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Do Markets Give Us Too Few Choices?

University of Pennsylvania business Professor Joel Waldfogel argues that markets give us too few choices because they often fail to provide products that satisfy minority preferences. This is the opposite of Barry Schwartz's argument that markets are bad because they give people too many choices, which I criticized here. In one sense, Waldfogel's point is irrefutable: due to high startup costs or fixed costs and just to the general scarcity of resources in the world, there are some minority preferences that the market won't satisfy. The market is undoubtedly inferior to a hypothetical world in which all preferences, no matter how unusual, could be satisfied at zero cost. Not even the most hard-core of libertarian thinkers denies this. That, however, says little about the question of whether government could satisfy such minority preferences better, or whether it is even a good thing to provide products whose costs are greater than their benefits.

Glen Whitman and Tyler Cowen have already pointed out the main flaws in Waldfogel's argument. Let me make two additional points.

First, Waldfogel largely ignores the fact that the market gives entrepreneurs incentives to find new and cheaper ways to satisfy the unmet demands of people with minority preferences. If an entrepreneur can figure out a way to reduce the fixed costs of, say, establishing a TV channel, then we can have channels that cater to unusual minority tastes. Of course, this is exactly what happened with the rise of Cable TV, which gave us such minority-oriented channels as C-SPAN, the History Channel, channels devoted to fishing and sports history, and so on. One of the most important economic trends of the last 200 years is the rise of a bewildering variety of products catering to specialized "niche" markets.

Government, by contrast, has little incentive to figure out new ways to satisfy unmet minority preferences, unless the minorities in question are wealthy or politically influential in some other way. Even then, the politicians - unlike private sector entrepreneurs - have little incentive to satisfy those preferences in a way that is cost effective. After all, they're not spending their own money, but that of the taxpayers.

Second, the relative lack of diversity of programming on radio stations - one of Waldfogel's principle examples of the inability of the market to satisfy minority interests - is actually a failure of government regulation. As Jesse Walker documents in this book, the FCC has for decades colluded with big broadcasters in suppressing alternative and "microradio" broadcasters, thereby greatly reducing the number of stations and making it very difficult to run a station that caters primarily to the interests of a small minority. Even a completely free broadcasting market would not satisfy all potential listeners. But it would have a great deal more diversity than is currently permitted by the FCC.

Waldfogel is absolutely right that fixed costs, startup costs, and scarcity limit the ability of markets to satisfy minority preferences. But this insight is neither original nor particularly helpful in determining the relative merits of government intervention and the market.

CEB:
That essay was so wrongheaded I don't even know where to start. The only example that he gives (the wide shoes for native americans) is actually a counter-example. Your comment bring up a point that has interested me: the debate over whether forcing people to pay for bundled cable channels enabled niche channels to survive and what the result would be if cable subscribers were able to pay "a la carte." Any thoughts?
10.11.2007 5:56pm
Ilya Somin:
Your comment bring up a point that has interested me: the debate over whether forcing people to pay for bundled cable channels enabled niche channels to survive and what the result would be if cable subscribers were able to pay "a la carte." Any thoughts?

It's a good question, but one that I don't have enough expertise to answer. Whatever the cause, however, there does seem to have been an explosion of niche TV channels over the last 20 years or so. This is one area where the market has done a fairly good job of catering to minority preferences.
10.11.2007 5:59pm
Charlie (Colorado) (mail):
Weren't we reading not long ago that people were being confounded by having too many choices?

In any case, we've got more choices than we ever had before, in almost any domain, so it would seem to be that we have more choices than ever and it still isn't enoughj.
10.11.2007 6:05pm
Elliot123 (mail):
New Balance has been offering shoes in sizes 2E, 4E, and 6E for years. They are a major player in shoes, and have exploited the width selection as a major selling point. Nike might not have done it, but that hardly means the market failed to offer Indians wide shoes.
10.11.2007 6:16pm
Oh My Word:
Please tell me that no one paid for this guy's musings. Government is the undisputed king of one-size-fits-all solutions for virtually everything it does.
10.11.2007 6:18pm
dearieme:
"too few": compared to what?
10.11.2007 6:22pm
Hunter McDaniel (mail):
I don't think Cable TV is the example I would use to illustrate an explosion of choices. If you subscribe, you can choose which channel to watch - but you can't choose which channels to buy in the first place.

