The Volokh Conspiracy

Waldfogel and Schwartz Reconciled:

My initial reaction to Joel Waldfogel's argument that the market gives us too few choices was that it directly contradicts Barry Schwartz's claim that it gives us too many because it is hard for consumers to decide which of the bewildering array of options available is best for them. However, it is theoretically possible that both are right.

Waldfogel argues that markets give us too few choices because they fail to provide products that satisfy minority preferences in situations where there are high startup costs or fixed costs. For example, there are very high fixed costs to producing a new type of car. That implies that markets will not have this problem in situations where the fixed costs are low. For example, there are millions of websites that cater to small, specialized audiences because the fixed costs of establishing a website are low.

This suggests that markets could theoretically provide too little variety of products with high fixed production costs, and too much of products with low fixed production costs. Maybe there are too few car models, but too many websites.

For reasons that I explained in my previous posts discussing Waldfogel and Schwartz's arguments (here and here), I think that both of them are wrong. Markets generally do a good job of both satisfying minority preferences and reducing the costs of choice for consumers who don't want to do detailed comparison shopping. However, it is worth noting that it is theoretically possible for Waldfogel to be right about one set of products, and Schwartz about another.

Gabriel (www):
The other way to reconcile them is that markets provide too few choices for minority tastes and too many choices for majority tastes. This is basically the Hotelling theorem, which is at the heart of much of Waldfogel's work. The model works even if you set fixed-costs at zero. (I haven't read the book but I'm familiar with Waldfogel's journal article on radio). Ironically, Waldfogel (and Hotelling) found that monopoly can square the circle.
10.11.2007 5:26pm
Pon Raul:
Aren't Waldfogel and Schwartz straw men?
10.11.2007 5:31pm
Dan Simon (mail) (www):
However, it is worth nothing that it is theoretically possible for Waldfogel to be right about one set of products, and Schwartz about another.

Uh, you meant, "worth noting", right? (Otherwise, you probably wouldn't have bothered to post this...)
10.11.2007 6:42pm
Mark H.:

it is theoretically possible for Waldfogel to be right about one set of products, and Schwartz about another.



My local sole-prop sub shop has 45 varieties on the menu, I can order in 3 words: Number "3" Everything. The local franchise sub shop has far fewer varieties listed, but it's nearly impossible to order a sub from that shorter menu. What kind of bread, what kind of cheese, what kind of this, that and the other thing, so I stopped going there.

Recently they mailed a coupon for a free particular style of sub with a beautiful photo of it, so I went back and sure enough they started in with the questions again, so I held up the photo and said I just want it like it's pictured. Haven't been back since.
10.11.2007 6:48pm
Ilya Somin:
However, it is worth nothing that it is theoretically possible for Waldfogel to be right about one set of products, and Schwartz about another.

Uh, you meant, "worth noting", right? (Otherwise, you probably wouldn't have bothered to post this...)


"Noted," and now corrected. Thanks!
10.11.2007 7:00pm
tvk:
As Mark H implicitly points out, I take issue with Ilya's critique of Schwartz's theory. Ilya's main point is that a consumer who really doesn't care for choice can simply forego the choice by making a random choice. The problem with this critique is that a random choice is not zero-transaction-cost event in the same way as having no choice. Random choice is only a low-transaction-cost event. It takes ever so marginally more mental effort to make a random choice than it takes to make no choice at all.

Further, like it or not, human psychology does tend to second guess itself, so that people emotionally prefer sometimes having no choice and never knowing what they potentially "missed out on." A choice that is rationally not exercised invokes this second-guessing whereas having no choice does not. (if Ilya never does this, then more power to him, but I think this phenomenon is quite common).

That said, I share Ilya's general skepticism toward a "ignorance is strength" philosophy. I just think that Ilya is not giving the other side of the debate enough credit.
10.11.2007 7:22pm
Mary (mail):
"Too many" choices may make it impossible for the minority to locate its choice, and so effectively prevent its being created by eliminating its market.
10.11.2007 8:24pm
seadrive:
If you were involved with helping senior citizens sign up for Part D a year ago, you would know what Schwartz was talking about. Many were not able to do the information gathering and analysis to select the 'optimum' plan. Over time, the choices will become more uniform and fewer in number, people will be better informed, and the problem will be ameliorated. It was, however, a clear example of too much choice.

Too many people believe in the market as a matter of ideology. A free market does what it does. It's good at local optimization and poor at global optimization. The regulated markets of real life work well or badly depending on the industry and the implementation. California's experiment in free energy markets are an example of the downside.
10.11.2007 8:55pm
Mark H.:

It was, however, a clear example of too much choice.


I disagree Seadrive. Rather, it was a muddled mess of cryptically explained (to put it mildly) choices with an odd combination of if/then stipulations. I spent hours trying to figure it out for a couple of neighbors. But too much choice was not the culprit.
10.11.2007 9:27pm
Eli Rabett (www):
We can call this the Walmart theory. Walmart can always run any small specialty business in a small town out of business and their business model is based on being able to do that.

The small specialty business would carry a larger variety of special widgets than Walmart, but a significant part of the profit would be from the most popular widget.

