all the costs; treat everyone equally, just a sum, not a weighted sum. But somebody may really value the good a lot, say really wants to eat at Afghan restaurant a lot, but only a few like that, a single price might not be able to cover the fixed costs of the restaurant even though there would be enormous value to everyone who even wants to eat there a little. Inability to price discriminate--or if the fixed costs were lower--there would be a net gain. But isn't that just a fact of life? Does it mean you have to do something about it? In large markets you can even have too many products. Empirical question--imperfect world. What could we do tangibly to make the world better? We have a fair number of government subsidies in markets like that. Air travel to small markets, public broadcasting, telecommunications in small markets. Do we abolish these things or say that maybe they are serving some efficiency-enhancing function?
38:30Mason City, IA, small town, far from any airports, so you have a drive a few hours, catch a connecting flight. City gets a subsidy of $1 million per year so an airline will serve them. Is that efficiency-enhancing? How widespread are those airline subsidies? As soon as a city gets big enough, it's no longer eligible. Something like 50 cities. Flat fee charged for everyone, nice for those being subsidized, paid for by the rest of us. Political process ignores efficiency and focuses on redistribution. How would you ever know if these inefficiencies are there as opposed to just being politically attractive? Could get data. Do high-value demanders get represented well in demand curve estimates? No, empirically hard to determine where demand curve hits the axis. Let's gather at least some evidence, though.
43:49Economic education. Book argues that textbook treatment of markets is overly optimistic, rosy. Is the economics education glass half full or half empty? How many economics majors are actually taught that markets work perfectly, versus how many are taught that markets are flawed? Supply and demand curves are good at some things but bad at capturing the dynamics of innovation over time. Perfectly competitive model is a model of homogeneous products, miss differentiation. Good intellectual benchmark and good first approximation, but it obscures other things. Teaching business students--unintuitive to them when economists say "taking quality as given." But in modern world quality is critical decision, which market should I be in. In economics classroom, it's how much should I make. Our models are very poor at the quality question, hedonics, Sherwin Rosen, Lancaster, Gary Becker have worked on it, but not a lot. John Sutton. Heterogeneity of people, winners and losers. Now data are more easily available.

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COMMENTS (15 to date)
Nathan writes:

To be fair I haven't read The Tyranny of Markets, but the subtitle gives a strong clue that its point of view is (non-classic) liberal. A fundamental feature of the liberal mindset is disappointment and searching for answers when reality doesn't meet utopia. The conservative (or libertarian, or whatever) would shrug and say, "You can't always get what you want because we live in the real world." The liberal looks for a reason why you can't get what you want and the scapegoat is often personal freedom.

Unit writes:

The famous "tyranny of the majority" is pretty straightforward. On the other hand markets seem to be tyrannical only in certain cases (when fixed costs are high) and even then there are substitutes, and there is international trade, and low transportation costs, etc...i.e. entrepreneurial creativity is buzzing all about trying to overcome these problems...so isn't "tyranny of the markets" overreaching a bit? How about (to keep with the Rolling Stones theme of the subtitle) "I can't get no satisfaction...just yet, but markets forces are working on that".

muirgeo writes:

Enjoyed the discussion. Would like to see more "contrarians" in the future. My electric auto, the one I want but can find on the market, quickly came to mind.

I really don't like conspiracy theories but having seen the movie, "Who Killed the Electric Car" I have to wonder.

There are alot of us out here who want a commute electric car. Heck give me a hybrid the can be plugged in and run on electricity only for short trips. But no such thing is available.

The idea of a house and a car run completly on self made solar and wind energy would cut deeply into the pockets of some of our biggest industries (power, auto and fuel). Why would any of them be interested in promoting a system that makes their golden egg laying goose only as valuable as the market price of its meat?

I'm blown away by the lack of avaiabity of electric cars and feel there is more of an issue then just high fixed cost.

Are biggest industries involved in auto and energy making are the best examples of market failure I can think of. Then again maybe they don't operate in a true free market.

So I'd be very interested in the professors view on this issue which didn't come up in the discussion.

