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Most people simply wouldn't care enough about finding the absolute cost minimising option. Instead, their estimation of the value would be pegged to the price they already pay, and as long as it doesn't rise too rapidly from this baseline, they will continue to think they have scored a good deal. Unfortunately, people don't maximise their utility subject to budget constraints. Instead, I (and others) suspect they pick a product, and mould their preferences around it.
Tom alludes to this in his mention of meta-information markets. If people don't know about the primary information markets, this is probably because they don't have enough of an impetus to look for it rather than the lack of secondary information markets. These would only spark a somewhat postmodern recursion of meta-markets, where we need to be informed about the information that we could use to inform ourselves....ad infinitum.
I think market failure arises here due to a divergence between the rational man of economic theory and the actual man paying power bills.
But if information is costly to obtain then not getting to the perfect outcome is rational. The assumption in the perefectly compeitive model is that transaction costs are zero.
ReplyDeleteCorrect, and this might be another reason why these information markets don't exist.
ReplyDeleteThe point I was trying to make was that even assuming zero transactions cost, these markets might not exist due to cognitive biases that remove the impetus on consumers to search for the best bargain.
I'm not sure exactly how this applies to this particular market - it seems like you could use your argument to argue why there should be no markets at all. Obviously there are markets, and there are competition, so I think you need to be a bit more specific.
ReplyDeletePeople aren't perfectly rational, but it shouldn't be our default explanation for every slightly perplexing feature of the market, especially in this case, as the cognitive 'defect' you speak of is so general and would perhaps be hard to pin down the effects of.
On the vagueness of the idea, experimental economists have well established the phenomenon called arbitrary coherence. This is where people's valuation of goods isn't independent every time they purchase it. Instead, it is likely to be pegged to whatever they initially paid. A product like electricity, intangible and purchased relatively infrequently would seem to be particularly susceptible to such a problem.
ReplyDeleteThe experimental results are all well and good but as Steven D. Levitt and John List have asked out about the whole behavioural approach, Do they generalize to real markets? They write,
ReplyDelete"Perhaps the greatest challenge facing behavioral economics is demonstrating its applicability in the real world. In nearly every instance, the strongest empirical evidence in favor of behavioral anomalies emerges from the lab. Yet, there are many reasons to suspect that these laboratory findings might fail to generalize to real markets. We have recently discussed several factors, ranging from the properties of the situation — such as the nature and extent of scrutiny — to individual expectations and the type of actor involved. For example, the competitive nature of markets encourages individualistic behavior and selects for participants with those tendencies. Compared to lab behavior, therefore, the combination of market forces and experience might lessen the importance of these qualities in everyday markets."