Wednesday, November 14, 2012

A failure of the free market?

I am no economist, so take this with a big pinch of salt. I am writing this as someone who loves to tinker and fix stuff. I have noticed that often consumer products have a simple mode of failure that could have been prevented at a very small incremental cost. For instance, a plastic bracket is used instead of a metal one or not enough plastic is used. Or a wire is too thin and breaks when cables are flexed too many times (two nights ago, one of the remote control wires for my beloved Logitech Z-2200 speakers broke for a second time; looking at the web, this may be a common mode of failure, at least for the Z-2300, which has the same remote control; I fixed it, but ended up dripping solder over the circuit board, and after cleanup, it may not be quite the same).

The additional cost of metal brackets, more plastic, thicker wires and similar simple upgrades would typically be no more than 5% of the total price, and might extend the length of life of the product by a factor of two. This would be a good thing for the consumer and the environment. But there is little in the way of incentive for this, except in the case of a few kinds of items (major appliances, motor vehicles, boats, etc.), since such things are well hidden from the consumer. Brand-loyalty might help here: consumers might notice that X's products last a long time. But this may be counteracted profitwise by the fact that if X's products last a long time, consumers buy replacements less often.

Maybe, though, there is no added utility from that 5% price increase, because maybe such a high percentage of consumers upgrade before the item breaks down that there is no net benefit to consumers.

And, no, I am not advocating for government regulations here: that's likely to result in even worse consequences.

8 comments:

amtheomusings said...

I wonder at the marginal improvements that might be made. Assuming this is something above the most basic product, then certainly there have been some improvements to the durability made. The question becomes, how much improvement? There will, no matter how much improvement you want to make, come a point where it's no longer cost effective to do so, and these common failures will resultantly crop up because that just happens to be the next most likely point of failure after the last marginal improvement.

I don't think this could be considered a market failure. It would be like blaming the market for entropy. At some point, things will fail.

Alexander R Pruss said...

Marginal improvements can always be made. But when an improvement costs, say 1%, and doubles the lifetime of the product, that's not marginal, unless the lifetime of the product is already something ridiculously long (practically speaking, it doesn't matter if a TV lasts 50 or 100 years, since likely in 50 years the standards will be different and the TV will be useless).

It is a common thing on the Internet to find discussions of products that are quite durable except for one mode of failure, and if that were improved, the lifetime of the product would be greatly increased at very low cost. The choice of the gauge of wires is a not atypical example.

In some cases, of course, the manufacturer would not have been in a position to predict this. But in other cases, I think a competent engineer given a week to think about most likely modes of failure would have come up with them.

Jarrett Cooper said...

Far from a failure of the free market, IMO.

One of the great things about the free market is that an individual with a good idea and ambition can come along and make improvements on a product (or create a brand new product).

All you're then lacking is a loan from a bank and off you go manufacturing and advertising your own "improved" product, and competing against other competitors.

If there's profit to be made, even short term profit. Then you can count there's someone trying to get a niche in that particular area of the market to make that profit (depending if the profit beats whichever cost-benfit analysis that individual has).

Alexander R Pruss said...

Jarrett:

Let's suppose an established company manufactures speakers that they have to sell for $100 to make a decent profit, and that these speakers last for 5 years.

Along I come with my idea for how to make speakers that have exactly the same features, but which I would need to sell for $105 and which would last for 10 years.

There is no way I can compete with an established company on this. Who would buy an unknown product that is more expensive, sounds no better, and where the only difference is that the manufacturer claims it will last twice as long.

Moreover, in starting up, my own costs per unit would probably be way higher than the established company's, due to much lower quantities.


Now what might work as a market strategy would be for an established company to slightly hike up all their prices while increasing the longevity across multiple product lines, in the hope that after, say, eight years consumers will start to notice that the products from this company are still running, while the competitor's aren't. That might work, but it requires taking a high risk (lower sales across multiple product lines due to higher price) for the sake of a quite uncertain payoff years down the road.

With a motive of producing a better product, on the other hand, rather than a profit motive, it might work. And in the long term it might, but then again might not, produce better profits.

Jarrett Cooper said...

No one said it would be easy. :)

Here's a list of loudspeaker manufactures: http://en.wikipedia.org/wiki/List_of_loudspeaker_manufacturers

What I'm saying is the free market provides the mechanism to allow for corrections and improvements on products.

I agree it would be very difficult for one individual to come and start competiting against the big dogs. However, what can and does happen is that other large corporations see areas in other niches where profit can be made and off they go competiting against the other large competitors.

Heath White said...

I think you have discovered the difference between profit maximization and utility maximization.

Alexander R Pruss said...

No, just an annoying case of the difference. :-)

I am actually not completely sure that there is a difference between utility and profit maximization here. If 96% of the customers would anyway replace the product within five years, then increasing the lifespan to 10 years from 5, at a 5% cost increase, will actually decrease utility. And consumers have grown used to rapid upgrades.

Alexander R Pruss said...

Interesting utilitarian thought: Suppose that there is a significant overlap between who like to keep consumer products for a long time and people who enjoy fixing things. Then there is actually a utility benefit to having things that break earlier than they could, because so many of their owners get to enjoy fixing them.