RAD Thoughts

I finished reading The Tyranny of the Market by Joel Waldfogel last weekend. The subtitle of the book is “Why You Can’t Always Get What you Want”. The premise is that markets do not always fulfill the needs of consumers whose tastes are not shared by a majority of people. To support this claim Waldfogel describes black and Hispanic populations in urban markets being underserviced by radio, newspapers, and television options. Waldfogel says that two prerequisites are needed for this type of market failure. “First, preferences must differ across groups. And second, something — generally fixed costs — must limit the number of available options and prevent products from being provided to small groups of potential buyers.”

My answer to Waldfogel is <Mick Jagger singing> “If you try sometime, you just might find, you get what you need”. Sorry, couldn’t resist :-)

The mass media examples presented in the book remind one of Chris Anderson’s Long Tail theory. Anderson claims that finite shelf space is to blame for your inability to get Bollywood films at your local Blockbuster. The internet, on the other hand, has infinite shelf space and that fact coupled with technology to help customers find obscure titles allows “long tail” products to outsell blockbuster products in aggregate (or so the theory goes).

In my mind, Waldfogel only manages to demonstrate what seems obvious, products and their prices are beholden to the laws of physics and the availability of information. In the Long Tail theory, the physics of shelf space and population density determines how many titles are carried in a bricks-and-mortar store. iTunes and Netflicks did not change the laws of physics but they changed the way their products/services are delivered which changes the specific laws of physics that apply (or are most critical). Amazon.com biggest breakthrough involved information, that is, the way people discovered books. Sears built an empire around warehouses, the railway, and a large selection of products communicated through a catalogue.

I think free markets tend to find an equilibrium that balances price with product offerings. It takes shifts in information (i.e. innovation) to disrupt the system and a new equilibrium results. The fact that these equilibriums preclude certain offerings is not proof of a market failure that requires government intervention. Waldfogel’s book is well written and his argument is clearly presented but I’m left unconvinced.

Steven Landsburg’s book More Sex is Safer Sex is full of pro free market examples but the information on why automobile insurance in Philadelphia is so expensive makes Landsburg squirm.

For ideological free-marketeers (like myself), theories like Smith and Wright’s can be intellectually jarring. We are accustomed to defending free markets as the guarantors of both liberty and prosperity, but here’s a case where liberty and prosperity are at odds: By forcing people to act against their own self-interest in the short run, governments can make everybody more prosperous in the long run. (Though some diehard libertarians will object that the prosperity is an illusion, because governments that have been empowered to make us more prosperous will inevitably abuse that power to our detriment.)

So what is this jar-a-libertarian theory of Smith and Wright?

CLAIM: the number of uninsured automobiles on the road drives up the cost of insurance which in turn drives up the number of uninsured automobiles.

It is a positive feedback loop that results in pockets like Philadelphia with very high insurance rates and a very high number of uninsured automobiles compared to other areas that are equivalent socio-economically.

Another topic in Steven Landsburg’s book More Sex is Safer Sex comes from the research on how teen height predicts adult earnings. Previous research shows that tall people earn more, however, the kicker is that your teenage height is all that matters.

Two adults of the same age and height who were different heights at age 16 are treated differently in the labor market—the person who was taller as a teen earns more. Being relatively short through the teen years—as opposed to adulthood or early childhood—essentially determines the (wage) returns to height.

The researchers say this is due to increased involvement in sports and other social extracurricular activities. Maybe. Perhaps it is due to a “nurture assumption” effect where teenagers sort themselves among their peers based on height. I also wonder if the numbers are not skewed by early vs. late bloomer affects which is the only way (in my mind) that individuals change their height relative to their peers between teenage and adult years.

Interesting stuff.

I am reading Steven Landsburg’s book More Sex is Safer Sex. There is a section on the growth of the shopping cart. You can read the original Slate magazine article online.

For the past three decades, only one economic variable has exhibited strong steady growth year in and year out. I refer, of course, to the size of shopping carts. According to the grocery store managers I just spoke to, today’s average cart is almost three times as large as its 1975 counterpart. That’s remarkable because by 1975 the growth spurt had already been underway and apparent to economists for several years.

Although I can’t conjure a citation from NEXIS or the Web, Ralph Nader is said to be one of the first to notice the growing-shopping-cart phenomenon. He is said to have offered it as a prime example of how consumers are manipulated by unscrupulous capitalists: Bigger carts were designed to shame consumers into bigger purchases.

I hate to disagree with “grocery store managers” but three times as large as 1975? Come on. Landsburg goes on to describe possible solutions to this puzzle. Here is my solution… shopping carts did not grow much if at all. Here is a picture from the Unarco Cart History page.

The year of the photo is not labeled but I think it is earlier than 1975. Three times the size? I’d say that is highly unlikely.  Here is a history of the shopping cart if you are interested.

Who gave Ralph Nader the Red Pill option to discover the truth about The Matrix anyway? You are THE ONE Nader.

Tom Slee has completed his critique of Chris Anderson’s book “The Long Tail”. I loved reading this series… thank you Tom for writing it. I really liked Chris Anderson’s “Long Tail” concept, especially the original Wired Magazine article while Tom strongly dislikes it.

So how can I like both the original concept and the no-holds-barred critique? I think it is because the apparent contradiction helps me understand how the mind works… both Tom’s mind and my own. So in this post I think I will focus on why I continue to like “The Long Tail” concept or “how my brain works”.

In my mind, “The Long Tail” is a business book and it targets the type of individual that reads Jim Collins’ “Good to Great”. As such, the lack of strong economic analysis does not bother me. Flimsy yes, but no worse than the vast majority of business books. With that context in mind, I like “The Long Tail” concept for two core reasons:

1. “The Long Tail” is a very sticky idea and the term will be widely used and understood for many years.
2.  ”The Long Tail” is a strong argument against the 80/20 rule prevalent in business thought.

Sticky and sound economic analysis do not go hand-in-hand. As an example I would use “The Skeptical Environmentalist” by Bjorn Lomborg which I think is an important book that is mostly unreadable because of the emphasis on economic analysis. You have to make conscious compromises to achieve stickiness.

The 80/20 rule states that 80% of your profit comes from 20% of your customers (or apply the 80/20 rule to your favorite business metric). Imagine Jack Welch consulting for Amazon and laying out a plan to relentlessly focus on the most profitable book customers. I can now envision someone using a long tail argument to counter Mr. Welch and explain that there is virtually zero marginal cost to service the long tail and it makes perfect business sense to continue or even put more effort into doing so. This, in my mind, is a good thing.

Just to throw another seemingly contradictory idea at you… I think Jack Welch is right about the 80/20 rule and ultimately his approach will increase profit, however, I also believe there is an intangible benefit in servicing the less profitable 80% of your customer base. The Long Tail helps strengthen the entire ecosystem (my apologies to the CyberSelfish lady).

That is the power of The Long Tail for me. A sticky idea that hints at a deeper truth.