Hyperchoice

I’m halfway through Larissa Macfarquhar’s excellent profile of Paul Krugman and am really identifying with the story of the young Krugman, especially the part where he decides to become an economics major instead of a history major because he’s more interested in the “why” than the “what.” (I made the opposite decision, but am not sure it was the right one…but anyway, that’s for a whole ‘nother post.) One thing that piqued my curiosity was the discussion of specialization and international trade:

…[W]hy would countries trade goods that were almost the same? Because consumers like to have a choice, and, as Avinash Dixit and Joseph Stiglitz had pointed out a few years earlier, the same logic of increasing returns to scale that Krugman had identified as an essential dynamic in trade could apply to a single brand as well as to a whole industry.

No doubt consumer choice drives trade in similar items. But I’ve been thinking a lot about choice lately, and it’s led me to wonder, first of all, what do we mean by choice? And is choice really always what we want, or just something that we believe is good, in spite of our best interests being elsewhere? After all, as a consumer, choice isn’t cost-free; to be able to make a good choice and feel like you have any idea of what you’re doing, you have to invest time into learning about what you’re choosing.

The example given – trade in cars between Germany and Sweden – seems like an example of a truly beneficial choice for consumers. While a Volvo and a BMW will both get you from point A to point B, there are clear differences between the two. A Volvo is (supposedly) safer and more sensible; a BMW is more expensive and more fun to drive.  And the large investment to buy a car seems like it justifies investing a chunk of your time into learning just what the differences between the two makes are.

But then there are other products whose differences are a) not obvious, and b) probably not worth investing the time into learning about these non-obvious differences. To use what’s becoming a weird favorite example of mine, take toothpaste. You’ll probably go through, oh, about 200 tubes of toothpaste in your adult life. Which means you’ll spend about $10 a year buying it. Yet apparently the competition is so fierce for this $10 a year that toothpaste makers keep thinking of new ways to differentiate their toothpaste from the other guy’s. Crest alone currently lists 42 different toothpastes on crest.com, divided into 6 (overlapping) groups. Are the benefits across brands and types of toothpaste so unevenly distributed that the health and well-being of your teeth depends on which one you buy? Doubtful.

So this seems like a case where hyperchoice brings the consumer little actual benefit relative to the cost. The amount you spend on toothpaste is so trivial that you really are wasting your time to try to understand what you’re buying. The only real benefits from this go to a subset of the toothpaste producers who are duking it out for your dollars. They can capture more of the market by constantly coming out with meaningless new bells and whistles that look appealing, and also might be able to gradually increase their prices across the whole sector if you’re perceiving that their new bells and whistles justify spending a little more per tube. (See the body wash market, for example – liquid body wash costs far more than regular bar soap, and has become a huge driver of profits in the last 10 years or so.)

Or, to use an example that doesn’t involve a product in your bathroom, how about mutual funds?  The average investor is utterly clueless when it comes to which funds they should choose in their brokerage account, yet that hasn’t stopped the number of funds from exploding. I’m of two minds here. On the one hand, having this much choice seems very frustrating. On the other, you can’t really be frustrated by something that’s so opaque that you don’t even understand how little you understand it. And so most investors, having made their choices, muddle through, blissful in their ignorance of how well they’re doing relative to how well they could be doing.

I realize that a lot of these questions are at their core philosophical rather than economic. Would be interested in checking out any research that’s been done on some of them, though.

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