Tag Archives: Variety

Marching Markups

This new paper by De Locker and Eeckhout will likely be classic:

We document the evolution of markups based on firm-level data for the US economy since 1950. Initially, markups are stable, even slightly decreasing. In 1980, average markups start to rise from 18% above marginal cost to 67% now. .. Increase in average market power .. can account for .. slowdown in aggregate output. .. The rise in market power is consistent with seven secular trends in the last three decades.

Yes, US public firms have only 1/3 of US jobs, and an even smaller fraction of the world’s. Even so, this is a remarkably broad result. I’d feel a bit better if I understood why their firm-level simple aggregation of total sales divided by total variable costs (their Figure B.5a) gives only a 26% markup today, but I’ll give them the benefit of the doubt for now. (And that figure was 12% in 1980, so it has also risen a lot.) Though see Tyler’s critique.

The authors are correct that this can easily account for the apparent US productivity slowdown. Holding real productivity constant, if firms move up their demand curves to sell less at a higher prices, then total output, and measured GDP, get smaller. Their numerical estimates suggest that, correcting for this effect, there has been no decline in US productivity growth since 1965. That’s a pretty big deal.

Accepting the main result that markups have been marching upward, the obvious question to ask is: why? But first, let’s review some clues from the paper. First, while industries with smaller firms tend to have higher markups, within each small industry, bigger firms have larger markups, and firms with higher markups pay higher dividends.

There has been little change in output elasticity, i.e., the rate at which variable costs change with the quantity of units produced. (So this isn’t about new scale economies.) There has also been little change in the bottom half of the distribution of markups; the big change has been a big stretching in the upper half. Markups have increased more in larger industries, and the main change has been within industries, rather than a changing mix of industries in the economy. The fractions of income going to labor and to tangible capital have fallen, and firms respond less than they once did to wage changes. Firm accounting profits as a fraction of total income have risen four fold since 1980.

These results seem roughly consistent with a rise in superstar firms:

If .. changes advantage the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms with high profits and a low share of labor in firm value-added and sales. .. aggregate labor share will tend to fall. .. industry sales will increasingly concentrate in a small number of firms.

Okay, now lets get back to explaining these marching markups. In theory, there might have been a change in the strategic situation. Perhaps price collusion got easier, or the game became less like price competition and more like quantity competition. But info tech should have both made it easier for law enforcement to monitor collusion, and also made the game more like price competition. Also, anti-trust just can’t have much effect on these small-firm industries. So I’m quite skeptical that strategy changes account for the main effect here. The authors see little overall change in output elasticity, and so I’m also pretty skeptical that there’s been any big overall change in the typical shape of demand or cost curves.

If, like me, you buy the standard “free entry” argument for zero expected economic profits of early entrants, then the only remaining possible explanation is an increase in fixed costs relative to variable costs. Now as the paper notes, the fall in tangible capital spending and the rise in accounting profits suggests that this isn’t so much about short-term tangible fixed costs, like the cost to buy machines. But that still leaves a lot of other possible fixed costs, including real estate, innovation, advertising, firm culture, brand loyalty and prestige, regulatory compliance, and context specific training. These all require long term investments, and most of them aren’t tracked well by standard accounting systems.

I can’t tell well which of these fixed costs have risen more, though hopefully folks will collect enough data on these to see which ones correlate strongest with the industries and firms where markups have most risen. But I will invoke a simple hypothesis that I’ve discussed many times, which predicts a general rise of fixed costs: increasing wealth leading to stronger tastes for product variety. Simple models of product differentiation say that as customers care more about getting products nearer to their ideal point, more products are created and fixed costs become a larger fraction of total costs.

Note that increasing product variety is consistent with increasing concentration in a smaller number of firms, if each firm offers many more products and services than before.

Added 25Aug: Karl Smith offers a similar, if more specific, explanation.

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Sexist Prices?

The New York City Department of Consumer Affairs compared nearly 800 products with female and male versions — meaning they were practically identical except for the gender-specific packaging. .. Controlling for quality, items marketed to girls and women cost an average 7 percent more than similar products aimed at boys and men. .. Compounding the injustice .. is the wage gap, .. women in the United States earn about 79 cents for every dollar paid to men. .. The largest price discrepancy emerged in the hair care category: Women, on average, paid 48 percent more for goods like shampoo, conditioner and gel. Razor cartridges came in second place, costing female shoppers 11 percent more. (more)

Stores: 24, Brands: 91, Product Categories: 35. .. Selected products that had similar male and female versions and were closest in branding, ingredients, appearance, textile, construction, and/or marketing. (the study)

There is a huge literature on gendered wage differences, but far less attention to this question of gendered consumer price differences. Maybe people avoid this question out of fears that their answer will sound sexist. So maybe it takes a brave (= insensitive) guy like me to dive into it.

