Who Benefits Whom in
Product Markets?
Joel Waldfogel
The Wharton School
University of Pennsylvania
1
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.
2
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
3
Theoretical Mechanisms

entry and positioning

Depends on size of FC


Think of Hotelling line




Perhaps endogenously large
Density of most preferred products
One-dimensional
Positive “transport costs”
Suppose FC large enough to support only one
product
4
Positioning: where does the product
locate?

Density of consumers

Here, “lefts” have large
transport costs
Here, “rights” have high
transport costs
People are happier, as consumers,
when more people share their
preferences
5
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
6
Entry illustration

Far to products
When a lot of people
share my preferences,
there are more
products near our
ideal
Close to products
7
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”)
8
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
9
Evidence

Local media market research




Radio (Rand 2003)
Daily newspapers (JPE 2003)
Television (BWPUA 2004)
Today, preliminary results on
restaurants as well
10
Preferences

Preferences differ sharply



Blacks and whites
Hispanics and non-Hispanics
In radio, tv, and newspapers
11
radio
Hispanics and non-Hispanics listen to different radio
Blacks and whites listen to different radio
12
TV Preferences

The top 10 shows among black viewers (few weeks
ago)


In top 10 for
all viewers








(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).
The average overall ranking of the remainder is 96
(among 141 ranked shows).
13
Newspaper Preferences


Tabloid/broadsheet shares differ sharply
across zip codes
Whiter zip codes prefer more “hard”
news
14
Product Entry and Positioning

Race and radio
% Stns Narrowly Black-Targeted
.5
.4
Markets with larger black
population shares have
proportionately more blacktargeted radio stations
.3
.2
.1
0
0
.1
.2
.3
Black Population Share
.4
.5
15
Race and local TV
Shows with 90% Black Local Audi
Prime Time Shows with 90% Black
235
Markets with more blacks
have more black-targeted
local half hours
0
.008741
.405411
Percent Black in CMSA Pop.
16
Newspaper positioning

Market demographic composition
affects positioning of product
17
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
18
Restaurants

Smaller fixed costs

MSA of 1 million has 600 restaurants


But market size may be much smaller


( 20 radio stations, 1 daily, 5 broadcast TV)
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?
19
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
20
3 vs 4 digit zip code
Restaurants in 3-digit zip
Fitted 4-digit Line
Restaurants in 4-digit zip
Fitted 3-digit Line
2000
1500
1000
500
0
0
50
100
150
200
250
300
Pop (000)
350
400
450
500
21
4 vs 5 digit zip code
Restaurants in 5-digit zip
Restaurants in 4-digit zip
Fitted 5-digit Line
Fitted 4-digit Line
500
400
300
200
100
0
0
25
50
75
Pop (000)
100
125
150
22
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”
23
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
24
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?
25
Agglomeration of likes promotes
availability of preferred cuisine
70
60
50
40
30
20
10
0
of
fe
e,
Ba
ge
l
St
ea
k
C
While 30 percent of metro
zips have a major chicken
chain, 60 percent of heavily
black zips do
Bu
rg
er
M
ex
ic
an
Pi
z
C
hi
c
za
all 5-digit zips
>50% black
> 50% Hisp.
> 36% College
ke
n
Percent
Restaurant Presence in 5-Digit Zip Codes
While 25 percent of metro
zips have a major coffee/bagel
chain, 50 percent of heavily
educated zips do
26
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
27
Trade complications

NYT and “local” papers


Wal-Mart and “local” grocers



Tradeoff between high quality national
coverage and local coverage
Tradeoff between low prices and local
tailoring
Winners and losers among consumers
“globalization”
28
Conclusion

How do differentiated products markets work
with large fixed costs and heterogenous
consumers?


Evidence - local media and restaurants


Agglomeration of likes promotes satisfaction
Trade can allow consumers to benefit from
distant persons


“who benefits whom?”
But introduces complications
These perspectives may be useful for food
29