For example, my wife was recently at a needlework convention where the exhibitors and attendees remarked how small stores in small towns were gone. In that case, Walmart was taking away the core DMC thread business with very low prices, but would not carry specialty threads, the profit per sq ft would be too low on that, and there is not enough supply in any case for Walmart, but there was not enough business in a small town for the specialty store to make up for the loss of the DMC thread sales.

In a big city, there are enough customers to support a needlework store based on the specialty thread business, and certainly this is true on the INTERNET.

The point is that you have to gather a large enough minority to support the business. It is not just production, but also location. It makes little sense to open a small business in a small town where Walmart is.
10.11.2007 10:08pm
Jim at FSU (mail):
It is pretty easy to convert a car to your tastes if you understand a few basic engineering principles and can operate basic garage tools.
10.11.2007 10:30pm
Mark H.:

Walmart can always run any small specialty business in a small town out of business and their business model is based on being able to do that.

That's quite the cynical position, don't you think Eli? I doubt, completely, that the executives at Wal-Mart sit around rubbing their hands together plotting to put small businesses down when they scout out new store sites. I'm sure, though, they do a demographic study to determine whether any given population in any given area will potentially, successfully, support their expansion.

I've got Wal-Marts to the south of me, to the west of me, to the north of me, though none to the east as they've not figured out how to break into the marine market with an offshore nautical version of their stores, and guess what? Every single one of the local hardware stores that I've frequented for years (and still do) are doing just fine thanks.

In fact, over the past few years, subsequent to a Wal-Mart opening in a desolate area, I can think of at least a dozen new franchise restaurants that opened in the vicinity to take advantage of the traffic -- oh, and the existing "mom and pop" bars, taverns and restaurants are doing better than ever as well.

Lots of choices! :-)
10.11.2007 11:53pm
psj:
I sometimes like Costco BECAUSE of the limited selection. Almost always, items Costco selects are good quality. Sor for something I need to buy that I'm not really familiar with, I can be pretty confident that it's a good quality item.
The alternative in a store with huge selection, is to "middle of the road" and choose an item with an average price. Don't marketers take advantage of this phenomenon?
10.12.2007 1:18am
seadrive:
Mark H: I don't mind agreeing to disagree, but I get a sniff of ideology making excuses for a real world not running as according to theory.
10.12.2007 7:55am
juris_imprudent (mail):
seadrive,

I was going to make Mark H's point until I read his post. I disagree that it is ideologically based/biased. Use a true "market" example if you wish to support the too much choice point - not a bureaucratic boondoggle.
10.12.2007 10:25am
Eli Rabett (www):
Well yes Mark, Eli is cynical. Often right, always cynical. In this case you simply have to look at how Walmart has wiped out smaller businesses in small towns. Elis is sure that they did this only out of altruism.

Face it, Walmart competes, they do so on price, they have the leverage to do so in any small market and they use it.
10.12.2007 11:23am
JBL:
One of the baffling shortcomings of the market-vs-government debate is the tendency of both sides to simplify the model and talk as if going 100% to their favored system will be the best choice for all possible goods and services. The pro-market side acknowledges things like information asymmetries and transaction costs, but doesn't spend enough time developing the fact that they are very real costs which government can in many cases reduce. The pro-government side doesn't spend enough time developing the fact that government regulation in general does not automatically solve problems and (if it can help at all) it needs to be tailored to a specific market failure.

If we can look at particular situations and are willing to be creative about solutions that start by finding the actual problem, it is usually possible to come up with a solution that does a pretty good job of addressing all parties' concerns.
10.12.2007 11:32am
SeaDrive:
JBL: In support of your point, where gov't is really effective in reducing costs, it's so well excepted that it's hardly noticed. My favorite example is building codes. The amount of money saved by (more or less) uniform standards of construction is enormous. What if every homebuyer had to have a "real" inspection to see if living room could support a grand piano?
10.12.2007 12:17pm
JBL:
SeaDrive: Exactly. Done properly, building codes not only improve safety, they reduce overall costs. Ditto for certain urban planning requirements regarding traffic and infrastructure.

Many other zoning provisions, on the other hand, are burdensome for property owners and builders while providing little, if any, public benefit. For example, a well-built 8-unit condo on two acres with good landscaping can easily be more attractive than eight individual houses on .25 acre each, and poses no additional traffic or infrastructure burden, but most areas zoned for low-density residential would not allow it.

The real situation can't be reduced to either a "markets are driven by greed" or a "politics is driven by ignorance" mentality.

The fact that the average homebuyer doesn't have the knowledge or time to get too involved in the choice of structural materials or construction techniques means that building codes work well, but saying the market would provide "too many choices" doesn't really grasp the issue.
10.12.2007 6:28pm
David M. Nieporent (www):
SeaDrive: Exactly. Done properly, building codes not only improve safety, they reduce overall costs.
But why do you think we need government for this? To the extent they have these effects, there's no market failure that would require government. Indeed, government doesn't normally create these codes at all; private organizations do. Government often simply adopts these codes directly into their own statutes/regulations. (Indeed, there are intellectual property/due process issues here, because the private organizations don't want anybody to have access to their codes for free, whereas laws are supposed to be accessible to all.)
10.12.2007 11:37pm