Price targeting (again) and spontaneous collusion (18 November 2006)

FT columnist Tim Harford had a column recently about breakfast cereal -- exciting as that may sound, it's actually about price targeting and spontaneous collusion. His point about cereal: the various brands are more or less arbitrary distinctions that have little to do with the grain products inside the box: "Most price-targeting strategies include a deliberately low-quality product at a low price. In the high-tech industry, this is often a professional piece of kit with the good bits disabled, but in the supermarket, it is simply the 'value' range, packaged to look like an air-drop from the World Food Programme. You might think that spoiling the look or performance of a product is a bad way to make money, but it’s simply a way of keeping the rich or careless customers buying the premium products." Thus, poor people wind up using poor-looking goods, in a sort of postmodern variation on sumptuary laws; only those who have no choice end up with junky looking stuff -- even cereal boxes -- with marks them as poor in the eyes of society and keeps the pressure on the rest of us to consume more attractively. Retailers are thoughtful enough to withhold any sort of brightness -- even in package design, though it wouldn't cost them more -- from the lives of the poor, because their squalor is more useful to them to threaten bigger spenders with. Class distinctions are carried out even in banalities like cereal boxes -- perhaps primarily through such everyday near-invisible things.

Harford is sort of a go-to guy on price targeting -- his Slate column about Starbucks' tortuous price points covers some of the same basic ideas, namely that retailers seek to charge different customers what they are willing to pay, not what they have decided a product is actually worth. (Another way of saying that is what a product is worth is what a customer will pay; thanks to marginal calculations, we are all beyond use value). WSJ has an article (on an obviously slow news day -- right next to an article on "gift" as a verb) highlighting another industry in which this occurs -- beer. The reason Molson Coors can charge more for its "craft" beer, Blue Moon, is not because it costs them more to make it, but because they know people who care about the way beer tastes will be willing to pay more for it. Period. "the craft segment represents a desirable demographic of young, educated, affluent beer drinkers willing to shell out more for their brew. And big brewers are eager to tap this market." (If you want use your taste in beer drinking to actually fight corporations like Molson Coors, check out Fermenting Revolution by Chris O' Brien.)

Along these same lines, in Naked Economics, Charles Wheelan proposes an experiment of asking the people sitting around you on an airplane what they paid for their tickets. It would seem as though the cost of flying has less to do with jet fuel and pilots' wages than with the context surrounding when you bought a ticket.

Price targeting seems more nefarious to me than it probably should, because it makes me suspect that it is in fact my responsibility if I get "ripped off" -- if those words even have any meaning once you've adopted this viewpoint. If we always pay what we are willing to, then we can't get ripped off, even if the next person in line pays half as much for the same product. But then I get bothered by how producers sabotage their own goods 9Harford offers the example of third-class rail and ugly packaging) to create pricing points based on fear and shame. You are expected to be afraid of what you might suffer if you let yourself consume the "lower" grade of good. Also, price targeting creates incentives for disinformation campaigns, for the manufacture of consumer idiocy, though perhaps I should see this as an opportunity to let those who don't research their purchases thoroughly (the Internet does allow one to make price comparisons and gather product reviews fairly easily) subsidize my consumption to the degree of their ignorance. I could readopt the attitude I had when I lived in Vegas, when I was happy about all the slot-machine-playing suckers allowing me to enjoy over-the-top absurdist architecture and $5.99 prime-rib dinners. There's no income tax in Nevada, but there is a stupidity tax.

But then I wonder if that isn't the real trap here, the false satisfaction one feels in "beating" the system that has in fact contained you. If I let myself glory in other consumer's stupidity or ignorance, then I have given myself incentive to keep them ignorant and aligned myself with the retailers rather than those like me, fellow consumers. If everybody follows suit, then we remain collectively ignorant at war with each other rather than with the retailers trying to stratify and bamboozle us. (That's why tuangou seems strangely appealing in theory.) This war of all against all caters to our individualism and reinforces competitiveness as the default mode of social interaction among peers. Shopping, which seems more and more the primary social activity, becomes a zero-sum game among consumers; we have no reason to cooperate. I gain when you lose. I fly cheaper when you pay more for your ticket. And I can think I'm a deserving winner and you are a deserving loser. This isn't a big deal with airline tickets, when it comes to our annual salaries or general class prerogatives, it becomes a bigger deal. This kind of thinking leads people to conclude that the poor are simply stupid rather than structurally disadvantaged; being poor, as this Ezra Klein post shows, is matter of having no safety net, no margin for error or bad luck in situations that are already stacked against you due to inherited disadvantages.

Harford's other point is about de facto collusion:

But economists have studied the breakfast cereal market. Richard Schmalensee, who analysed the US breakfast cereal market when it was under anti-trust investigation in the late 1970s, found that the proliferation of brands was simply a way of avoiding good honest price competition. Each new brand staked out new ground and discouraged competitors from entering. Economist Aviv Nevo reached similar conclusions more recently. He believes that although a few large companies supply most of the cereal market, there is no conspiracy at work. There does not need to be: the practices of price-targeting and product proliferation are enough to keep margins high and competitors at bay.