So let’s try to list the possible theories. First, some people seem to think that firms purposely raise prices on women just to be mean to women, or kind to men. But I’m pretty sure that the vast majority of economists will reject this theory. Firms might all be making the same mistake on how to maximize profits, but even then we’d want a story about what they are thinking. And given the lack of firms trying to profit via contrary assumptions, most economists will find it hard not to share the beliefs of most firms on what increases firm profits.

So, what could firms be thinking? Well one obvious hypothesis is that the study cited above fails to control for enough relevant features of quality. That is, maybe even though these products looked similar, they actually were made with different materials, to different standards of reliability, with different degrees of product marketing and other supports. For example, maybe women tend to return and exchange their products more often. But I’ll give these study authors the benefit of the doubt here.

Another obvious possibility is that these 800 products are not representative of the larger space of products and services. The study authors could have selected products to get the answer they wanted. And products where it is plausible to have two closely related versions targeted to different genders must be more intrinsically unisex than other products. Bras and condoms, for example, wouldn’t qualify. However, even if these products aren’t representative, we still want a theory of why prices correlate with gender within this category.

In economic terms, two obvious types of causes of price differences are elasticity of demand and product quantity. That is, within this category of products profit-maximizing prices could be higher for women either because women are less price sensitive than men, or because fewer items can be sold of female product versions, forcing each item to cover a larger fraction of the product’s fixed costs. Fixed costs can include costs of design, testing, manufacturing, distribution, or marketing.

First, women could just have a higher preference for quality. Even if these pairs of products are actually the same quality, women may have assumed that the female versions are higher quality because products targeted at women tend in general to be higher quality. Also, a stronger preference for quality could tempt firms into increasing prices because consumers often infer that higher priced products are higher quality. Perhaps women also have a greater tendency than men to infer quality from price.

Second, women might be less aggressive in searching for lower prices for similar products and in switching when such prices are found. Women might instead be more loyal to prior suppliers and brands, and feel worse about betraying previous brands by switching.

Female versions of products might sell fewer units because women just buy fewer of the sorts of products that have similar male versions, because women are buying more of other kinds of products instead. This might be because women have a great taste for product variety, i.e., for products that are more closely tuned to their particular needs and wants. (Here variety is a kind of quality.) It might be because women tend to see more differences between products, relative to men who see fewer differences. Or it might be because women are actually more different from each other than men are from each other, at least regarding the features relevant for these products.

OK, but which of these theories are most true? I’d guess women actually do tend to have a higher taste for quality and variety within this category of products. But I still doubt that women have higher taste for quality and variety overall. Instead it seems to me that the sorts of products that can have similar male and female versions tend to be lower-quality less-varied more-commodity-like sorts of products.

Women could have a higher taste for quality among lower quality products, and still have the same overall taste for quality, if women have less tolerance for variation in quality across product categories. That is, men may be more willing to save via lower quality in some areas, in order to pay for higher quality in other areas. In contrast, women may seek a more consistent level of quality across many product categories. Women may be more afraid someone will judge them badly from one particular unusually low quality category, while men may hope someone will judge them well from one particular unusually high quality category. This theory fits with many other results suggesting that men are and seek higher variance, and have less conformity.

Is my theory sexist? Honestly, I don’t know how to tell. As far as I can tell a claim is most prototypically “sexist” when it posits women as being lower in some nobility ranking than men. So it depends a lot on what features you consider noble. Many see conformity as ignoble, but I’ve blogged often against that view. I don’t see myself as being sexist here, but others may see it differently; maybe posterity can decide.

This post benefited from a lunch conversation with Tyler Cowen and Bryan Caplan.

Added 6:20p: Tyler Cowen riffs, offering a more readable “generalization” of my theory.

Added 6:30p: Anamaria Berea notes that women more often buy for men than vice versa. So the relevant difference could be less actual difference in men versus women than a difference in how women see others vs themselves.

Added 27Dec: Another simple story is that each gender has higher willingness to pay for quality and variety in that gender’s traditional area of specialization. Perhaps this price comparison survey had more items from traditional female than male areas.

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Variety Is Shallow

I haven’t read that much in the field of marketing, but what I have read so far has tended to confirm what I’ve read and taught in economics industrial organization: firms try hard to make products have distinctive feature packages in order to gain market power over customers whose ideal product is closer to that package. Even if some of those features are symbolic and created via how ads make people see products.

