Where Economists Meet In The Nation's Capital
“The Tyranny of the Market: Why You Can’t Always Get What You Want”
Summary of Remarks by
Joel Waldfogel
Ehrenkranz Family Professor and Chair of the Department of Business and Public Policy
The Wharton School, University of Pennsylvania
November 8, 2007
Conventionally, economists consider that the free market, rather than the government, is best at providing consumers with the greatest variety of options of goods and services. Whether these options are different styles of neckties, music genres on the radio, or the subject of newspaper content, the long-held belief is that the market is capable of providing these different types and styles proportional to consumer demand. In his new book, The Tyranny of the Market: Why You Can’t Always Get What You Want,Dr. Joel Waldfogel argues that, just like in democratic governments, the market also caters to the majority.
The title, Tyranny of the Market,refers to John Stuart Mill’s concept of the tyranny of the majority in democratic systems and Milton Friedman’s argument in Capitalism and Freedom that political channels require conformity, while free markets permit diversity. When Dr. Waldfogel refers to tyranny of the market, he implies that the market also requires conformity, as goods and services only initially enter a market if a large group of people share the same preference for that good or service.
In order to understand this argument, Dr. Waldfogel asks for us to look at the theoretical mechanisms of entry and positioning in the marketplace. To further explain, when a producer decides to enter a new good or service into the market, he must first know that there is a group of people large enough who share the same preferences for the product itself, and additionally the specific type, style, color, genre, educational level, topic, and other characteristics, to cover initial fixed costs and ensure its profitability. Therefore, it is most desirable for a producer to develop his product positioned to cater to the tastes of the majority of consumers in his market, especially when fixed costs are high. When fixed costs are lower, there is a possibly for more options, but more products are closer in line with the preferences of the densest masses that share the most preferences, as opposed to those individuals whose preferences veer significantly from the norm.
Therefore, people are happier when more people share their preferences. When many consumers share the same preferences, they benefit one another by making their preferred products more profitable, and therefore a greater number of their preferred products are available to them in the market place. On the other hand, individual consumers who do not share many preferences with the majority of consumers have fewer options available to them. This is especially the case with products where fixed costs are high or when there is limited room for many firms in a market, such as with daily newspapers and radio stations.
For example, most cities have only one or two daily newspapers. Therefore, the positioning of the product is determined by the preferences of the majority of the population in the overall metropolitan areas. Statistics show that preferences of newspaper content differ sharply among geographical regions, influencing the availability and content of newspapers in different locales. For example, tabloid purchases differ sharply across zip codes and whiter zip codes prefer more hard news. Proof of this phenomenon can be seen through paper purchases among different races. In metro areas heavily populated by white people, paper purchases are significantly lower in heavily black zip codes. However, in metro areas that are overall heavily black, there are more papers whose topical coverage is targeted towards black culture.
Therefore, blacks benefit blacks and whites benefit whites as they share the same preferences and demand the existence of their preferred products. Minorities typically do not have their preferred products available to them in the marketplace, contrasting with Friedman’s argument that each individual group’s tastes are proportionally represented in the market.
Likewise, sharp differences in preferences can also be seen through other local media markets, such as radio stations and television. For example, radio stations, such as contemporary hit, jazz, and religious stations, are not narrowly targeted to a black audience, but blacks, places with few blacks have no black-targeted stations while places with more blacks have some or more. Therefore, when blacks are a minority within a geographical area, there are not any radio choices that suit their preferences. The same can be seen when looking at the prevalence of Hispanic-targeted radio stations among population shares, although this is slightly more pronounced due to the linguistic barrier.This trend can also be seen through the availability of fast food restaurant chains in different geographical areas. Although they are not seen as a high fixed cost industry, they have small local markets. Dr. Waldfogel shows the fast food preferences among whites, blacks, those who have attended college, and those who have not, by looking at a poll of which restaurants individuals from these groups have patronized in the past thirty days. While eleven percent of those who had attended college had gone to a coffee and bagel chain, only five percent who had not attended college patronized a restaurant of this type. Eleven percent of the white individuals polled had eaten at a southern food chain, but twenty-one percent of blacks had.
Dr. Waldfogel shows that an agglomeration of likes promotes an availability of preferred cuisine in a geographical region. When looking at restaurant presence in five-digit zip codes, thirty percent of metro areas have a major chicken chain, while sixty percent of heavily black zip codes do, and while twenty-five percent of metro zips have a major coffee and bagel chain, fifty percent of heavily educated zips do. If you do not prefer the same cuisine as your neighbors, you must look farther for a restaurant that suits your tastes.
However, Dr. Waldfogel questions whether or not the tyranny of the market is completely problematic. Majority rule in markets does contribute to efficiency. Things that should not be done are not done, unless governments interfere and create a deadweight loss, meaning a situation where a loss to one party is not offset by a gain to someone else. The tyranny of the market also makes most consumers happy, but at the expense of small markets or minority groups within large geographic markets. Clearly, there are also costs that go along with the benefits of the free market.
While the conventional view held by economists is that markets are good at providing greater options to consumers, the market is not necessarily infallible at providing consumers with exactly what they want. While Dr. Waldfogel does state that he sees both the shortcomings of the market as well as the government, his intention is to present factual evidence, not only theoretical, on how markets actually work. Since this problem arises from large fixed costs relative to market size, the market can look towards technology or market enlargement through trade or the Internet in order to create more variety in products.
Joel Waldfogel is the Ehrenkranz Family Professor and Chair of the Department of Business and Public Policy at the Wharton School of the University of Pennsylvania. Prior to his work at the Wharton School, he was a professor at Yale University. In addition to Tyranny of the Market, Dr. Walfogel has recently published "The New York Times and the Market for Local Newspapers" in The American Economic Review (2006) with L. George, "Does Consumer Irrationality Trump Consumer Sovereignty?" in The Review of Economics and Statistics (2005) with R. Rob, and "Do Low-Income Housing Subsidies Increase Housing Consumption?" in The Journal of Public Economics (2005). He received a PhD from Stanford University and BA from Brandeis University.
Rapporteur: Nicole Firment
National Economists Club
P.O. Box 19281
Washington, DC 20036
703-493-8824
info@national-economists.org