Just as price targeting encourages individuals to compete, it invites firms to cooperate.

This echoes a point Slee makes in No One Makes You Shop at Wal-Mart about cooperation between firms. Without explicit communication, dominant firms in a industry with few players can quickly figure out how to anticipate each other's moves and avoid the prisoner's dilemma of price-cutting wars by signaling reciprocation and retribution, by making their reactions predictable and reliable over time. Thus, as Slee points out, things like low-price guarantees and loyalty plans and inexplicable brand proliferations from the same company are actually ways by which firms tell each other not to compete for each other's customers by lowering prices.

The price of noble gestures (9 November 2006)

One of the depressing thing about economics is its attempt to provide a system (a flawed one, albeit, but still recognizably predictive) to assign a price tag to virtue, to assign numeric value to things we prefer to think are magnanimous gestures that transcend all forms of petty calculation. Economics primarily concerns itself not with ethics (beyond matters like the economic efficiency of trust) but with what you have to give up for what you want to get. What this reminds us of -- what we generally don't want to countenance -- is that a "socially responsible" world isn't a product of mere well-wishing and ethically sound intentions. It comes from tangible sacrifices, from making difficult choices among many theoretically desirable outcomes, from using power to guarantee outcomes that benefit certain groups over others. (At Cato Unbound, economist Bryan Caplan looks how this impacts voting here -- his conclusions are that we vote to flatter our own ignorance rather than to pursue a rational course.)

No good deed happens in isolation; it has a cost that others may be unwilling to pay. Chris Dillow's post about the subpar returns for "socially responsible" stocks -- you know, no polluters, firearms, booze, tobacco, etc. His explanation for this is dour but apt:

So people who prate about "socially responsible" investing have lost out to proper investors; it's almost enough to make you believe the world is just.
There are two reasons why we should expect this:
1. "Unethical" firms like tobacco and arms companies face regulatory and litigation risk. If investors regard these dangers as non-diversifiable, they'll require a risk premium for holding them. So "unethical" stocks will deliver higher returns, if these risks don't materialize.
2. Investors equalize total risk-adjusted returns. And some of the returns to "ethical" investing are non-financial - the warm glow of sanctimoniousness. That means financial returns are lower.

In other words, we get paid in self-satisfaction for investing "responsibly" (it's a definition of responsible that most investors wouldn't accept; responsibility usually means profit maximizing) -- just as, say, our recycling as individuals makes us feel better rather than helping the world in any measurable way. It's a deft economics move that, in the name of making our behavior susceptible to modeling, invalidates our altruistic intentions and tries to make what we're doing seem irrational, selfish, or in some way beside the point. A price tag makes our noble gestures assimilable to greed. It reduces the wish to make a difference to something that you are purchasing for yourself, a consumable good like an organic carrot or chemical-free dish detergent. That you can actually make a difference to anything but your self-regard is virtually ruled out.

Sometimes I am attracted to this perspective because it clarifies that we shouldn't assume that investment -- a passive deployment of capital -- is the appropriate means for enacting social change. Social change is ultimately a matter of politics rather than finance, though money certainly plays into it. But Dillow's right that it's sanctimony to think that all one needs to do is by some green-oriented mutual funds and you've done your part for the planet. This is just a dodge -- a way to launder one's own (natural?) accumulative impulses. It's just strange to choose investing as a means to accomplish what are ultimately spiritual goals. You can prefer to see altruism as a means to selflessness, as a way out of the box of identity that so much of the consumer economy hinges on (foisting lifestyles, etc., on us), but skeptical economists regard altruism as nothing more than a lifestyle choice, a luxury, a practice of charity that assures that the existing relations of dependency remain in tact.

Of course, one could refuse to accept these methods of assigning meaning to an action, and reject the underlying assumptions of what is rational and what effects incentives have, and to what degree human behavior can be meaningfully analyzed. Many people are perfectly functional and happy without having any apparatus for analyzing their behavior whatsoever, preferring to approach the zero degree of totally spontaneity and randomness (the one thing that's impossible for a machine to accomplish, iPod Shuffle be damned). Here's how Caplan defines this kind of behavior: "My view is that these are symptoms not of ignorance, but of irrationality. In politics as in religion, some beliefs are more emotionally appealing than others. For example, it feels a lot better to blame sneaky foreigners for our economic problems than it does to blame ourselves. This creates a temptation to relax normal intellectual standards and insulate cherished beliefs from criticism — in short, to be irrational.... Irrationality, like ignorance, is sensitive to price, and false beliefs about politics and religion are cheap. If you underestimate the costs of excessive drinking, you can ruin your life. In contrast, if you underestimate the benefits of immigration, or the evidence in favor of the theory of evolution, what happens to you? In all probability, the same thing that would have happened to you if you knew the whole truth." Likewise, there's apparently no cost to you for believing in your own altruism in the face of doubting economists. But as Caplan points out, this attitude has a social cost, if not an individual one.

