Joel Waldfogel
Copyright Date: 2007
Published by: Harvard University Press
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  • Book Info
    Book Description:

    Economists have long counseled reliance on markets rather than on government to decide a wide range of questions, in part because allocation through voting can give rise to a "tyranny of the majority." Markets, by contrast, are believed to make products available to suit any individual, regardless of what others want. But the argument is not generally correct. In markets, you can't always get what you want. This book explores why this is so and its consequences for consumers with atypical preferences.

    eISBN: 978-0-674-04479-1
    Subjects: Business, Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-xii)
  4. Introduction
    (pp. 1-10)

    Societies need to make decisions about material questions, such as what to produce and who gets what; broadly, these decisions can be made either through political processes such as voting or through voluntary arrangements among individuals in markets. Choices made through voting result in “laws” that apply to everyone. Whatever decision the group makes, everyone must obey. Laws have some disadvantages, which can be illustrated by an imaginary town meeting. Will the town square be a playground or a shopping mall? Only one outcome is possible; the space cannot be both. Suppose that 55 percent of the people want the...

    • CHAPTER 1 Markets and the Tyranny of the Majority
      (pp. 13-20)

      This book is about “differentiated products”: products like Coke and Pepsi that are similar but not identical. Many people can tell the difference and prefer one over the other. In automobiles the distinctions are more obvious. While both deliver motorized transportation on four wheels, a Humvee and a VW Beetle are quite different. Examples of differentiated products abound: automobiles, packaged foods, pharmaceuticals, information products (books, music, movies, newspapers, video programming), furniture, housing, consumer electronics, and clothing. Essentially, everything available at the mall, and most of the products outside the produce section of the grocery store, are differentiated products.¹

      I am...

    • CHAPTER 2 Are “Lumpy” Markets a Problem?
      (pp. 21-36)

      When fixed costs are large relative to market size—when markets are “lumpy”—the number of options targeting each group, and their satisfaction, will increase as the size of the group grows. If fixed costs are very large, an increase in the size of one group can decrease the well-being of another group. For example, we expect preference minorities—small groups of consumers with tastes distinct from the tastes of the majority—to fare relatively poorly as consumers. Black Americans, for example, make up 13 percent of the U.S. population. As I will show in later chapters, as groups, blacks...

    • CHAPTER 3 Who Benefits Whom in Practice
      (pp. 39-58)

      According to some estimates, it costs an average of $900 million to bring a prescription drug to market.¹ This is a fixed cost, independent of the number of doses sold. As a result, when a pharmaceutical company contemplates developing a drug, one major consideration is the size of the market. How many people have the condition and are in a position to pay for the drug?

      Conditions afflicting large numbers of people in rich countries are targeted by the most products. As an article in theNew York Timesput it, “The pharmaceutical industry invests $27 billion a year in...

    • CHAPTER 4 Who Benefits Whom in the Neighborhood
      (pp. 59-73)

      On Saturday mornings, when I’m driving my daughters to and from their basketball games in Lower Merion township, a close suburb of Philadelphia, I frequently pass groups of pedestrians walking and pushing strollers. The men wear dark clothing and long coats. The women wear long skirts and headscarves. The eastern end of the township is densely populated with Orthodox Jews. Why do Orthodox Jewish people cluster in this neighborhood? What benefit do they derive from living near others who share their preferences in food, styles of worship, and other aspects of life? Although the public schools, parks, and other services...

    • CHAPTER 5 Preference Minorities as Citizens and Consumers
      (pp. 74-86)

      To this point we have seen that the consequence of a product’s availability is that consumers purchase it and experience satisfaction. But consumer satisfaction is not the only possible effect of product availability. Media products offer both entertainment and information, and entertainment consumption is an end in itself. Information is different. Generally, people do not watch the Weather Channel because they enjoy it; they watch it to find out how to dress their children in the morning or whether they should carry an umbrella to work. Similarly, most people do not read, watch, or listen to the news primarily for...

    • CHAPTER 6 Market Enlargement and Consumer Liberation
      (pp. 89-99)

      If the “who benefits whom” phenomenon is a problem, what are the solutions? My satisfaction depends on the mix of product preferences in the population when fixed costs are large relative to market size. The smaller are fixed costs in relation to market size, the greater the number of products that a market can accommodate. Hence the obvious solution, at least in theory, is to increase the size of the market relative to fixed costs.

