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Glenn Willen

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03:13 pm: Capitalism
I responded to a post on Hacker News today, and decided I should post here too, with my pet theory of free market capitalism:

"People's brains can handle optimizing on one or _maybe_ two things when making a product decision, and anything else is overwhelming. For a theater, that's what movie you want to see, and what price you have to pay. Anything beyond that, [such as the price of popcorn,] and you have to start making spreadsheets, and it's not worth it to anybody. So beyond the price and the main desirable quality of the product, producers aren't really forced to compete, because nobody will call them on it."

I think this is generally true of markets, and I think it's something people ignore when doing analysis assuming that markets are free. For another example: airlines are not forced to be competitive on amenties like food and WiFi (which is why food is crappy and overpriced, and WiFi rare, overpriced, and run by a third party.) People searching for flights have the main important qualities in mind, which are 1) dates, times, and locations of flights they need, and 2) price of flights. There's not enough brain-juice, or care, left to optimize for things like WiFi availability, food cost, food quality, etc. And even if there were, the small amounts of utility those things represent are overwhelmed by the large increments of utility between the best flight and the next-best flight, especially on a route where not that many flights are available. And even if they weren't, information about those kinds of amenities is unavailable when committing to the decision to purchase a flight. (Hipmunk makes the "WiFi or no?" information available, but not things like: How much does the WiFi cost? How much does the food cost? What is the food quality? What types of food are available?" Of course, you already know what the WiFi costs, but that's because a single provider has a monopoly on in-air WiFi, which is a different problem.)

A partial counterexample is the housing (rental or real estate) market. In those markets, the decision is rare enough, and expensive enough, and important enough, and has enough factors, that people actually do sit down and make spreadsheets of their decisions. So those decisions account for location, and price, and size, and general quality, and any other factors the consumer thinks are important enough to make a column for. But even there, the market doesn't have an infinite number of entrants; so the large jumps in utility among the top few contenders will overwhelm the market importance of any issues that are of smaller utility to most consumers; and many of those issues are not easily available to measure in any case. For example, landlords will not experience market pressure to make sure their water heaters produce enough hot water, or that their buildings aren't drafty in winter (in markets like Pittsburgh where all rental-shopping is done in the summer). And there's questionable market pressure on things like how responsive they are to complaints from tenants; that information is _sometimes_ available, for larger landlords, if you search the Web for it, and it's _sometimes_ got enough associated utility to tip the scales. (For example, many people I know will never rent from Lobos Management in Pittsburgh.) And (again excepting general measures like "perceived overall quality of landlord") there's little or no market pressure on things like "doesn't try to cheat you out of your deposit." This last item, among others, suggests the importance of regulation in this market.

Comments

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From:dachte
Date:November 6th, 2011 02:23 am (UTC)
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Maybe some of the free benefits one gets from capitalism are similar in nature to what one gets from "sleeper democracy" like ours; anything sufficiently large scale will be noticed (if one supermarket charges 1.5 times what another does and doesn't offer some other benefit, like home delivery or being full of people of one's social class, people will consider it expensive and avoid it); anything close enough to being a wash will be less important than convenience and personal preference. Likewise, in a sleeper democracy, anyone proposing sufficiently nasty policy has to work harder to get it accepted.

There are always a few people who care more, who subscribe to Consumer Report, who clip coupons, etc, and some of them might even be overoptimising, but for most people there's a threshold.

Maybe there even should be a threshold, to prevent competition from making the provit margin too thin for sellers to be reasonably available. Remember the tension between Lassiez-Faire capitalism and Perfect-Competition capitalism; the latter, while a work of theory, is the one that is most easily argued to produce the economic benefits (the former is most easily argued for on terms of philosophy). In practice, we have neither, but both of them are useful abstractions in considering the many forms of capitalism and nearby mixed-systems.
From:tak
Date:November 7th, 2011 05:41 am (UTC)
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so, you know that this is exactly the problem that the start-up i work for is trying to solve, yeah? (pikimal.com)
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