Factors Influencing Consumer Behavior
Discuss about the Danger of Dismissing Market Failures.
However , consumer decisions are not made in vacuum. Consumer behaviour is cultivated by personal, social and government influences. Consumer decisions are influenced by a variety of factors:
- Psychological factors such as conditioning, motivation etc.
- Socio-cultural factors such as attitude towards spending, self care, products etc.(Court, et al. 2009)
Marketing and advertising seeks to cultivate a favourable attitude of the consumer towards one’s products, thereby influencing the behaviour. Marketers target these factors to influence the behaviour of the consumer and develop a preference for their product. This in turn, affects the demand of a product.
Additionally, government policies tend to encourage consumption of some goods while discourage consumption of some goods. For example, some countries like Norwar have start introducing sugar tax to counter the growing problem of obesity in the economy. Introducing a sugar tax makes the consumption of foods pre processed with sugar more expensive. This, the government has influenced consumer behaviour. Another example is that of policies such as maintaining low interest rates by Reserve Bank of Australia has led to a housing boom in Australia. This is because the policy incentivizes spending against savings. (Reserve Bank of Australia 2016).
In order to increase the sovereignty of the consumer, there must be a control on the advertising. Additionally, government intervention in the economy must be minimized.
“ Allocative Efficiency of Markets” , in general, refers to the function of markets that markets allocate the resources in the economy efficiently i.e the more perfect the market structure, the better will be the allocation of resources in the economy. (Michael J. Buckle 2004) Simply put, if a market is efficient or near to perfect competition, then it would lead to the best allocation of resources.
Allocative efficiency of the market however, is subject to the extent which the Marginal Benefits are equal to the Marginal Cost. In a perfectly efficient market, there is perfect or our competition and the Marginal Benefits derived by the consumer would equal the marginal costs. However, the marginal benefits for the consumer do not always equal the marginal costs. The loss of the benefits to consumers is the loss if cinsumer surplus.
Firms are represented as passive entities in the Orthodox Theory. In reality, firms play an active role , both on demand and supply side , in determining the allocation of resources.
Price Setting and Price Discrimination: The Orthodox theory assumes free market. Only in pure completion are firms active agents to allocation of resources. Firms, in reality, engage in various strategies to maximize profits which helps determine allocation of resources.
One of the most prominent examples is oil cartels. Oil cartels such as OPEC artificially keep the prices high when the demand for crude low decreases in comparison to supply. This in turn, affects the long term and short term supply of crude oil in the market. (Samuelson and Nordhaus, Economics: Seventeenth edition 2004).
Allocative Efficiency of the Market
In some markets structures like oligopolies firms collude to set the output or the price. For example, in the European markets, firms are known to indulge in predatory pricing to keep out competition. This affects the supply of telecommunication services to consumers.
Innovation: Firms also make innovations to bring the costs of production down or to differentiate their products from the other available products in the market. For example, firms often invest in technologies that will reduce the requirement of manual production, in order to increase output. Firms also often invest in technologies and processes that reduce the use of raw materials, water, electricity etc. This helps in re-allocation of resources on the broader level. Firms also, innovate to cope up with the changing consumer demand. For example, many vehicles companies now offer electric engine run cars. The innovation if electric cars has provided an alternative to fossil fuel driven cars (Gravelle and Rees 2005). As a result, countries can now focus on policies that will reduce the usage of fossil fuels. (Volkswagen AG 2017) (Chrisafis & Vaughan, 2017)
In a monopoly or oligopoly, price setting or supply is not necessarily determined by the demand supply mechanism . Instead monopolists and oligopolists indulge in price and outpur determination. The loss of consumer surplus due to such called the deadweight loss of the monopoly and helps understand why such markets cannot be efficient.