Just imagine if breakfast cereals were sold the same way as Cable TV. The stores would not sell individual cereals, only the "variety pack". Every year they would add five new entries to the package (three highly sugared, one inedible crunchy, and one you actually like) - and then raise the price to cover the increased "choice" they have given you.
10.11.2007 6:23pm
Ilya Somin:
I don't think Cable TV is the example I would use to illustrate an explosion of choices. If you subscribe, you can choose which channel to watch - but you can't choose which channels to buy in the first place.

Cable TV doesn't offer unlimited choice. It's cheaper to bundle a large number of stations together than to sell all of them separately. However, it DOES cater to a wide variety of minority preferences, which was my point in the post.
10.11.2007 6:30pm
CEB:

Just imagine if breakfast cereals were sold the same way as Cable TV.

I don't know if you saw my comment above, but the argument is this (to use your cereal example as a metaphor): Suppose that not very many people like your favorite variety and it cannot turn a profit at low volume. The cereal company must A) sell it at a high price (say $15/box) B) discontinue it, or C) sell it bundled in a variety pack. C seems to give the consumer the best result. Of course this doesn't work with cereal, the question is whether it works with cable channels.
10.11.2007 6:36pm
A. Zarkov (mail):
"I don't think Cable TV is the example I would use to illustrate an explosion of choices. If you subscribe, you can choose which channel to watch - but you can't choose which channels to buy in the first place."

That's a good point. Let's take it further. I don't get a choice of cable companies. Where I live, it's Comcast of nothing. Of course you can use DSL for the Internet, or one of the two satellite companies for television, but only one cable. Going back to your point, I got a free DVR from Comcast as a special offer. But someone I know couldn't get that deal just a few months later. Now you have to buy a really expensive package of TV channels to get a DVR (which is $11 per month). One solution is to get a minimal package and buy a Tivo. As far as I'm concerned the cable market has insufficient choices. As for C-SPAN I resent being forced to pay for it as a fee embedded in my cable subscription fee.
10.11.2007 6:36pm
Arkady:

The market is undoubtedly inferior to a hypothetical world in which all preferences, no matter how unusual, could be satisfied at zero cost. Not even the most hard-core of libertarian thinker denies this. That, however, says little about the question of whether government could satisfy such minority preferences better, or whether it is even a good thing to provide products whose costs are greater than their benefits.


Would you say that of the Orphan Drug Act?

Wikipedia says:


Under the act many drugs have been developed, including drugs to treat glioma, multiple myeloma, cystic fibrosis, and snake venom. In the US, from January 1983 to June 2004, a total of 1,129 different orphan drug designations have been granted by the Office of Orphan Products Development (OOPD) and 249 orphan drugs have received marketing authorization in the US. In contrast, the decade prior to 1983 saw fewer than ten such products come to market.


10.11.2007 6:37pm
Tucker (mail):
This is fundamentally silly, the silliness of which is demonostrated by the solution: Government should step in and produce niche products which the market cannot produce profitably.

So who's going to run the new Department of Un-Marketed Products? What will it's budget be? Since its budget won't be infinite, and since, almost by definition, it will run a loss on every one of these products, how will it decide which products are not produced by the DUMP?

Will Professor Waldfogel then write a book critical of the unproduced sub-niche products, and recommend a reform of DUMP?

The fact that these products are not produced is a feature, not a bug.
10.11.2007 6:39pm
Pon Raul:
I really hate it when anyone compares a rivalrous good to a non-rivalrous good. Anyone who does it is stupid, including illegally downloading music = shoplifting people. For a non-rivalrous goods, it doesn't cost the provider must of anything extra to provide the good to extra people, while rivalrous goods do have costs associated with providing those goods to extra people. It is very reasonable for cable providers to bundle, because otherwise each consumer would only select 3-6 channels that they really want. That would mean less consumers for each channel. To continue to provide the level of programming, each channel would need to charge more per household with access. Accordingly, everyone pays the same and gets less or pays less and gets much less.

