Consumer Choice in a Free Market Economy
Musings from The Ethics of Technological Disruption
This post is based on the first session of Stanford’s Ethics of Technological Disruption class. The content is my own opinion, prompted by material discussed during the class.
In a perfect free market economy, consumers have the ability to freely pick among available options. There are enough of these available options to represent different points of view. The ability to freely pick represents the demand power that gives consumers a voice in the market. This power forces suppliers to meet consumer needs. In short, if people start buying more of one thing, that will indicate consumer favor toward that thing and shift the market to produce more of that one thing.
At least, in theory, the above is true. It’s important to understand that this view of the free market system is the foundational understanding that every business leader is trained in and company on the planet is built upon, whether intentionally or unintentionally. Ultimately a company must make enough money to sustain itself, so it must, unless otherwise subsidized or disproportionately overpowered in market position, follow what people buy.
Don’t believe me? Read it from Adam Smith’s own words, in the foundational book on capitalism, about how consumer interest is what drives production.
“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”
— The Wealth Of Nations, Book IV Chapter VIII
For the reality of the free market system to be truly representative of the theory, the effort required by you as a consumer to pick among available options must be relatively equal.
As an example, imagine that I prefer organic food. That is my preference, so the market should produce more organic food for me to buy. But what if no organic grocery store exists in my city? My options are 1) more effort to get my preference or 2) less effort to get what I need but not what I prefer. Faced with this dilemma, the reality is that I will likely take some occasional trips to the further organic store and do most of my shopping at the local store. (As an extreme example, look at DesErmia’s preference for Trader Joe’s.)
The result is that some of my consumer preference is expressed but most of it is swallowed by the simple limitations of human effort — laziness.
We all have a limited amount of effort in the day and this drives our behavior greatly. Entire industries are built on “convenience.” Yet, the cost of human effort is surprisingly absent in the discussion around decision making in a free market system.
Consumers, in practice, are not able to freely and equally pick among available options. If Dell Taco is closer but I like Taco Bell more, I’m probably going to Dell Taco more often.
Food aside, this has major implications when leaders of companies subscribe to the idea that consumers are able to freely and equally pick among available options. It allows leaders of companies to hide ethical responsibilities in the design of the market system.
This often sounds something along the lines of, “If you don’t like the way our company runs, then don’t shop here.” That’s all fine and well depending on what my other options look like. This type of statement assumes that: 1) many other options do exist 2) it is of similar effort and cost for me to use all of these options and 3) an option does exist that does align with my interests. The reality is that almost never does a consumer have all three of those requirements.
Let’s take a moment to talk switching cost. Put simply, this is the amount of effort and resources it takes to change your status quo to some alternative.
Simply saying use something else if you don’t like the way we work, does not hold because the free market is not a free market when the switching cost is high and there are few viable alternatives.
People will stay with something they don’t like — it is simply a preference after all. No one dies because I’m getting my Taco Bell fulfilled by my Dell Taco.
This presents a major flaw in the assumptions of the free market system.
My signal in the marketplace of my preference, actually contains option I do not prefer. My behavior will show that my preferences actually are: shopping at the non-organic grocery store and eating at Dell Taco. But are they?
Enter the silicon valley technology industry.
In the business of technology, using a product is taken for consumer preference. If you use it, you agree with it. That’s the nutshell of any terms of service of any technology. You check that box when you sign up and keep using the product.
You do have the option to stop using the product if you do not agree. That sentence is a darn good way to absolve companies from ethical problems. And you agree to that sentence every time you use the product.
However, the organic grocery store and Taco shop dilemma described above applies here. “What are my other options?” is the question we need to be asking. In many cases the other options are dismal. In many cases, the switching cost is high since I have to learn an entirely new system. It’s not like I can simply swap all my electronics and accounts overnight because I disagree with some ethical decision. Sure, I could. But it takes effort. And we all know what happens when more effort is involved — we tend to stick to the status quo.
One recent case shows what happens when people do disagree with the ethics of a company and there is a viable alternative the requires little switching cost. #deleteuber was such a fascinating phenomenon because there was a viable alternative with little switching cost. I could simply use Lyft instead of Uber. Sure I might have to make a Lyft account and sure that takes some effort but I don’t have to make a profile and migrate some data and preferences over. The apps are similar enough that if I use one and I at least understand the other.
It’s much harder to switch a social network, or an email provider, or some system that stores all your documents, etc. Not impossible, but harder. And usually, it’s hard enough that people don’t do it.
Effort to keep the status quo and be dissatisfied is less than switching to be more satisfied, at least for the general population. Don’t believe me? See how much a competitor US cell phone provider will pay you to switch to their service. They are literally paying for the effort involved in your switching cost. This is how discount codes, referrals, etc. work in the tech world. They pay for your switching cost. The lure of “free” money is strong (and a whole other ethical conversation). All of this again assumes that a viable alternative exists, which is not always the case.
In practice, consumer choice in a free market system does not work the way it does in theory. As a business leader, absolving ethical responsibility due to the underlying logic of a theory that does not hold true in reality, is not a great way to solve the ethical problems we face. I applaud the business leaders and companies, whether in technology or not, who face ethical problems regardless of market pressures.
For business leaders faced with an issue where the automatic response seems to be, “well the consumer has a choice whether to use our product or not,” I encourage asking some more whys in order to better understand what issue is being sidestepped.
The moral argument for this type of behavior shift is hard-won and requires a change in the way many business leaders think. Perhaps a better approach is to meet business leaders where they are. I do this now by offering that it may actually better serve the business to grapple with the issue at play because it could earn the trust of consumers, especially those who may be feeling like their preferences are unheard. And as Adam Smith explained earlier, the interest of the producer is the consumer.
Thanks: My friends who read, corrected grammar, and gave feedback on the article. The teaching team and guest speakers of Stanford Continuing Study’s POL 55 — The Ethics of Technological Disruption class.
Note: I do currently work at Lyft. My example of Lyft and Uber does not reflect the opinion of Lyft — it’s simply my own attempt to give an example to illustrate an idea in this article. Additionally, I have no affiliation with Taco Bell or Dell Taco — that’s simply my attempt at a funny example to illustrate an idea in this article.
Credits: Photo by Brendan Church