Russ Roberts writes:

Muirgeo,

There is a long tradition of blaming entrenched players for killing innovation. I don't know the movie you mention, but both "The Man in the White Suit" and "Tucker" are about innovators who are squashed by existing competitors who don't want to lose their profits from the products they make already. I'm not sure, but I think both of them are about in-house developers of the innovation. In the case the "White Suit," the clothing company that employs Alec Guinness tries to kill him because he has developed a fabric that doesn't wear out. The presumption is that this fabric will destroy their profits because you'll only be able to sell one suit.

It is a nice application of economics to understand why that logic is wrong. In fact, it would be more profitable to sell a suit that would last forever. True, you might sell fewer suits, but you could charge a lot more per suit.

The same argument is made about light bulbs. The claim is made that the manufacturers know how to make a longer-lasting light bulb but they keep it secret to maintain their profits. That makes no sense and in fact, light bulbs last many times longer than they once did because of innovation.

If GM knew how to make a cheap electric car (or one that was more expensive but sufficiently convenient or valuable to consumers), they would be thrilled to make and market it. True, it would cut into their sales of gasoline-powered cars, but if the electric car is a better value, then they'll more than make up for their losses elsewhere. But even more worrisome is that someone else, either another car company or a new entrant will take away their profits by introducing a superior electric car.

So my presumption is that an electric car is much more expensive to make than you think. But maybe I'm wrong. If so, you and a few friends have a great opportunity to become fabulously wealthy.

muirgeo writes:

So my presumption is that an electric car is much more expensive to make than you think. But maybe I'm wrong. If so, you and a few friends have a great opportunity to become fabulously wealthy.

Posted on November 13, 2007 04:17 PM


Russ you're probably right but if you're ever with nothing to do rent Who Killed the Electric Automobile and let me know what you think.

I am somewhat convinced the next Bill Gates will be the guy who comes up with a home power unit that runs their house and car all off stored wind and solar energy.

Can you imagine the independence of getting all your energy needs on your own? No reliance on power plants or mega-energy companies. Ideally after the initial purchase of a product with out high start up cost and much available in a competitive free market.

shayne writes:

Russ and Joel - Thank you both for the Podcast.

While the component of high fixed costs of some industries is very compelling artifact in this context, neither of you seemed to address the most interesting features of economics and markets. To explain, I would suggest to Joel that he change the title of his book to "The Tyranny of the Market: Why You Can't Always Get What You Want - At the Price You Want to Pay". Or at worst, "At a Price Others Are Paying".

There is nothing inherently flawed or unhelpful in conventional demand/supply curves - you're just addressing the demand curve segment below and to the right of the market equilibrium price. Granted, there are real folks occupying that part of the demand gradient, but they are generally far better served by innovation and entrepreneurship (market forces) than by taxpayer subsidy offsetting fixed costs.

I would point out that there are 2 different approaches to innovation: 1.) One can invent new products, and 2.) One can invent newer, lower cost production/distribution methods for existing products. The overwhelming majority of gains from innovation throughout history is from the second approach. Innovators and entrepreneurs find a "target rich environment" for their product in high-fixed-cost industries. As a matter of fact, high-fixed-cost industries have a great deal to fear from innovators and entrepreneurs - unless their high-fixed-costs are supported/sustained by taxpayer subsidy or other protection!

To muirgeo:

See Tesla Motors - http://www.teslamotors.com
I'd be interested in seeing your comments about the product (I think it will meet or exceed most of your performance and availability requirements) AND it's pricing. Do you really want an electric car? Or are you just like everyone else and want transportation that you DON'T have to pay for - either to own or operate? I apologize if I sound snide here. I'll confess that I am just like everyone else - I'd like a Tesla at a lower price as well.

shayne writes:

Follow-up to muirgeo:

The fully self-contained electrically powered home you say you seek is also available right now! There are any number of manufacturers, retailers and installers you can contact via Googling "Solar panels".

Or is it that pesky "Price You Want to Pay" thing again?

To would-be economists everywhere:
It's always about the PRICE! No discussion of economic principles, social optimums or anything related can be conducted outside the context of pricing. Anything is Always Available to Everyone - at a PRICE!

Floccina writes:

muirgeo,
Production Electric Vehicles

http://www.evworld.com/evguide.cfm?evtype=production

Wow! These are electric cars?

