> The market will avoid the proprietary solutions if that's really what the market feels
I don't really buy into (no pun intended) any argument that relies on the efficient market hypothesis. As this article pointed out, there's a vast asymmetry of information, which prevents an efficient market, even in theory.
> but I suspect these companies actually have a good idea about what their customers are looking for.
I suspect these companies have a good idea about what will cause their customers to purchase more often, and which parts cannot be evaluated on a showroom. Replaceable batteries would add tremendous value for customers, and battery life is frequently the most desired feature in surveys.
> As this article pointed out, there's a vast asymmetry of information, which prevents an efficient market, even in theory.
What kind of theory are you using here?
There might be some theoretical reasons to expect that symmetric information (and a few other conditions) will lead to an efficient market.
But that doesn't mean that a pre-existing information symmetry is necessary for an efficient market.
The classic example is the 'market for lemons', a paper about the information asymmetry in the market for used cars: layman buyers typically can't judge a used car well via a short inspection.
That was supposed to prevent an efficient market where you can buy quality goods.
Of course, the business solution to this problem is fairly straightforward and profitable: reputation.
You run your company with strict standards, so over time you build up a reputation and charge a premium for that. In addition you can sell warranties, too.
A really simple example is white goods: it's really hard to judge a dishwasher when you just see them in the store. There's reviews I can look at, but I can also just go and buy a Miele dishwasher. They are pricey, but I also know that they are extremely high quality and will last.
For a while, Miele could ride that reputation and sell shoddy products until the market catches up. But it's more profitable for them in the long run to defend their reputation. (Also employees would probably rebel against a change in policy. Many people like to take pride in their work.)
This is all without regulation having a binding impact: shoddy dishwashers are just as legal as premium dishwashers.
You're about to talk about "market for lemons," so presumably you figured it out.
> the business solution to this problem
It's not solved, so I can't wait to hear about the solution.
> reputation
LOL. Reputation is laggy, easy to manipulate, and easy to bypass.
> warranties
Insurance contracts are even harder to analyze for quality than cars, so you have replaced a small problem with a big problem.
> Miele dishwasher.
I am glad you are happy, but I am not in a position to assess if there is wisdom in your happiness. In markets where I am in a position to analyze the wisdom in premium options... you have to pay a very high dollar premium for a very small edge in quality. Buying cheap and hoping for the best (70% 1x, 30% 2x) absolutely pummels buying premium in cost efficacy (90% 2x, 10% 4x), even though the cost premium to produce quality is small. In other words, "market for lemons" fits my observations of market price structure while "reputation and warranties are totally great" just doesn't fit the evidence.
"But that doesn't mean that a pre-existing information symmetry is necessary for an efficient market"
The literal textbook prerequisite for efficient market is not just informatuon symmetry, its perfect information. You shoupd know that if you are making 'free market can do no wrong' arguments.
Its like if all arguments about physics where made by 1st year university students that never moves beyond 'a hypothetical 100% efficient car on a frictionless surface hits another and has a perfectly elastic collision, what is the new velocity'
> The literal textbook prerequisite for efficient market is not just informatuon symmetry, its perfect information.
Please point me to that textbook.
Who says that free markets can do no wrong ever?
(I'm mostly saying that some markets might have some problems, sure. But most of the time most real world regulation dreamt up by real world politicians and implemented by real world civil servants etc is unlikely to improve them.)
> the business solution to this problem is fairly straightforward and profitable: reputation.
"Reputation" is yet more information that is both well known to and distorted by businesses. It's no kind of counterbalance to information asymmetry, it's just another example of it.
You seem to assume that businesses are some kind of mythical, omnipotent entities?
In contrast, for many of my needs, I find it relatively easy to buy high quality items even where there's a vast information asymmetry, as long as I am willing to shell out for products from companies with stellar reputations.
Granted that's neither foolproof nor applicable for every product or service. It can also get really expensive really fast.
But: given your comment, it sounds like that strategy shouldn't work at all, and even companies with ostensibly great reputations should sell me only trash?
> In contrast, for many of my needs, I find it relatively easy to buy high quality items even where there's a vast information asymmetry, as long as I am willing to shell out for products from companies with stellar reputations.
So it's not an efficient market because of the premium you have to pay for reputation.
"The efficient-market hypothesis is a hypothesis in financial economics that states that asset prices reflect all available information." from Wikipedia.
There is a huge price spread on nearly-identical products because people don't have enough information to determine which of the various supposedly equivalent products available are more reliable, efficient, safe, etc. and this is reflected in people spending more than necessary.
If, in fact, a particular brand was consistently more reliable than others but priced at a premium then with perfect information everyone would know this and a new manufacturer could introduce a similarly-reliable product at a price point within the spread and everyone would buy that instead.
