Leadership Spotlight

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“Bread and Butter” Interests

When he’s not writing for Slate, Waldfogel spends most of his research time on what he calls his “bread and butter” interests, one of which he recently turned into a book published in October by Harvard University Press and depicted by one reviewer as “a provocative statement on why free markets don’t necessarily make everyone better off.”

In describing The Tyranny of the Market, Waldfogel explains that about 10 years ago, he began looking at radio listening across different-sized cities. He found that “bigger markets have more stations and more variety, so there is something closer to what everyone likes. In general, people benefit one another by consuming in the same market, which is an agglomeration effect.”

But people don’t benefit equally, he found. When he divided the population by demographic groups, different patterns emerged. In cities with larger black populations, a higher share of blacks listened to the radio. And likewise, those cities with higher white populations had higher concentrations of Caucasian listening. So, he says, the bigger one’s own group, the greater the tendency for members of that group to listen to the radio.

“If members of different groups turn out to have different preferences, then you won’t be helped by people who don’t share your preferences. You are only helped by people like yourself who share your preferences. The question is, are there stations near what you like? I call this the ‘Who benefits whom’ phenomenon. As there are more people who share your preferences, you derive more benefit from products.”

In other products like daily newspapers, there’s typically only one product, he says. It can be positioned to appeal to one group or another. The larger one group is, the less the product is targeted to the other.

Waldfogel says this is the product market analog to what John Stewart Mill called the “tyranny of the majority” in the voting context. “If you decide what kind of product you will have by voting, then you will have a product that appeals to the median person. As you are farther away from that median person, the less happy you will be,” says Waldfogel.

“So a big part of Milton Friedman’s argument in Capitalism and Freedom is that markets are great because they avoid the strains on social cohesion that government entails. But markets don’t actually avoid that problem. When there are big fixed costs, markets only bring forth products with large followings.”

For example, Waldfogel says, “if you are unlucky enough to have a terrible disease, you would be much better off having one that affects many people because the costs according to the drug industry are such that it costs almost a billion dollars to bring a drug to the market. You can’t bring a drug to the market unless there are a lot of people who also need that drug.”

What consumers get depends on how many people share what they want, which is not the traditional way that econ-omists have thought about markets, he notes. “Most people have said that we can get what we want because we want it, but that is only true in theory and when production can take place on a relatively small scale and without big fixed costs.”

There are a few solutions, including increasing markets through international trade or the Internet, as well as technological progress to lower fixed costs. Waldfogel explains that if the market is enlarged people need not rely on nearby buyers to provide the demand to bring things to market. Waldfogel addresses this issue in The Tyranny of the Market, using research from a paper he co-authored with Wharton real estate professor Todd Sinai. The paper looked at African Americans’ tendency to use the Internet, finding that in general, “there is a digital divide in which black people overall use the Internet less. However, that divide is smaller in places where blacks are more isolated, as they go online to find the products they want.”

Another solution is government intervention. He points to regional air service as an example. “It used to be tough to get direct flights between smaller cities. One technological change was regional jets that have become more common, making regional air travel more feasible, but there also are subsidies that were left intact when the airline industry was deregulated for smaller markets that help cover the costs of air travel for intercity service. Similarly, there are orphan drug laws that subsidize the development of drugs for small disease populations.”

So what is the right balance between a free market and government interventions? Waldfogel maintains that “there has almost been a religious faith in the market and I agree that the market is wonderful, but what the market does on its own does not define the limits of what we want done in our society. Economic theory predicts that markets will ‘get it wrong’ sometimes, and so we can’t dismiss all sorts of government intervention out of hand. A decision to use the market versus government interventions will have consequences and we ought to be open to a discussion about what set of outcomes we prefer. We shouldn’t always just leave it up to the market.”