On the otherhand, if a company did that with cereal, then people would start to resell or trade the unused cerial.
10.11.2007 6:40pm
Ilya Somin:
I don't get a choice of cable companies. Where I live, it's Comcast of nothing. Of course you can use DSL for the Internet, or one of the two satellite companies for television, but only one cable. Going back to your point, I got a free DVR from Comcast as a special offer. But someone I know couldn't get that deal just a few months later.

From the standpoint of getting the programming you want, what matters is the variety of channels and shows, not the variety of cable companies. It is true that a combination of natural monopoly factors and government regulation has limited competition between cable providers (though not between channels). However, it's far from clear that government control could improve taht situation.
10.11.2007 6:41pm
one of many (mail):
Given the prohibitive shoe tariff in the US it is hard to accept that "free" markets have been given the option to attempt to adress the needs of native americans. If the shape of native american feet is typical of all in the new world then the combined size of the North and South American native descended population is certainly not a niche market. (As an aside the problem really is not the width but the height of the arch and thickness of foot.) Perhaps it might be better to say that markets with artifical (government) bariers to entry have difficulty adressing the needs of niche markets, but that would change Walfogel's argument too much. If shoes and radio are the best example he can present of inefficencies of markets then he might be better off arguing for libertarianism and actually free markets. I recall some Smith fellow mentioning the same sort of problems Walfogel does in similar non-free markets, I believe it was called something like "The Wealth of Nations".

I should also note that the niche market of high volume feet (my feet are among them) has not been entirely previously ignored by the footwear industry. Hiking boots for high volume feet (wider and thicker than 'standard' feet) have been arround for decades. Of course hiking boots are a niche market also, and tend to be pricier than most footwear. Now that I think of it, all the high volume hiking boots I've seen have been US made and thus not subject to the tariff.
10.11.2007 6:41pm
Elliot123 (mail):
A complicating factor in cable TV is that some channels pay the carrier to broadcast them. They are essentially free to the consumer. So, when we look at the basic bundle provided by the cable company, it's not really accurate to say we are paying for each individual channel. The cable company is selling our eyeballs.

Does anyone think they are really paying for the Shopping Channel?
10.11.2007 6:44pm
Pon Raul:
Well, in a world where each consumer could select and only pay for a few channels, channels like the Shopping Channel would come free. But no one cares about those channels. People are mad because they are paying .75 for Spike and 1.25 for lifetime per household, eventhough they really only watch ESPN, which costs 3.25 per household. Without bundling, only 50% of households get ESPN, which means that ESPN only gets half the cash. To make that up, ESPN must either charge 6.50 per person or fire Stu Scott. Spike and Lifetime, on the other hand, now only get 10% of viewers and must either charge 7.5 and 12.5 per person or put on less well made shows. In balance, people would probably pay slightly less but get far fewer options and no Stu Scott.
10.11.2007 7:01pm
Houston Lawyer:
Johnston &Murphy once made a style of shoes that I liked, but they no longer make them. Should the government be able to force them to continue to make those shoes for my benefit?

How about Members Only jackets.
10.11.2007 7:12pm
Henry Bramlet (mail):
Agreed Pon-

In general the market has already demonstrated that it will pay $50/month for the (on average) 25 Channels that a user regularly visits. If users suddenly got the right to go a la cart, why WOULDN'T the cable companies charge basically the same price? Sure, there will be some exceptions, but people thinking that they would only have to pay $1 or $2 for the channel they want are deluding themselves.
10.11.2007 7:48pm
American Psikhushka (mail) (www):
Pon Raul-

I really hate it when anyone compares a rivalrous good to a non-rivalrous good. Anyone who does it is stupid, including illegally downloading music = shoplifting people.

But rivalry doesn't really come into it - if you are getting a product for free you are not going to pay for it, hence the producer's ability to sell product decreases. You're not "using up" the music, but you are certainly reducing the number of people who will pay for the music by providing it for free. Since musical talent is a scarce good, you are essntially demanding that the artists socialize it. Which is fine as long as everyone else works for free, but that has been tried and it doesn't work too well.
10.11.2007 8:09pm
Malvolio:
if you are getting a product for free you are not going to pay for it, hence the producer's ability to sell product decreases. You're not "using up" the music, but you are certainly reducing the number of people who will pay for the music by providing it for free.
Price serves two functions: it moderates demand and it incentivizes production. With a non-rivalrous good, there is not benefit to moderating demand, but the need for incentives remains.

