Market Failures Punish Honest Companies and Hurt Consumers

Market Failures Punish Honest Companies and Hurt Consumers Photo (cc) by Oddernod

I hate when Gotcha Capitalism wins, and you do, too.

It happens all the time, because markets fail, and when they do, bad operators win and companies trying to be honest are penalized. That’s not a free market, that’s a free-for-all market. It’s terrible for everyone — consumers, businesses, the government, the economy. Terrible for everyone, that is, except the bad actor.

Let me show you what a market failure looks like, and why those of you who think government intervention is always bad are asleep at the wheel. We’re going to stick with something noncontroversial today: buying tickets to sporting events and concerts.

You know I don’t give out compliments to corporations lightly, so it should mean something when I throw flowers at StubHub for doing the right thing about two years ago when it converted to “all-in” pricing. Consumers who shopped for tickets on StubHub’s site saw the full, out-the-door price as soon as possible. No exorbitant handling fee, no $35 overnight shipping fee, no $17 print-at-home fee.

Just the price. Bravo.

And what happened? The (broken) market punished StubHub. Mercilessly. Competitors who continued hidden-fee trickery appeared to have cheaper tickets, and StubHub lost sales. Websites that sorted tickets by price punished StubHub. While survey after survey showed consumers hate the after-charge game, it’s still intoxicating. When you spend 25 minutes picking your tickets out, you can’t help but tell yourself, “Crap, I don’t feel like starting over.” And you buy the ticket. With the fees.

StubHub gamely held out, but in the end, it waved the white flag. As I like to say, you can never afford to be the only honest poker player at a game of cheats. So in September, StubHub went back into the hidden fee game. A $36 ticket on the site now costs $45. And so on.

I could have told StubHub things would have ended this way. I’ve been preaching this since my book “Gotcha Capitalism” came out and since I read Xavier Gabaix’s economics paper on “shrouded attributes” nearly a decade ago. The paper explains all the ingenious ways corporations hide, or shroud, the real price of things, and why that makes it impossible for consumers to be intelligent agents. His pet example is the computer printer. No one knows how much ink will cost, so the real cost of a printer is invisible.

And when prices are invisible, there is no free market. The entire reward system of capitalism breaks down. Instead of the best companies with the best products and lowest prices winning, the companies that shroud prices most effectively win. The cheaters win, and the honest players lose their shirts.

But that’s only half the story Gabaix tells. The other half is even more depressing, and it explains why StubHub failed (and why InterContinental Hotels failed at upfront pricing, and why JC Penney failed at “fair and square pricing,” and why Southwest Airlines keeps hinting it will have to add baggage fees).

A company might get the bright idea to shine a light on hidden fee practices of competitors, which you might think would give them a marketing win. Instead, this attempt at “debiasing,” or teaching, consumers is an abject failure. It just calls attention to the competitor’s lower prices and trains consumers that they should use competitors and try to beat them at their hidden fee game somehow.

I call this the “death of the price tag.” Here’s a link to a cute animated video I made about this problem, which is dire, and I say contributes mightily to the boom and bust cycle of American (Gotcha) Capitalism. It’s a horrible cycle. Companies cheat, they get ahead, honest companies fail, they disappear or join the dark side. Then, eventually, the gig is up, consumers do learn their lesson or the bubble of fake value pops, and all the roaches scatter with the people’s money. An entire industry collapses in on itself. Then the cycle repeats. Buy the book if you want a more intellectual discussion of this problem, or start a discussion below.

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