Reconciling Marketing and Economics

Okay let's be clear we are talking about competition, and to some extent recently I've been caught up in the fancy that perhaps even economics needs reconciling with itself.

Namely, economics says people are 'rational utility maximisers' which I don't believe, not entirely it all depends I guess on your definition of utility. I generally accept the 'our world has evolved much faster than our brains' thesis and lean towards 'people are irrational utility maximisers' or as Robert Schiller and other-guy said in 'Animal Spirits': If people want snake oil, the market is remarkably efficient at producing it.

But for todays sermon, I'm going to have to drop the irrational utility maximisers and instead look at utility.

The General-Story: We can't measure utility, so we assume it to be a function of consumption and consumption to be a function of wealth. This assumption is what makes GDP the be-all-and-end-all of economic management comparisons, and a large reason as to why so much in this world is so fucked up.

I'm going to 'cheat' as I have accused others and reconcile into this definition/assumption of utility marketing know-how, that is intangibles that people also consume. Namely 'Goodwill' and 'Brand Equity' things rational people shouldn't pay for but do.

Okay, I think I've got enough pieces now to start putting this puzzle together.

Let's start on the Economists' side of the fence (assuming Finance is a subset of economics) over here people are rational utility maximisers, thus consumers should LOVE competition. Competition of perfectly substitutable goods drives down marginal revenue (the prices paid) to the point the marginal revenue = marginal cost = price. That's the ideal Economists call perfect competition. It basically means there's no excess gain on the part of producers that redistributes wealth.

Economists as such encourage competition (well at least they say they do) because the cheaper goods are they more consumers can consume and thus thusly increase their utility, the broad aim of economics. You also achieve efficient allocation of resources.

This is all very slapdash, but there's an Economist and his accompanying school that deserves mentioning - Keynes and the Keynesians. They observed that prices were not perfectly flexible but rigid downwards, as were wages. The implications of which I don't wish to go into, but this was based on the observation that most industry is not characterised by perfect competition or even competition but monopolies.

This means most firms don't look at supply and demand factors to set their prices, but take a 'cost + markup' approach. They can only do this if there is a lack of competition to force their prices to market equilibrium.

Here finally we have a hole in the fence to the marketers side.

Al Ries and Jack Trout in their seminal work 'positioning: the battle for your mind' make numerous allusions to the 'first, second or exit' theory of industries. This thoery/maxim/folk-wisdom isn't marketing per se, but it is an observed reality.

Generally the market leader for a given market category get's about 60% of the revenue. The number two get's 30% of the revenue. The number three 3% and so on in ever diminishing slices of the revenue pie.

This bears out across all industries where generally the race for number 1 is a two-brand race, and not a particularly fair one at that. Nike and Adidas, Coke and Pepsi, Fuji and Kodak, Hertz and Avis, Qantas and Virgin, Lakers and Celtics, Ford and Holden (Australia only) etc.

Which tells us people like some competition, but not heaps. And sure take an example like footware you can ad in Puma, Reebok, Aasics, New Balance blah blah blah.

The fact is the marketers, who perplexingly study markets, believe that people increase their utility by consuming more brand equity or good will.

That is, whilst we can characterise the market as monopolistic and thus prices don't really behave in lockstep with supply and demand equilibriums, we can't really explain it. Sure we like to imagine that Mr Coke walks into Pheonix Cola's bottling factory one day and has some goomba's rough up the management and send them packing out of town, but generally market leaders aren't elected through anti-competitive behaviour per se, but acclamation.

Is this your experience: You go to a restaurant in town, and you order something, and you like it. After a suitable interval you decide to eat out in town again, you go to the same restaurant and order the same dish. You do so without really shopping around for alternatives. Been there, done that?

Fuck, do you usually get Hawaiin pizza? Meat lovers? BBQ chicken? Chances are there are products and brands you just buy, you don't constantly test empirically whether they are the best option or not.

Generally people enjoy choice up until they have picked a winner. After that choice becomes annoying.

That is the marketers experience and if I take license, philosophy. Build brand equity, build goodwill. If it's a product or service you want people consuming it as often as possible with little deviation.

This seems to contradict the Economists, and Finance peeps over the fence. How to reconcile?

Well, Economists believe peeps to be risk-averse. Risk generally involves fluctuation, deviation etc. this is how we measure risk. Thus it is understandable to hypothesise that people don't like the idea of their wages being renegotiated every day. Why? Well because rent is typically fixed, and other expenses. Uncertainty creates stress, will we be able to pay rent? etc. It should be mother fucking obvious! Why am I explaining this to you!

