The Tyranny of the Market: Why You Can't Always Get What You Want

217 Pages·2007·0.46 MB·English

by  Joel Waldfogel

The Tyranny of the Market

The Tyranny of the Market
WHY YOU CAN’T ALWAYS GET WHAT YOU WANT
Joel Waldfogel
HarvardUniversityPress
Cambridge,Massachusetts
London,England
2007
Copyright©2007bythePresidentand
FellowsofHarvardCollege
Allrightsreserved
PrintedintheUnitedStatesofAmerica
LibraryofCongressCataloging-in-PublicationData
Waldfogel,Joel,1962–
Thetyrannyofthemarket : Whyyoucan’talwaysgetwhat
youwant / JoelWaldfogel.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN-13:978-0-674-02581-3
ISBN-10:0-674-02581-4
1.Consumers’preferences. 2.Majorities. 3.Supplyand
demand. 4.Socialchoice. 5.Freeenterprise. I.Title.
HF5415.32.W352007
381—dc22 2007000531
Contents
Preface vii
Introduction 1
PART ONE
THEORY
1 MarketsandtheTyrannyoftheMajority 13
2 Are“Lumpy”MarketsaProblem? 21
PART TWO
EMPIRICALEVIDENCE
3 WhoBenefitsWhominPractice 39
4 WhoBenefitsWhomintheNeighborhood 59
5 PreferenceMinoritiesasCitizensandConsumers 74
PART THREE
MARKETSOLUTIONSANDTHEIRLIMITS
6 MarketEnlargementandConsumerLiberation 89
7 FixedCosts,ProductQuality,andMarketSize 100
8 TradeandtheTyrannyofAlienMajorities 108
9 SalvationthroughNewTechnologies 119
vi (cid:129) Contents
PART FOUR
POLICYSOLUTIONSANDTHEIRLIMITS
10 GovernmentSubsidiesandInsufficientDemand 131
11 BooksandLiquor:TwoCaseStudies 147
Conclusion 163
Notes 173
References 189
Credits 195
Index 197
Preface
Inthisbook,Irespondto—andextendinnewways—ideaslaidout
most famously in two very important works in economics and po-
litical economy, Milton Friedman’s Capitalism and Freedom and
John Stuart Mill’s On Liberty. Mill points out a fundamental fea-
tureofdecision-makingthroughgovernment,thatmajorityruleim-
poses constraints on individuals who disagree with the collective
choice.Mylibertyisabridgedinthesensethatthechoicesavailable
tomeasacitizendependonthepreferencesofothers.Ifthemajor-
ity wants liquor stores closed on Sunday while I would prefer to
have them open, then my freedom is abridged by the fact that we
make this choice collectively. If I want green shirts but the state
shirt-makingcollective,bowingtomajorityviews,makesonlyred,
thenmyfreedomtochooseamongshirtcolorsisabridged.
Friedman agrees that allocation through collective choice pro-
motesatyrannyofthemajority,andhearguesthatwhenallocation
takesplacethroughmarkets,ratherthancollectivechoice,individ-
ualsgetwhattheywantratherthan,say,whatthemajoritywants.
Friedmanarguesforastarkdichotomybetweenmarketandcollec-
tive choice. Markets offer “freedom” in the sense of allowing peo-
pleaccesstowhateverproductsmightsuittheirtastes,regardlessof
whatothersprefer.Onthisbasishearguesthatsocietiesshouldlet
the market decide as many questions as possible to avoid effects
akintotyrannyofthemajority.
viii (cid:129) Preface
AsastudentIreadbothCapitalismandFreedomandOnLiberty
with great interest. Capitalism and Freedom inspired me with the
message that allocation through markets is not just expedient; it
also promotes freedom, something far nobler than base material
needs.IoftenclaimedtoincredulousacquaintancesthatCapitalism
andFreedomwouldstillbereadcenturiesfromnow.
IstillviewFriedman’sbookasanenduringcontribution,butfor
more than a decade I have been an empirical economist studying
the functioning of actual markets. In the course of my research I
have discovered a (growing) number of contexts in which people’s
consumptionoptions—andindeedtheirensuingsatisfactionascon-
sumers—dependonthepreferencesofothers.Inparticular,inmar-
kets where fixed costs are substantial and preferences differ across
groupsofconsumers,individualsfindmoreoptions—andmoresat-
isfaction—whenmorepeoplesharetheirpreferences.Thatis,Ihave
documented phenomena analogous to the tyranny of the majority
inmarkets.Thesefindingsstandinstarkcontrasttothenotionthat
marketsavoidobjectionablefeaturesofcollectivechoice.
My goal in this work is not so much to argue that Friedman is
wrong. To the extent that Friedman is arguing that capitalism al-
lows better tailoring of consumption opportunities to heteroge-
neouspreferencesthan,say,acommunistsystemofstate-runindus-
try, he is surely correct. Rather, my goal is to demonstrate that
Friedman’sdichotomybetweenmarketsandcollectivechoiceisnot
right. Under some simple circumstances that prevail in many mar-
kets,whatIgetdependsonhowmanyothersalsowantit.Market
allocationsharesmanyofthefeaturesofallocationthroughcollec-
tivechoice.Thisfinding—whichisthechiefmessageofthebook—
undermines some of the rationale to let the market decide such a
widearrayofquestions.
When I first began talking about these ideas in seminars in the
late 1990s, one prominent economist told me, “That’s interesting.
But aren’t you worried about what the Right would do with those
Preface (cid:129) ix
results?” This economist was presumably concerned that conser-
vativeswouldseeintheresultsanargumentforpromotingresiden-
tial segregation. For example, clusters of blacks would bring forth
products more appealing to blacks, relieving pressure for policies
promotingresidentialmobilitybyminorities.Aweeklater,another
prominenteconomisthadasimilarbutoppositereaction,findingit
“interesting” but expressing concern about “what the Left would
do with the results.” This economist was presumably concerned
that activists would see an argument for subsidizing products tar-
getedatminoritiesandothersmallgroupsofconsumers.Annoying
people across the ideological spectrum confirmed my sense that I
wasontosomething.Thisbookistheresult.
This book is the distilled product of ten years of work, much of
it undertaken with students and colleagues, to whom I am enor-
mously grateful. Collaborators who helped educate me include
Steve Berry, Lisa George, Felix Oberholzer-Gee, Peter Siegelman,
andToddSinai.Ihavebenefitedfromcommentsonthebookdraft
frommyeditoratHarvardUniversityPress,MikeAronson,aswell
as Mary Benner, Steve Berry, Matt Kahn, Jeff Milyo, Fiona Scott-
Morton,AsherWaldfogel,andtwoanonymousreferees.
I am grateful for the intellectual atmosphere of the Wharton
School,whereIhavebeenfreetopursueempiricalappliedeconom-
ics informed by heavy doses of reality. I am also grateful for the
hospitalityoftheWhartonMarketingDepartmentduringaleavein
thefallof2005,whenIcompletedadraftofthemanuscript.
This book is dedicated to three sets of people who have been
instrumental in my life and work: my wife, Mary Benner, an ac-
complished scholar who has supported this project from before its
beginning; my father, Melvin, and late mother, Gertrude, whose
rearingmademesensitivetotheconcernsofpreferenceminorities;
andmychildren,HannahandSarah,whoinspiremeeveryday.