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1 Who Benefits Whom in Product Markets? Joel Waldfogel The Wharton School University of Pennsylvania.

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Presentation on theme: "1 Who Benefits Whom in Product Markets? Joel Waldfogel The Wharton School University of Pennsylvania."— Presentation transcript:

1 1 Who Benefits Whom in Product Markets? Joel Waldfogel The Wharton School University of Pennsylvania

2 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 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 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 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 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 7 Entry illustration When a lot of people share my preferences, there are more products near our ideal Far to products Close to products

8 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 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 10 Evidence Local media market research Radio (Rand 2003) Daily newspapers (JPE 2003) Television (BWPUA 2004) Today, preliminary results on restaurants as well

11 11 Preferences Preferences differ sharply Blacks and whites Hispanics and non-Hispanics In radio, tv, and newspapers

12 12 Blacks and whites listen to different radio Hispanics and non-Hispanics listen to different radio radio

13 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 14 Newspaper Preferences Tabloid/broadsheet shares differ sharply across zip codes Whiter zip codes prefer more “hard” news

15 15 Product Entry and Positioning Race and radio Markets with larger black population shares have proportionately more black- targeted radio stations

16 16 Race and local TV Markets with more blacks have more black-targeted local half hours

17 17 Newspaper positioning Market demographic composition affects positioning of product

18 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 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 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 21 3 vs 4 digit zip code

22 22 4 vs 5 digit zip code

23 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 24 Some Fast Food Preferences WhiteblackNo college college Burger29363127 Southern11211311 Coffee/bagel77511 Mexican111211 Pizza1012109 Percent of group patronizing selected chains in past 30 days

25 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 26 Agglomeration of likes promotes availability of preferred cuisine 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/bagel chain, 50 percent of heavily educated zips do

27 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 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 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

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