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1
Who Benefits Whom in Product Markets?
Joel WaldfogelThe Wharton School
University of Pennsylvania
2
Introduction What happens when fixed costs
are large and preferences differ across groups of consumers?
“Preference Externalities” product variety and welfare grow in market
size But who benefits whom?
You make me better off only to the extent that we share similar preferences.
3
Do markets avoid tyranny of the majority? Q: Does Friedman dichotomy hold?
Capitalism and Freedom: Markets avoid strain on social cohesion required by collective choice
A: not with FC and heterogeneous preferences
4
Theoretical Mechanisms entry and positioning
Depends on size of FC Perhaps endogenously large
Think of Hotelling line Density of most preferred products One-dimensional Positive “transport costs”
Suppose FC large enough to support only one product
5
Positioning: where does the product locate?
Here, “lefts” have large transport costs
Here, “rights” have high transport costs
People are happier, as consumers, when more people share their preferences
Density of consumers
6
Entry vs positioning Suppose fixed costs are lower but
still “substantial” Then get multiple products but get
more products nearer denser masses of potential consumers
7
Entry illustration When a lot of
people share my preferences, there are more products near our ideal
Far to productsClose to products
8
Preference Externalities As more people share my preferences
More products targeted to us Greater satisfaction
As more people disagree with my preferences Entry – no effect on me (“zero across-group
effects”) Positioning – the product moves away from
me (“negative across group effects”)
9
Operation and Detection Operation requires
large fixed costs relative to market size heterogeneous preferences
Detection requires Data on multiple markets
Goods not easily traded Variation in group sizes, shares Data on products, groups’ tendencies to
consume
10
Evidence Local media market research
Radio (Rand 2003) Daily newspapers (JPE 2003) Television (BWPUA 2004)
Today, preliminary results on restaurants as well
11
Preferences Preferences differ sharply
Blacks and whites Hispanics and non-Hispanics
In radio, tv, and newspapers
12Blacks and whites listen to different radio
Hispanics and non-Hispanics listen to different radio
radio
13
TV Preferences The top 10 shows among black viewers (few
weeks ago) (1) Girlfriends (UPN) (2) NFL Monday Night Football (ABC) (3) Half and Half (UPN) (4) Second Time Around (UPN) (5) One on One (UPN) (6) Eve (UPN) (7) NFL Monday Showcase (ABC) (8) Kevin Hill (UPN) (9) America’s Next Top Model (UPN) (10) CSI: NY (CBS).
In top 10 for all viewers
The average overall ranking of the remainder is 96 (among 141 ranked shows).
14
Newspaper Preferences Tabloid/broadsheet shares differ
sharply across zip codes Whiter zip codes prefer more
“hard” news
15
Product Entry and Positioning Race and radio
% S
tns
Na
rro
wly
Bla
ck-T
arg
ete
d
Black Population Share0 .1 .2 .3 .4 .5
0
.1
.2
.3
.4
.5
Markets with larger blackpopulation shares have proportionately more black-targeted radio stations
16
Race and local TV
Percent Black in CMSA Pop.
Shows with 90% Black Local Audi Prime Time Shows with 90% Black
.008741 .405411
0
235
Markets with more blacks have more black-targeted local half hours
17
Newspaper positioning Market demographic composition
affects positioning of product
18
Consumer Satisfaction: Who Benefits Whom?
Positive within-group effects for blacks and whites In radio, television, newspapers
Cross-effects Generally zero Negative cross effect of whites on
black newspaper reading
19
Restaurants Smaller fixed costs
MSA of 1 million has 600 restaurants ( 20 radio stations, 1 daily, 5 broadcast TV)
But market size may be much smaller MSA? x mile radius?
Questions How large is the market? Do preferences differ across groups? Does agglomeration of like persons promote
availability of preferred products?
20
How Large are Restaurant Markets? Strong relationship between
population and restaurants at the MSA level Local supply serving local demand
Very similar relationships at narrower geography Mean radius
3-digit zip: 15 4-digit zip: 6 5-digit zip: 3
21
3 vs 4 digit zip code
Pop (000)
Restaurants in 3-digit zip Restaurants in 4-digit zip Fitted 4-digit Line Fitted 3-digit Line
0 50 100 150 200 250 300 350 400 450 500
0
500
1000
1500
2000
22
4 vs 5 digit zip code
Pop (000)
Restaurants in 5-digit zip Fitted 5-digit Line Restaurants in 4-digit zip Fitted 4-digit Line
0 25 50 75 100 125 150
0
100
200
300
400
500
23
Implied Restaurant Market Size
Local demand bears same relationship with local supply at broad and narrow levels of geography
(different for fancy restaurants) Implies
Small markets (5-digit zip) “exports” balance “imports”
24
Some Fast Food Preferences
White black No college
college
Burger 29 36 31 27
Southern 11 21 13 11
Coffee/bagel
7 7 5 11
Mexican 11 12 11 11
Pizza 10 12 10 9
Percent of group patronizing selected chains in past 30 days
25
Local Chain Availability If restaurant markets are
geographically small, then it matters whether I have an appealing restaurant nearby
Look at data on all locations of 140 chains, by zip code
Are heavily (black/educated/?) zip codes more likely to have restaurants targeting group?
26
Agglomeration of likes promotes availability of preferred cuisine
Restaurant Presence in 5-Digit Zip Codes
010203040506070
Chic
ken
Pizz
a
Bur
ger
Mex
ican
Ste
ak
Cof
fee,
Bag
el
Per
cen
t all 5-digit zips
>50% black
> 50% Hisp.
> 36% College
While 30 percent of metro zips have a major chicken chain, 60 percent of heavily black zips do
While 25 percent of metro zips have a major coffee/bagelchain, 50 percent of heavily educated zips do
27
Forces limiting preference externalities in food markets Trade and market expansion
Prepared food does not travel well Consumers do not travel far for most
meals Grocery superstores may liberate
consumers from their neighbors’ tastes If consumers travel to them
28
Trade complications NYT and “local” papers
Tradeoff between high quality national coverage and local coverage
Wal-Mart and “local” grocers Tradeoff between low prices and local
tailoring Winners and losers among
consumers “globalization”
29
Conclusion How do differentiated products markets
work with large fixed costs and heterogenous consumers? “who benefits whom?”
Evidence - local media and restaurants Agglomeration of likes promotes satisfaction
Trade can allow consumers to benefit from distant persons But introduces complications
These perspectives may be useful for food