Do Markets Give Us Too Many Choices?

Lately, it has become common for critics of free markets to argue that they give us too many choices, and making all those decisions is too burdensome. Barry Schwartz's book The Paradox of Choice is the best-known defense of this argument. Tyler Cowen links to a good statement of it by Megan of the From the Archives blog:

This is the other thing I don't get about small government types. You protest so vociferously that government takes choices away from you. But a whole lot of choices are BORING. If I never once think about car bumper safety standards for 25mph crashes, I will never miss it. I do not want to carefully match my car safety standards to my most likely driving patterns and save two grand in the process. I would not enjoy that process. (Perhaps you would, and you would rather have the money.) I've never been a comparison shopper or a meticulous consumer. Maybe my model of the individual is too biased by my experience. But I don't want to figure out how much coliform bacteria I can tolerate on my spinach, given my health. I don't want to do that even if it saves me money. I don't want to figure out what goes into paint in nephews' toys. I don't even want to handle my health care.....

I can hear you already: "But you are FORCING me to take that deal too.". Yes. But right now our system FORCES me to comparison shop. Either way, someone gets FORCED to do something, and I don't see a justice interest on one side or the other....

There are several flaws in this argument. First, the market does not in fact "force" anyone to do "comparison shopping." If you genuinely don't care much about the price or quality of a particular product, you can simply choose at random from the options on sale. In that scenario, you can still benefit from the comparison shopping efforts of consumers who care more than you do, since most manufacturers will cater to the preferences of the better-informed consumers at least to some substantial degree.

Second, if you do care, but simply don't want to take the time and effort to choose intelligently, the market again provides solutions for the problem. You can 1) rely on the advice of better-informed friends and acquiantances, 2) use one of the many consumer publications (e.g. - Consumer Reports) that summarize product information in an easy to use format, or 3) pay an expert to make your decisions for you. Megan herself seems to approve of this third option:

People talk about being rational health care consumers, but they are maximizing some combination of health outcomes and money. I want to maximize my utility. My utility is optimized by going outside to play while someone who is interested in health care gets paid to balance my health care and money. I'll pay a little extra to cover that person. I come out well ahead in that deal.

Of course, if I interpret Megan correctly, she means that she would like to pay government regulators to impose decisions on everyone rather than to hire a private sector expert on her own initiative; otherwise, her argument would not be a criticism of "small government types." But a key advantage of the market over government is that you get to choose when you want to rely on experts, and which ones you want to hire. This gives the experts much stronger incentives to do what you really want, and also reserves to you the vital right to reject their advice at the end of the day - points I discussed in greater detail in my post on "Power to the Experts."

Finally, Megan's argument (and Schwartz's more sophisticated version) don't adequately consider the important fact that people differ from each other on what products and product attributes they care about. Choices that she and I would consider "BORING" or unimportant are intensely interesting and significant to others. In the market, people can choose for themselves which choices they want to study in detail, which ones they are willing to make more or less randomly, and which ones they prefer to delegate to an expert. With a mandatory government solution, we will at best get the menu of choices that the majority of voters consider appropriate - a result that will be deeply unsatisfactory to many who have minority preferences. At worst, the menu will be dictated by narrow interest groups that manage to capture the regulatory process and use it for their own benefit. Even "boring" choices that I have to make myself are preferable to that.

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.

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.