Thursday, December 20, 2012

Random Thursday Thoughts #4

I've been thinking about luxury brands in the context of an economic phenomenon called "Akerlof's Quality Trap." How do luxury brands persist? Marketing is one answer, but is it the only one?

Is a Mercedes-Benz really a better car? Are Michelin tires of any better quality than Kelly or Roadhawk?

There's a neat anecdote in the book "Deluxe: How Luxury Lost its Luster" about a high-end dress manufacturer's experience with different cultural systems of determining quality/value. In the book, Thomas describes a dress with a 'flaw' - a single stray thread is visible on the bottom seam. In Japan, a typical customer won't purchase the jacket, seeing the thread as an indicator of the garment's overall quality. A French customer, by contrast, will see the thread but think "That's fixable!" and still consider the dress. An American won't even notice.

This may have to do with a thinning population of tradespeople (and affiliated knowledge transfers) in the U.S. If one is unable to determine whether or not a product is made with the best available or  cheapest materials, then one is at the unfortunate end of an information asymmetry. Being that practically all retail activity is predicated on this arrangement, it's easy to see how capitalist societies will tend toward lower-quality (read; higher-cost) products as the market will capitulate to economic pressure.

This has had some personal relevance lately as I've been subjected to the depressing process of obtaining service on an automobile. With little/no information about the engineering, manufacture, etc of my car, and no reasonable way to obtain that data in the first place, I am at the mercy of a mechanic/dealer who have competing economic incentives. I want my car fixed at a reasonable cost - the dealer wants as much profit as he can create - he has a strong incentive to oversell services and under-repair the car.

The presence of these incentives in and of themselves is not the revelation - that they lead to a situation in which it is impossible for the dealer/mechanic to provide "quality" parts or services because there's not a consensual means of determining good vs. not-good.

If economics are going to be the tools by which value (and cash) are extracted from us, then they are also the tools of (literal) accountability. From this perspective, one solution may be political: the altering of Lemon Laws to consider a lifetime cost of repairs vs. 'market value.' In my equation, "market value" is the sum a dealer is willing to pay on a trade in (the best indicator of a vehicle's cash value, IMHO.) In other words, if the cost of maintenance exceeds what the dealer themselves are willing to pay for the car under a trade-in, the vehicle is a "lemon" and can be returned to the manufacturer. Crazy? Stupid?

Returning to the idea of a kind of market paralysis, I want to talk about music, because I think we have very analogous situation. The buyer of a ticket, for example, does not know beforehand whether the show will be a "cherry" or a "lemon". So the buyer's best guess for a given band/show is that the act is of average quality; accordingly, he/she will be willing to pay for it only the price of a act of known average quality. This means that the manager of a solid act will be unable to get a high enough price to make selling that act worthwhile. Therefore, the most talented will not place their wares in the market. The withdrawal of music talent reduces the average quality of bands on the market, causing buyers to revise downward their expectations for any given act. This, in turn, motivates the moderately good not to perform, and so on.

It's not a perfect analogy. The point about diminishing expectations driving out not only talent but the possibility for it at all cannot be understated.

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