The appropriate question then is perhaps this: If we resist the analytical viewpoint of mainstream economics to preserve altruism and significance for our individual selflessness, what amount of utility have we gained at the margin? At what point to we retrieve better returns for our individual happiness by adopting a more "realistic" perspective on our pseudoaltrusistic deeds?

Against the case against zero-sum positionality (25 October 2006)

Cato Instituter Will Wilkinson makes a valiant attempt to argue against the zero-sum nature of status games -- comparing ourselves to others and deriving our satisfaction from that rather than the utility of whatever we possess or are capable of. The essence of his argument seems to be positionality is inevitable, but we can always change the game we're playing until we find one we can win.

Crucially, there is no limit to the possible forms of excellence. So, while the number of positions on any single dimension of status may be fixed, there is no reason why dimensions of status cannot be multiplied indefinitely. It does not in fact require a violation of mathematical law to produce more high-status positions, for it is possible to produce new status dimensions.

This seems to ignore the fact that some status games are more significant than others and that ultimately society confers significance on these things; it's not a product of an individual's force of will.

I really want to believe that Wilkinson's right about this:

We are not destined to want fancier cars, bigger houses, and more upscale outfits, nor are we helpless to feel diminished by those who out-consume us. We can opt out by opting in to competing narratives about the composition of a good life. And we do it all the time. We can, like Gauguin, quit law and family to paint naked natives in Tahiti. Or, better, we can move the family to a quieter place where houses are cheap and schools are good. (‘Is this heaven?’ ‘No, Iowa.’) If we are aggrieved by the rigours of the rat race, the answer is not the clumsy guidance of a paternal state. The answer is simply to stop being a rat.

But the problem is not that we internalize the rat race and are unable to let it go and be happy. The problem is the races we want to run are not necessarily recognized as relevant socially, and ultimately, the pursuit of social recognition is not a race we can easily opt out of, no matter how libertarian we seek to become.

No matter how hard I might want thorough knowledge of Dylan albums or 18th century novels to be an important status signifier, in the eyes of most everyone I encounter or ever will encounter, it's not and it's not going to be. So I can be king of an insignificant hill, put my blinders on, block out the rest of the world and be satisfied with that -- or as Wilkinson spins it, "The cultural fragmentation some critics lament is precisely what liberates us from unavoidable zero-sum positional conflict. Surfer dudes don’t compete with Star Trek geeks for status." Apparently you use the Internet to discover a niche in which you can dominate and excel.

In his view, the benefit of technology is precisely the alienation and isolation it produces -- it allows you to construct a fiefdom in which your own predilections and proclivities are the defining traits of importance and influence. But if you are the only resident of that fiefdom, you only influence yourself. This solipsistic game gets boring, just as playing chess versus yourself does. Of course positional conflict isn't unavoidable. It only becomes so if there are actually others present to position yourself against. If you want to take part in an intensely competitive society like ours in a meaningful, recognized way. If you change the rules of the game to make social recognition an insignificant by-product to the pursuit of the joy of winning, rather than its very essence, then yes, status games are not zero-sum. They are just pointless. And I generally disagree with the logic here -- I think zero-sum positionality infects these niches once we import the urge to dominate them for status purposes. Under the spell of capitalism's standard operating procedures (creative destruction for growth, etc.) we bring the fashion imperative to spheres of culture that were once immune to it; and then suddenly it's not about the thing itself but where you stand in relation to others on the competitive field supplied by that thing. That thing recedes in significance, and becomes interchangeable with any other.

Still, Wilkinson's ideas, if not feasible as an overall strategy, do make for good tactics for resisting positionality in everyday life, for imagining alternatives, for trying to conceive other means for deriving recognition. They sound a lot like the ideas the downshifters put forward. (To get utopian for a moment, these individual efforts are likely the minuscule building blocks for building a different kind of society, one less reliant on the fashion and novelty within consumerism for perpetuating economic growth. Wilkinson's right that a paternalistic state wishing competition into the cornfield and guaranteeing equal outcomes isn't the solution.) The key is to opportunistically seize on those moments wherein one escapes the pressures to rank oneself and is lost in an activity.

Every week I get together with friends and we play music in a practice space we rent. It doesn't matter, to me, if anyone else ever hears the music we make, because right now it's an oasis for me where those pressures of positionality are suspended, held at bay. Suddenly I'm in a world where collective action is all; in our all too temporary society of three there is for those two hours no distinction between personal and social goals, and recognition is as immediate and reciprocal as a picked-up change, an established groove that's otherwise inexpressible and intangible.

Addendum: At Crooked Timber, Henry Farrell takes similar issue to Wilkinson's argument: "Wilkinson’s claim implies, unless I misunderstand him badly, that it doesn’t matter very much to me if I’m a despised cubicle rat who can’t afford a nice car and gets sneered at by pretty girls, because when I go home and turn on my PC, I suddenly become a level 75 Night Elf Rogue who Kicks Serious Ass! Now this example is loaded – but it’s loaded to demonstrate a serious sociological point that Wilkinson doesn’t even begin to address. These indefinitely proliferating dimensions of status competition are connected to each other in their own implicit meta-ranking, which is quite well understood by all involved.… In short, people are highly aware of the relative rankings of their obsessions."