Reading the book How Brands Grow: What Marketers Don’t Know, by Byron Sharp, leads me to doubt this usual story. Sharp presents a lot of data (some shown in these figures for the Audible version) in support of these points (from this summary):

1. Penetration is key .. all brands have similar levels of loyalty.
2. Light users are as or even more important as heavy ones
3. Leading brands are distinctive, not different
4. Create memory structure to build “mental availability”
5. The power of “physical availability”
6. People don’t want a love affair with most brands

Most price promotions, and ads that don’t reinforce easy-to-recall product cues, are wasted money. We can model the distribution of purchase choices pretty well via these assumptions:

A. People vary a lot in how often they buy from any given product category; most buys are from very infrequent buyers, who mostly buy from other brands.
B. People have a some “loyalty” in having a better than random (but far from certain) chance to buy the same brand choice as last time.
C. If they don’t pick the same brand as last time, buyers pick a brand at random in proportion to product popularity.

Product categories are surprisingly large. For example, to a first approximation all fast food competes nearly equally with all other fast food. It isn’t that pizza places compete mainly pizza places while burger places compete mainly with other burger places. There are some exceptions, such a rich people tending more to buy expensive brands, or people with kids tending to buy books for kids, but these are rare and weak. Mostly there is no “space” of product features; there is just a set of distinct but equally different options, some more popular than others.

Over the last century consumers have moved to choosing a LOT more product variety, which ends up being expensive because of all the fixed costs to support all those different products. We like to tell ourselves that we do this because the new products we pick are closer to the ideal points of our complex authentic identity. Marketers like to tell the same thing to us, and to the firms who buy marketing services. But in fact we just want the appearance of having specific feature packages we like that fit who we are; we mostly don’t actually have coherent identities, but instead just wander around in the space of available products.

This greatly strengthens the welfare case for reducing product variety, in order to reduce unit costs. It seems we are mostly trying to gain a zero-sum status via showing off our wealth and not-actually-there distinct identity.

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Variety Seems Social

We sometimes complain that we are bored, and so we need to “change up” our products, services, and life habits. We often says this is due to our general preference for variety. But we are actually quite selective in when we want variety. In many areas of our lives we have little variety, and that doesn’t bother us much.

Toothpaste and mouthwash have flavors, but I use the same flavors for months at a time. My breakfasts are mostly alone, and have only minor variations from day to day. Dinners I usually eat with my wife, and we rotate between maybe a dozen different standard dishes. I often eat lunch out with a half dozen colleagues, and we rotate between a half dozen or so places, and in each place I vary what I order. When we host someone who visits from out of town, we go to a wider range of places.

The clothes I sleep in vary very little, and the clothes I wear around the house vary less than the clothes I wear to the office, which vary less than the clothes I wear to special occasions. Under-clothes vary less than more visible clothes. In my home, when we’ve repainted, or bought new furnishings or wall fixings, we tend to change things more often in our more visible rooms. We change the yard the most often, and the living room and entryway the next most often.

Products like cars, couches and refrigerators vary more on the outsides that more people can see than they do on the insides that few people see. We more often rearrange visible things like the placement of furniture compared to less visible things like where clothes are located in our chests or closets, or where dishes sit in kitchen cabinets. Advertising can change the images and attitudes associated with products, even when products don’t physically change, and we have more ads for types of products whose use is more visible to more people.

The general pattern here seems to be that variety is social – we prefer variety more for things that have wider social scopes. It is as if we personally don’t care much for variety, but we need our larger social circles to see that we can afford and tolerate a great deal of variety.

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Excess Turbulence?

To help me imagine how different future cultures might be, I’ve been trying to learn about typical lives of our distant ancestors. One excellent source is Montaillou: The Promised Land of Error by Emmanuel Le Roy Ladurie in 1978. Around 1300 Jacquest Fournier, who eventually became pope but was then a bishop, led an Inquisition against heretics in the small town of Montaillou in southern France, population 200. He transcribed several years worth of interviews of them, revealing great detail about ordinary life there. One tidbit:

Instability was the hallmark of a shepard’s life, as of the lives of all rural workers in Occitania: ‘Every year’, says Oliveier de Serres in his book on agriculture, ‘change your farm hands, make a clean sweep. Those that come after will put all the more heart into their work.’ The people we are concerned with did not feel this instability as some kind of oppression or alienation. On the contrary, the migrant shepard changed his master more often than his shirt! (p.114)

I’m told that even in the modern world one tends to hire new ranch hands every year.

In the farming world, people like shepards, loggers, etc. who lived furthest from concentrations of people tended to have the lowest status and be the poorest. Such jobs were almost entirely done by men, and so such men rarely married until they switched careers. All of which makes some sense. But I’m puzzled that such people typically changed jobs every year, moving many miles away to work with very different people. It is hard to understand such behaviors as productivity maximizing ways forced on people living at the edge of subsistence. This seems instead to be one of the few luxuries such men purchased, so that they could feel less bored and enjoy variety.