You bet your lithium ion battery they are. From the $400,000 Venturi Fetish pictured above to the $105,000 Commutercar Tango and $100,000 Tesla, these cars are fast and capable. The new Tesla will smoke a Ferrari with 3.9 seconds 0-60 acceleration and still able to travel 250 miles on a single charge

Floccina writes:

PS
Convertions are availabe also:

http://www.evworld.com/evguide.cfm?evtype=conversion

Michael writes:

The future of newspaper, say the St. Louis Post Dispatch, is local. In the Post-Dispatch case, this was explicit when they were sold a few years ago. The main papers, like the Washington Post will continue to have high quality national coverage, but the St. Louis Post-Dispatch, to the extent that they would like to stay in business, will stop duplicating the Washington Post and the AP wire and report more on the undefeated little league team. Vive la Market!

Drtaxsacto writes:

This was one of the best Econtalks in recent weeks. I thought Russ was wonderful in bringing out the thoughts of the Wharton guy - although I thought most of his arguments were mostly silly. The explosion of the new media - disproves his theories about large sunk costs for media. What does he know about blogs and alternative media (vodcasts, XM, other sources) - evidently not much. He also seems to discount the tyranny of the majority in political decisions which can be even more intrusive and directive.

John Henry writes:

Russ,

I too like the contrarian podcasts. I want to see what others think rather than listen to an echo chamber. Not to say that I don't love your overall mix. I anxiously await Monday mornings though sometimes it takes a week or two to actually listen.

Re Waldfogel:

I think he makes a fundamental error and an unattractive one, especially for an economist. He wants special treatment. He wants custom produced products at mass produced prices.

Someone mentioned an electric car. You can have one if you want. But you will have to pay more (a lot more) for it. Or, to use Waldfogel's example, Thai food in that little city in Minn. It will cost an arm and a leg since you will have to have it specially made. But it is available.

Or the direct flight from Mason City to LA. It is available. Hideously expensive, no doubt, but one could charter a direct flight.

Market economies are pretty good (not perfect) at providing anything anyone might want, whenever, wherever and however they want it. The only question is what will the price be?

Contrast this to command economies. In Canada, no matter how much she is willing to pay, a woman can't legally get a mammogram unless the health police OK it.

In the US, if here insurance will not pay for it, a woman still has the option of paying privately.

No, I found Waldfogel interesting but whiney. He wants what he wants but wants it without paying for its cost.

BTW: The PO is not the only business charging flat rates. Fedex and UPS do as well. An overnight letter costs $13.95(?) regardless of where it is going.

Bastiat, in one of his books, contrasted the British and French Post Offices and the way they charged. The simplicity of the British system, flat rate, more than paid for any differences in individual costs.

Love the podcast!

John Henry

David Zetland writes:

I also disagree about Waldfogel's media market POV. As mentioned above, blogs, anti-local papers (i.e., criticizing the local paper), local wikis and many other means of communicating and customizing local news exist. Sure, there may be a "digital divide" such that poor people can only afford the local paper, but free papers and cheaper and cheaper internet access put paid to those arguments. (Demand side is another story.) His focus on print media is myopic.

David Johnson writes:

Mr. Waldfogel basic thesis seems to boil down to "markets are not perfect therefore they are tyrannical". About halfway through he pulls out the Chicago saw that the markets would be perfect if only they had perfect efficiency. I'm not sure why I'm listening to someone whine about the lack of perfection. I'm hoping that Russ will argue some sense into him.

I haven't yet heard the last half of the broadcast, but I'm pretty sure he is going to have some solutions to the tyranny, and that all of those solutions are going to involve governmental action to correct market imperfections. I hope none will be so droll as to invoke Sherman Antitrust and break up the NYT.

rxb writes:

I did not find Mr. Waldfogel's pov convincing. As pointed out earlier, one issue clearly is that you can get what you want but not at the price you want. In case of the newspaper example, the analysis seems to discount the quality differences between say the New York Times and a local newspaper. Another issue here might be that a newspaper is not a single product but a bundle of products sold together (national news, sports, local news etc.). When NYTimes comes into the market, consumers presumably prefer it for all its constituent components/products except the local news. Since NYTimes cannot really report on and more importantly, produce a local section for each market, local news gets dropped and the previously full features local newspaper moves into the niche of local reporting. In areas such as Washington where the media market is big enough, Washington Post does in fact have local sections for various areas.

This seems to me to be exactly how markets should behave.

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