> There is a huge price spread on nearly-identical products because people don't have enough information to determine which of the various supposedly equivalent products available are more reliable, efficient, safe, etc. and this is reflected in people spending more than necessary.
Information about a product is part of the whole package. It's ok that people pay extra for it.
You even get effects like what you describe in some of the most efficient markets. Eg aluminum that's traded on the exchanges often sells for a different price than over-the-counter deals. See https://www.bloomberg.com/opinion/articles/2014-11-20/the-go...
That doesn't mean that the market for aluminum is not 'efficient'. It's just a bit weirder than a naive look at the physical properties of the ostensible good, aluminum, would let you to believe.
Basically your critique says 'there's this subset of physical properties that is the same for two products, but they sell for different prices; hence the market must be inefficient'. But products aren't always made up of their physical properties alone.
Eg suppose I have a business selling sheets of paper with the winning lottery numbers of five years in the future. This is a product with a lot of information asymmetry: you can only judge its quality five years after buying it. To make it more extreme, assume that my predictive powers aren't quite so awesome: I can't divine guaranteed winners, I merely manage to produce lottery numbers that are a thousand times more likely to win than your average number. Still a useful product, but even harder to judge by individual customers.
Now a competitor springs up who sells the same sheets of paper with numbers printed on them. It's just that my competitor's numbers are no better than chance.
The physical properties of the paper and ink are exactly the same. They even use the same font. A lab couldn't tell them apart.
Would you insist that both suppliers' products should sell for the same price?
Now assume that I don't even print my own sheets: I just buy them in bulk from the other supplier, but I only resell the sheets that have the increased chances.
Now the sheets really are identical, and the only difference is my reputation for quality.
I hold that an efficient market will have different prices for this ostensibly identical goods.
> If, in fact, a particular brand was consistently more reliable than others but priced at a premium then with perfect information everyone would know this and a new manufacturer could introduce a similarly-reliable product at a price point within the spread and everyone would buy that instead.
> Now the sheets really are identical, and the only difference is my reputation for quality.
The information I value isn't related to the product you are selling, however, unless you also run the lottery (which would lead me to be highly suspicious). I'd pay roughly the same price for the same information on any medium, and it would be directly related to your reliability and not your reputation. E.g. you may have a reputation as a soothsayer, wizard, Oracle, or be named Omega but I will not bid more than the value of the lottery times your predicted accuracy (assume you sell only one prediction per lottery at auction, and your accuracy is the ratio of correct predictions to total predictions sold, to ignore the effect of multiple buyers+winners). Your brand reputation is your accuracy, not pieces of paper.
The closest analog I can think of is paying for a subscription to Consumer Reports to determine which lightbulb lasts the longest, for example. The information is decoupled from both the products and the manufacturers; the MTTF of a particular run of lightbulbs is simply a property of the world to be discovered. Given that a Consumer Reports subscription is less costly than the price difference on a basket of goods from reputable brands vs. generic brands suggests that consumers are not reaping an accurately priced benefit from brand reputation.
My theory is that most customers/consumers don't have the time and energy to invest into microeconomics (or reading CR) and therefore can't achieve an efficient market in the same sense that you or I could, or that large organizations can. Microeconomics requires approximations of rational actors and most people are not, and therefore business strategies incorporate this information in their pricing and advertising.
Another example is Costco which has generous return policies, sells with lower margins than most retail stores, and still makes money. Clearly they must be incorporating more information than is available by brand reliability or they would lose money on returns or sales or both. Likewise, they are charging a nominal membership fee for the job of collecting and acting on information about product quality that is isolated from the actual pricing of the products they sell. In practice, they work with existing manufacturers to rebrand their products as Kirkland at a lower price than the brand name, directly exploiting the arbitrage. There's probably still a fairly moderate price spread but it becomes harder to exploit with the cost of additional research and risk of asking for prices that are too low from the Kirkland suppliers. To survive (and thrive) they only have to pick a price in the middle of the spread where their popularity still allows manufacturers to make a sufficient profit that they put up with the dilution.
Where the market fails is in the creation of new industries that are willing to invest in manufacturing and selling products in the spread between the lowest cost junk and Costco prices. There is still money to be made there but customers won't have enough information to know that it's the most efficient option for them. It's the difference between saving pennies or millipennies on production costs vs. additional months or years of reliability that people would pay an entire extra dollar for, but practically pay several more when trusting brand reliability.
I don't really buy into (no pun intended) any argument that relies on the efficient market hypothesis. As this article pointed out, there's a vast asymmetry of information, which prevents an efficient market, even in theory.
> but I suspect these companies actually have a good idea about what their customers are looking for.
I suspect these companies have a good idea about what will cause their customers to purchase more often, and which parts cannot be evaluated on a showroom. Replaceable batteries would add tremendous value for customers, and battery life is frequently the most desired feature in surveys.