In the case of music itself, there is a simple solution, because essentially all musicians produce two goods, one non-rivalrous (the recorded music) and the other rivalrous (the live performance). As Radiohead has recently discovered, it is better to price the non-rivalrous good near zero, as a marketing tool for the valuable one.

Of course, that puts the record companies (who produce a competing, but much less desirable product) out of business. Some people would regard that as feature not a bug.

Musicians who cannot or choose not to perform live also have a problem. As the only musician in that category that I can think of is Barbra Streisand, and I don't like Barbra Streisand, that is a feature too.
10.11.2007 9:57pm
liberty (mail) (www):
Wow.

Thats really great. It totally explains why there is no such thing as indie music or indie movies or little specialty shops, or size 25 pants for the very large person, or weird niche comic auctions, or really anything that caters to sci-fi geeks or to weird cat ladies. It basically explains how we have such homogeneous options in this country and why they had literally billions of options under socialism - everything in every size - cause you know government is much better at catering to minority desires.

It isn't like little businesses can do well making stuff for small niche markets the way that government can.
10.11.2007 10:23pm
Grover Gardner (mail):
I am definitely a minority market--obscure historical recordings; long-forgotten books; esoteric stereo equipment, parts and components--you name it. Today *all* these things are available to me in the internet. Whenever I type in "search for" and hit the go button, sure that I won't find what I want, I'm invariably surprised and delighted.

Shoes? Skechers are made wide and roomy. I love them. Need a narrow? L. L. Bean (I can't wear them). The minority market exists in the variability of any given manufacturer's version of whatever size you're looking for.
10.11.2007 10:34pm
Sean O'Hara (mail) (www):
Whatever the cause, however, there does seem to have been an explosion of niche TV channels over the last 20 years or so.


But look at the evolution of these niche channels -- they all start out with a mission statement, usually embodied in their name (the Sci Fi Channel, American Movie Classics), and eke out a living within the constraints of their core concept. But over time the channels find that programs on the edge of their niche get better ratings than those firmly inside it, and that programs with nothing at all to do with their central concept do even better still.

The classic example of this is MTV, but you can see it everywhere -- Sci Fi airs professional wrestling; AMC shows Iron Eagle III; TNN became Spike and airs Star Trek and James Bond non-stop; TLC only teaches how redecorate your home; the History Channel shows Mad Max movies; Cartoon Network routinely airs live action shows; TechTV/G4 is often closer to Adult Swim than a channel for computer geeks; etc., etc.

Comedy Central is the only channel that seems immune to this, possibly because comedy isn't a niche. Everything else eventually turns into the USA Network. So even in the current system, niche channels can't survive in their pure form before market forces mutate them.
10.11.2007 10:41pm
one of many (mail):
"But over time the channels find that programs on the edge of their niche get better ratings than those firmly inside it, and that programs with nothing at all to do with their central concept do even better still. "

I suspect you are missing the major part of the equation. Sci-Fi Channel seems to have discovered that there is a minimal audience for the StarGate reruns they would probably have run Tuesday night from 10-11 and since there is an availible and larger market for wrestling at that time and they are being broadcast anyway . . .. A cable channel is going to run 24/7 and if the niche audience is not large enough to support that ammount of niche programing then it makes sense for the programer to put something else in some of that 24/7 utside the niche. (support is bolded to preempt confusion with consume.) TNN is a good example, it has gone through umpteen makeovers attempting to find a niche (remember when it was The Nashville Network) which has not been completely served by some other channel (I think they are now still Spike but mostly show CSI to serve those who don't get enough on USA and TNT, apparently this is a very large audience.) I don't think it is primarily a question of shows outside the niche driving out niche shows, but of the niche recieving all it can support before the 24/7 is exhausted.
10.12.2007 12:27am
Rich B. (mail):

Without bundling, only 50% of households get ESPN, which means that ESPN only gets half the cash. To make that up, ESPN must either charge 6.50 per person or fire Stu Scott.