Okay, now here I get controversial, would you eat at a restaurant that changed its prices every day? Probably not, you'd never know whether your plate of spaghetti al ragu was going to clean out your wallet or be a steal. You'd rather eat somewhere where you know you are going to pay 9 clams.

So prices are typically stable in the short run, and consumers love it. Why because consumers are peeps and they are risk averse. Producers, firms also comprise of peeps and are risk averse. So in some ways having prices change everyday for the people that produce those goods is like having your wages renegotiated every day.

Now let's go to Thailand, this was my experience in Thailand. I hated the barter system, I would much prefer having a clear and unambiguous price that I may simply pay it than to waste 15 minutes trying to negotiate 30 baht off the price of a pair of thongs (flip flops). I fucken hated bartering, particularly when I had to do it for almost everything all day. Now the thing is that the advertised price would be $25 for a shitty t-shirt. You knew you could barter them down, and you ostensibly 'wanted' to, because you wouldn't pay $25 for the same shitty shirt in Australia. But how far down could you go and get them for $11, $10, $8... what is a reasonable price? When do you give up on the investment time wise of bartering to go start the whole process again with somebody else down the road?

It's fucking annoying, competition is annoying and the costs of finding the best deal are routinely underplayed by economists.

Here then I change the narrative, the market generally weeds out competition itself. This would be supported by the research Psychologists like Dan Gilbert go into, which show that people who are given opportunities to change their mind, switch products etc experience less satisfaction/less utility than those who don't.

People actually dislike competition, because as economists have pointed out - they are risk averse.

The cost of competition is opportunity cost, and you only experience opportunity cost when you have an opportunity. Now this sounds terribly like a 'Chinese people aren't ready for democracy' a falsifiable claim that ironically could be tested with a vote.

But marketers know that people don't just consume a computer, they consume the Mac brand as well. They don't just use footwear, they use the streetcred of nike. They don't just read the time off a clockface, they let everybody else know they have a Rolex. People get currency out of the lack of competition, and they enjoy it surprisingly much.

It may be a departure from the traditional concept of utility - people buy watches to read the time. But if we are capable of learning from experience, we realise that people don't just want to buy things to make their lives easier, they want to be recognised for it too.

This isn't a blanket statement either. Generally people want choice to begin with, and thus competition for any solution that is new to them. So in the 80's 90's they may have wanted multiple OS software packages. But eventually people settled on Microsoft not because it was the best, or whatever, but because it was the lingua franca, and then rightly they rejected competition because it would have been a pain in the arse to try and conduct business via the internet with people who were constantly switching their OS.

Likewise a runner doesn't want to train in different brands and fits of running shoes every day. Fans of athletes don't want their favorite NBA player switching shoe company sponsorship 3 times a season. All because people are risk averse, and whilst on the surface competition should make things cheaper for risk averse consumers, it introduces opportunity costs, and they don't like it. It increases the costs of the goods they consume.

And of course you have people like my mother Janice, who's risk aversion takes another form, in some regards competition is her worst enemy, she won't buy anything until she is certain she has it at the best price. This makes shopping with her stressful, and I try to avoid being roped into it but will concede once per decade.

So even for her, her life would be less stressful and more time abundant if she wasn't kept awake at night by the prospect of MYER having a sale on a particular item in 2 weeks time. Thank god she doesn't really understand inflation or the time value of money.

What's the point of all this?

Well there's a school of economists that tout lassez-faire economics, that is Governments and regulatory bodies do as little as possible to intervene in the market. They believe the market is powerfully efficient.

To me this school of thought is directly comparable to politicians who think civilians should have no individual rights in a democracy though. It sort of suggests that people's natural and popular inclinations are infallable.

As Schiller said, the market is powerfully effecient, and if people want snake oil, it will produce snake oil. But it is the rare individual who is risk-aggressive and thus can actually appreciate and exploit the benefits of competition. These people should be the regulators on account of their rarity that can make up for the short comings of the risk averse masses.

If left to its own devices the market would probably eradicate competition all together, as risk averse consumers seek to increase their utility by eliminating all sources of uncertainty.

I hold that the role of economics is not to assume people are 'rational utility maximisers' and build a system on that assumption. I believe it should assume people to be 'irrational risk-averse utility maximisers' BUT build an economic system where 'rational risk-taking utility maximisers win'.

We have to accept that the human mind is messy (but surprisingly consistent) and that it is our job to overcome it, by encouraging the behaviours that will profit society in every possible way.