A related phenomena is the puzzling fact that people tend to get weary of exerting effort, and so need to take breaks and rest periodically. Not only do people need to rest and sleep at the end of a work day, but on the job mental fatigue reduces mental performance by about 0.1% per minute. Since by resting we can recover at a rate of 1% per minute, we need roughly one tenth of our workday to be break time, with the duration between breaks being not much more than an hour or two (Trougakos and Hideg 2009; Alvanchi et al. 2012). This doesn’t seem to be due to any obvious physical wear or depletion; it seems to be all in our mind.

Both of these examples, a preference for variety in work locations and associates, and a preference for periodic work breaks during the day, seem plausible functional behaviors for our forager ancestors, and also for their more distant animal ancestors. But they make less sense today. Maybe our minds have embedded the assumption that these are functional behaviors at such a deep level that we are still better off following them today. Or maybe not.

Added 25Aug: In many animal species, a single male controls a harem of females, and the other males wander between the harems, looking for a chance to tempt females for illicit trysts, or to challenge a weak harem ruler. Maybe young low status human males are expressing very ancient animal behavioral patterns.

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Meaning Via Work Or Play?

Our culture celebrates variety and change. People who move from small towns to big cities often go on and on about how those small towns were hells where nothing happened and the ignorant locals liked it that way. Sophisticated city folks love to visibly embrace change and variety, bragging about their new clothes, gadgets, and exotic vacations.

Some tell themselves that this taste for variety is the natural human state. Yet kids have to be taught to like variety. Kids start out wanting to watch the same movies over and over, not wanting to try out new food dishes, and not wanting to move to new homes or neighborhoods. Also, as anyone trying to push a work reorg can tell you, adults don’t actually like to change their jobs much. And people tend to be pretty stressed on those exotic vacations; what they like is to brag about them before and after.

Similarly, our culture celebrates leisure relative to work. Most of our fiction is set in leisure, and we tell ourselves that kids naturally want to play, and must be forced to work. But in fact foragers don’t push their kids to work; adults wait until kids beg to be allowed to follow adults around and be taught how to do adult jobs. Furthermore, kids today worldwide actually like the meaning and autonomy that comes from mundane work:

[Mexico City’s] Centro Santa Fe mall [is] one of the largest in Latin America. … At one end of the mall is KidZania, a theme park for children that opened fifteen years ago, and has since spread to cities in a dozen other countries, including Tokyo, Kuala Lumpur, Mumbai, and Istanbul. …

KidZania gives children between the ages of four and fourteen the chance to enact the roles of grownups in a lavishly realized, scaled-down world. … Children can work on a car assembly line, or move furniture, or put out a fake fire with real water. … Children receive a check for fifty kidzos upon arriving at KidZania, and can supplement that with the “salary” they earn for participating in an activity. The most popular of them, like training to be a pilot on a simplified flight simulator, are not as remunerative as the less popular, like being a dentist. (You peer inside a dummy’s mouth.) Children can spend their kidzos … at the mini city’s department store, which bears the name of a regional chain and is stocked with covetable trinkets. …

In Mexico, kids tend to spend their kidzos immediately after earning them; in Japan, it is difficult to persuade children to part with their kidzos at all. … “What they love most, on the second or third visit, is their independence. … Even if you go to Disneyland, you are guided—you are supposed to walk a typical way.” (more)

Here are some results from a 2002 paper on work vs. leisure, from a survey of 1942 Israelis in the years 1981 and 1993:

People can be divided by whether work or leisure is more important and central to their lives. Those who see leisure as more central see work as less central and vice versa. Leisure orientation has increased over time, and is more common among women, the young, and the unmarried. High school graduates are more leisure-oriented, compared to those with both more and less education.

Money is just as important to both types, and both feel equally entitled or not to a job. Leisure-oriented people are less satisfied with their job, and they feel less intrinsic rewards from work and more such rewards from leisure. They care more about interpersonal relations at work, they feel less obligated to work to contribute to society, and they work fewer hours.

I recently watched two acclaimed movies, Still Alice and The Wind Rises, about people with strong work orientations. Such characters seemed quite human and sympathetic to me. And The Profit, a reality show about a guy who saves failing small businesses, is my favorite tv show in years.

If, as I suspect, the future will be much more competitive and push more people back to a work orientation, you might lament that to the extent you have strongly internalized modern cultural values. But I don’t think you can plausibly claim that because of this such future folk would be any less human than you, more self-deceived than you, or that they’d see their world as a hell. Beware too easily projecting your values onto others.

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