On this blog I have discussed a lot of economic theories and ideas. I wrote about many flaws in the market, problems of competition, the need for the government etc. But all of that is hypothetical so I decided to use some practical examples. Over the next couple of posts I will apply economic theory to different parts of the economy. It’s not going to be a rigorous examination, more just things I notice during the day. I’m a firm believer in the relevance of economics and that it must be based on the real world. The best way to test a theory is to see how it matches the real world.
I got the inspiration for this when I was doing my shopping and went to buy bacon. I love bacon so this is an important matter. However when I went to the aisle, this is what I saw.
There were 40 different types of bacon. 40! There was smoked, unsmoked, thick cut, thin cut, honeyed, streaky etc. There were different sizes, brands and packages. It was at this moment I realised the free market cannot lead to the most efficient outcome. I know this is a strange epiphany to have in Aisle 3 of Tesco, but I suddenly realised it. The market is too complex for consumers to understand and compare all the options. We have neither the time, the knowledge nor the patience to buy and taste 40 different types of bacon and find which is the best. Instead we guess. This means that an inefficient (either overpriced or poor quality) product can remain on the market for a long time and may even dominate. I stood there for 10 minutes, very confused, before I bought the packet that was on sale.
Mainstream economics argues that the free market is the best system in the world. It pushes companies into making the best quality products at the lowest prices. If one firm makes bad products, then good firms will drive it out of business. This simple idea is repeated constantly in textbooks as fact. But it is based on the assumption that consumers can easily compare products, in fact it is regularly assumed that all products are homogenous (identical).
That is where problems arise. If the products are different then consumers cannot compare them easily and as a result cannot find out which one is best value. (See my post on asymmetric information) Naturally, all inefficient firms will try to differentiate their product to avoid comparison. This is why there are 40 different sizes and types of bacon. They probably aren’t that different, probably mostly the same bacon in different packages. But there is no way for a consumer to know this so instead there brain melts and they buy whatever they bought the last time.
This is the problem of “overchoice” or a “confusopoly”. If there was only say, 3 types of bacon, I could compare them and choose the best one. However if there is 40 types, then this is impossible. People don’t even try. This is the strange situation where more choice makes things worse not better. Competition is the cause not the solution to this problem.
Some people may not want to give up on the free market. Is there no way for consumers to tell the difference between the brands? The only proper way of doing this would be if I bought every single type of bacon (all 40 of them) and did a blind taste test. This test would have to be done more than once to remove the element of chance and luck (3 times I think is the norm for experiments). Of course nobody has the time or patience for all this.
But people eat bacon so surely they won’t buy something if they don’t like it? But is that because they didn’t like that brand or bacon in general? Was it simply a bad batch? Was it the bacon or was it just badly cooked? What if the person buying the bacon is different to the person who has to eat it (i.e. most households)? What if people can’t remember if they liked the last batch or not? (This happens to me a lot when shopping; I can’t remember what I got last time). Again there are too many variables that we cannot control.
But you might say people can rely on brand recognition. But brand is mainly based on how large their advertising budget is. Reputation is a subject of fashion, which is pretty irrational. The most popular person in school isn’t necessarily the nicest or the best. So if I make mediocre bacon by have an expensive and impressive ad campaign, I can effectively “buy” a large share of the market. People choose brands they are most familiar with (familiarity is comforting) so the more it is advertised, the more familiar it is.
But didn’t I buy the one that was on sale? Isn’t that an example of a company cutting prices to gain a share of the market? Maybe, or maybe not. Sales can be simple tricks into getting you to buy goods that may not be cheaper. Tesco got into big trouble last year by raising its prices and then cutting them back to their original level and calling it a sale. Even if you reduce the price by a couple of cents you can still call it a sale.
Strangely this problem could be even worse. Although there were 40 types of bacon there was only 3 major brands (Tesco, Galtee and Denny) and 2 minor brands (Clonakilty and I can’t remember the name of the other one). So we have mass confusion in a market that is essentially an oligopoly! This adds credence to the idea that companies are deliberatively confusing people to avoid competition.
The world is too complex for people to easily compare and contrast different goods and find the one that is best value. When there is too much choice the free market does not operate as it should. This leads to market failure as the best product is not properly rewarded and the worst is not properly punished by the “invisible hand”.