      Perhaps the simplest way to do so is through trade across geographic areas. Trade, the production in one locale for consumers there and elsewhere, expands...

    • CHAPTER 7 Fixed Costs, Product Quality, and Market Size
      (pp. 100-107)

      Residents of Fergus Falls, Minnesota (population 13,000), and the Minneapolis–St. Paul metropolitan area (population roughly three million) face very different product options. For some products, such as restaurants, bigger places like Minneapolis have more (and more varied) options, including a wider range of qualities.

      Fergus Falls has thirty-six restaurants, including two Burger Kings, one McDonald’s, a Pizza Hut, a Domino’s, a Subway, and an Applebee’s. But if you want to eat at TGI Friday’s, or California Pizza Kitchen, or Romano’s Macaroni Grill, or Chili’s, not to mention Morton’s Steakhouse, you will not find them in Fergus Falls. Nor will...

    • CHAPTER 8 Trade and the Tyranny of Alien Majorities
      (pp. 108-118)

      In a memorable gesture during the 1999 World Trade Organization meetings in Seattle, antiglobalization demonstrators vandalized McDonald’s outlets and broke windows at Starbucks.¹ Among the many complaints of opponents of globalization is distress over global exporting of branded U.S. products such as Coke, McDonald’s, and Nike.²

      But what, exactly, do the opponents of globalization oppose about the availability of U.S. products abroad? After all, as I argued earlier, the availability of additional products could simply provide foreign consumers with more options, thereby offering preference minorities liberation through trade. But is it that simple? Does trade simply increase the number of...

    • CHAPTER 9 Salvation through New Technologies
      (pp. 119-128)

      Preference minorities face few appealing options in markets with high fixed costs relative to market size. As I have shown, one way of addressing their plight is increased market size. The other solution, of course, is to reduce the fixed costs of offering differentiated product options. While new technologies do not invariably achieve this result, technological change has been responsible for much of the improvement in our quality of life since the Industrial Revolution. Indeed, Robert Solow won a Nobel Prize in economics in part for documenting that roughly two-thirds of the increase in output per worker in the United...

    • CHAPTER 10 Government Subsidies and Insufficient Demand
      (pp. 131-146)

      What have been the policy responses to the “who benefits whom” and “tyranny of the majority” phenomena in product markets? That is, how does government address the problems of preference minorities? As emphasized earlier, there can be important shortcomings in the range of products that consumers face in markets when fixed costs are substantial. Markets can offer inefficiently too few products, or inefficiently too many. Indeed, in lumpy product markets there is no expectation that the market will generate a range of products that, like Goldilocks’ porridge assessment, is “just right.” Outside of efficiency concerns, there are also distributional concerns....

    • CHAPTER 11 Books and Liquor: Two Case Studies
      (pp. 147-162)

      Most people do not realize that the stamp they use to send their letters represents a dramatically egalitarian way of treating customers. The U.S. Postal Service, the only entity legally authorized to deliver letters to mailboxes, charges the same rates regardless of distance or destination within the United States.

      Suppose I want to send letters to West Philadelphia (zip code 19104) from two locations: Shelby, Montana (zip code 59474), and the University of Chicago (zip code 60637). Chicago is a large metropolitan area served by frequent flights and two major interstate highways, whereas Shelby, Montana, is quite remote. With a...

  9. Conclusion
    (pp. 163-170)

    What have we learned in our tour of various industries, fixed costs, market enlargement, and policy interventions?

    There are four basic lessons, and the first is theoretical: When markets are lumpy—when fixed costs are substantial—there is no theoretical reason to expect market outcomes to be efficient. While it is true that in a perfectly competitive market, everything that should be done will be done and nothing that should not be done will, this expectation does not carry over to realistic, high-fixed-cost examples. The point is that in an industry whose production technology gives rise to lumpy outcomes, the...

  10. Notes
    (pp. 173-188)
  11. References
    (pp. 189-194)
  12. Credits
    (pp. 195-196)
  13. Index
    (pp. 197-204)