Pon seems to believe that ESPN could charge twice as much, but elects not to so that the Spike and Lifetime channel can get some revenues. If they could charge twice as much, they would do so and tell Comcast to either drop Spike or increase the charge to consumers.

The true irony, of course, is that people here seem to think that cable is an example of the free market at work, rather than one of the most highly regulated markets in the country.
10.12.2007 12:55am
Publius Endures (mail) (www):
The problem with cable is that it is effectively a government granted (local) monopoly with rates subject to government approval- I don't think there are many areas of the country with an actual choice of cable companies. Since it's a government granted monopoly, the cable companies are, in a way, acting in lieu of government.

Additionally, it doesn't seem like the cost of providing 150 channels to a customer is significantly more than the cost of providing 3-6 channels to a customer, since you will have a much higher marginal cost per channel provided at that level- in fact, there may be extra administrative costs that actually make it more expensive for the company to provide 3-6 channels than 150 channels. Certainly, the cable company would see a decrease in ad revenue, as many of the niche channels get driven out of the market. All of this would also create the problem of dramatically increasing entry costs for new niche channels.

Given all of this (especially their close affiliation with the government), I almost think that the cable companies should be thought of more in the role of government-like protector of free markets in channels than as members of the market themselves.
10.12.2007 1:08am
JBL:
The cost of the programming is not the only cost incurred by the cable provider. There are also a number of fixed costs. So an a la carte option would necessarily have some base price in addition to the price per channel. Getting 100 channels for $50 doesn't mean we could get a la carte programming for $0.50 per channel.

Now throw in the questions of selection and elasticity. Suppose I regularly watch six channels, but sometimes watch others if they are available. The 100-channel bundle is $50. If the a la carte option meant I could get the six channels for $3 and do without the rest, that might be worth it. If the a la carte option meant that six channels would cost $25, that's a different question. In other words, at some level pricing is not particularly elastic. Whatever that level is, it becomes efficient to bundle and charge up.

The effect on programming of the (market-based) development of DVR and video-on-demand technology is a more interesting question.
10.12.2007 11:45am
American Psikhushka (mail) (www):
Malvolio-

In the case of music itself, there is a simple solution, because essentially all musicians produce two goods, one non-rivalrous (the recorded music) and the other rivalrous (the live performance). As Radiohead has recently discovered, it is better to price the non-rivalrous good near zero, as a marketing tool for the valuable one.

Well what Radiohead is doing is relatively new, so I don't know whether one can state conclusively that the practice of giving away the recorded music for free is "better".

There are a significant amount of people that rarely go to live performances, like myself. So I don't know if there are enough people who go to live performances for that model to provide similar incentives to the current one. Do you know the average breakdown in income between records sales royalties, radio play royalties, and concert ticket sales?
10.12.2007 12:32pm
Thales (mail) (www):
The musician example is pretty interesting, but much more complicated than the commenter allows, I think. Note also that music *performers* may produce both recordings and live music, but that *composers* don't always. Different copyrights for composition and performance reflect this. And the output of a composer is almost by definition purely nonrivalrous. There's a decent argument that without some level of copyright protection, composer output would be suboptimal and shunted back to a patronage system (some would say we in fact have this for most of what passes for classical music today, the more entrepreneurial composers such as Glass being the exception).

What of some acts that produce excellent recordings but lackluster live performances (e.g., I'm told by those who have seen them perform, The Shins), and those who have a huge body of composed and recorded work, but whose principal creative innovation for much of their careers has been on stage (Bob Dylan, some would say). These sorts of acts may not necessarily do well with the pairing of the free nonrivalrous/expensive rivalrous goods.
10.12.2007 12:53pm
Heather:
I noticed he didn't mention all the times the government has REMOVED drug choices from Americans. The FDA will pull drugs if a couple of people have fatal side effects, which means the millions of people who benefited without the side effects have less choice in their health management.
10.12.2007 2:30pm
one of many (mail):
I assume the whole orphan drug think was just a "brain fart". Yes, the free market fails to provide for minority needs because government had to intervene in one of the least free markets.
10.12.2007 8:10pm