- Large companies maintain status quo by creating structural barriers or maintaining the natural structural barriers. This is known as ‘monopoly capitalism’. Some ways in which monopoly capitalism affects the economy are:
- There are natural monopolies that exist within the economy. This implies that some firms or market entities cannot enter a market simply because of the size of investment required, in order to set up a business to be profitable. In other words, there are some businesses that require a scale so high, that only some firms with the ability to generate large enough investment to enter and stay the market. (Chauhan 2009)
- Industries such as electricity providers, telecommunications, airlines etc., generally, tend to have oligopolistic structure due to the large amount of capital required for entry. (Chauhan 2009)
In oligopolistic structures, firms indulge in mechanisms such as predatory pricing, output determination etc. in order to keep newer firms from entering the market and to keep prices artificially high. For example, the OPEC cuts output to keep prices artificially high in the international markets. This leads to loss of consumer surplus.
Some industries such as power generation, airlines etc. are critical for the development of a country and entry barriers to these industries has social costs. This erodes consumer surplus even further.(Chauhan 2009) It is the presence of these barriers and natural advantages, there can be a serious loss of consumer surplus. (Chauhan 2009)
- In developing countries monopolists can increase the concentration of power and increase inequality. (Dutt 2006)
- Additionally, major corporations also have bargaining power and can use that power to pay workers less, which in turn, increases inequality(Dutt 2006)
- . Major corporations can have positive effects too. Corporations employ a large number of people and can uplift the local economy. Additionally, major corporations have the resources to fund major innovation projects, infrastructure projects which may not be possible for small companies or governments. (Samuelson & Nordhaus, 2004) (Dutt 2006)
- Hence, government intervention is required to ensure that the effects of large corporations are not detrimental to the society. Governments can create policies that restrict monopolies, anti-trust trade etc. and encourage innovation.
In the framework of Orthodox economic theory, climate change caused by human activities can be termed as market failure. (Samuelson & Nordhaus, 2004). It is referred to as a market failure as the social costs of climate change are to be borne by the consumers and not the polluters. The solution to climate change is, therefore, government intervention since the market mechanism does not completely capture the costs of production of goods and services. (Samuelson & Nordhaus, 2004).
Climate change, however, a global issue and requires changes in international policy with action at the local level. Hence, the solution to climate change is in the international political economy “Political economy is defined here as the processes by which ideas, power and resources are conceptualised, negotiated and implemented by different groups at different scales.” (Tanner and Allouche 2011)
The impact of climate change affects the community at large, and not individual consumers. Hence, like all social goods, there are no individuals who are willing to pay for the mitigation since the benefit derived from the mitigation of climate change is not individual benefit to a very large extent. Extending this logic to the global level, climate change has always been tackled as a global issue instead of a national and sub-national issue. Hence, some countries that are less vulnerable to the effects of climate change such as USA, have historically taken less action than countries that are more vulnerable such as Maldives. This discrepancy also represents are great market failure since developed countries like USA tend to produce more Green House Gas emissions per capital than developing countries like Maldives. Thus, the emitters of Green House Gases do not pay for the social costs of the Greenhouse Gases since international treaties on climate change cannot be imposed on governments, it poses a unique challenge to solve. (Stern 2007) (Thomas 2017)
Some of the political-economic solutions that are prominently used as policy tools for climate change are:
- Carbon pricing: Assigning a price to the carbon emissions (or the carbon emission equivalent of Greenhouse Gas emissions) is a strategy that is being increasingly used to account for the social costs of climate change.
- Carbon Taxation: Taxing industries for the excessive release of carbon (or the carbon equivalent of Greenhouse Gas emissions) is another policy that is being used to combat climate change.
The above mentioned policy tools will ensure that the social costs of pollution and emissions are accounted for in the costs of production.
The producer can either innovate and use clean technology to reduce the costs, or can pass on the price to the consumers who use the goods and services.
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Tanner, T., and J Allouche. “Political Economy of Climate Change.” IDS Bulletin, 2011: 1-14.
Thomas, Vinod. The Danger of Dismissing Market Failures. July 12, 2017. htttp/www.brookings.edu/the-danger-of-dismissing-market-failure (accessed August 30, 2017).
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