1

Who Benefits Whom in Product Markets?

Joel WaldfogelThe Wharton School

University of Pennsylvania

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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.

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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

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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

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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

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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

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Entry illustration When a lot of

people share my preferences, there are more products near our ideal

Far to productsClose to products

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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”)

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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

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Evidence Local media market research

Radio (Rand 2003) Daily newspapers (JPE 2003) Television (BWPUA 2004)

Today, preliminary results on restaurants as well

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Preferences Preferences differ sharply

Blacks and whites Hispanics and non-Hispanics

In radio, tv, and newspapers

12Blacks and whites listen to different radio

Hispanics and non-Hispanics listen to different radio

radio

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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).

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Newspaper Preferences Tabloid/broadsheet shares differ

sharply across zip codes Whiter zip codes prefer more

“hard” news

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Product Entry and Positioning Race and radio

% S

tns

Na

rro

wly

Bla

ck-T

arg

ete

d

Black Population Share0 .1 .2 .3 .4 .5

0

.1

.2

.3

.4

.5

Markets with larger blackpopulation shares have proportionately more black-targeted radio stations

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Race and local TV

Percent Black in CMSA Pop.

Shows with 90% Black Local Audi Prime Time Shows with 90% Black

.008741 .405411

0

235

Markets with more blacks have more black-targeted local half hours

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Newspaper positioning Market demographic composition

affects positioning of product

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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

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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?

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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

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3 vs 4 digit zip code

Pop (000)

Restaurants in 3-digit zip Restaurants in 4-digit zip Fitted 4-digit Line Fitted 3-digit Line

0 50 100 150 200 250 300 350 400 450 500

0

500

1000

1500

2000

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4 vs 5 digit zip code

Pop (000)

Restaurants in 5-digit zip Fitted 5-digit Line Restaurants in 4-digit zip Fitted 4-digit Line

0 25 50 75 100 125 150

0

100

200

300

400

500

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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”

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Some Fast Food Preferences

White black No college

college

Burger 29 36 31 27

Southern 11 21 13 11

Coffee/bagel

7 7 5 11

Mexican 11 12 11 11

Pizza 10 12 10 9

Percent of group patronizing selected chains in past 30 days

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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?

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Agglomeration of likes promotes availability of preferred cuisine

Restaurant Presence in 5-Digit Zip Codes

010203040506070

Chic

ken

Pizz

a

Bur

ger

Mex

ican

Ste

ak

Cof

fee,

Bag

el

Per

cen

t all 5-digit zips

>50% black

> 50% Hisp.

> 36% College

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/bagelchain, 50 percent of heavily educated zips do

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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

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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”

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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