Post No.: 0644
Furrywisepuppy says:
There’s always at least one direct misalignment of interests between a buyer and a seller – the buyer wants to give as little money as possible to the seller, and the seller wants to take as much money as possible from the buyer, in exchange for a product. Because these interests aren’t aligned, manufacturers and retailers aren’t always transparent, especially if consumer choice is low in the marketplace.
In situations where people/entities are working on behalf of others, a ‘moral hazard’ situation may arise. This is when someone takes more risks because they’re effectively insured – because someone else will bear (the brunt of) the costs if anything goes wrong.
The ‘principal-agent problem’ is when an agent makes decisions or acts on behalf of, or makes decisions that’ll impact, a principal, client or patient – but the interests of the agent aren’t perfectly aligned with the interests of the principal, hence they conflict (e.g. the agent is a doctor and the cheapest efficacious drug for his/her patient is drug A, but drug B will net the doctor a higher commission (or greater ‘gifts’) from the pharmaceutical companies thus the doctor chooses to prescribe drug B. But the patient doesn’t know this because there’s an ‘information asymmetry’, where both sides know different amounts/pieces of information to the advantage of one side over the other).
There’s frequently a conflict of interest between a business giving its clients an efficient and effective service and keeping them as paying customers for longer i.e. by never ever really solving their problem (e.g. keeping daters on dating services for as long as possible instead of helping them to get married, or keeping patients on perpetual medical treatments instead of curing them). This means that in a free market, customers don’t always receive the best deals in either the short or longer term, or the small or bigger picture.
So an expert’s or agent’s best interests aren’t always aligned with the client’s best interests. Their incentives aren’t perfectly aligned to give the client the best possible value. When selling your property, real estate agents will goad you to undervalue your home because they only receive a small incremental share of the value when a house sells for more, hence they’d prefer a quicker sale (e.g. they’d only receive £150 for every extra £10k you sell your house for). (In such cases, consider holding your house on the market for just a couple of weeks longer than they suggest.)
If someone is so good at his/her work that he/she gets results quickly and easily, a customer won’t always see this person as highly skilled but that the job wasn’t worth the high asking price to do in the first place. For instance, if an incredibly skilled car mechanic can pop around and fix an incredibly complex problem within 5 minutes and without breaking into a fuzzy sweat – the client might see this job as not worth the £350 that the mechanic is asking for. Meanwhile, with a less skilled or deliberately slower car mechanic who, when faced with the exact same task, takes 60 minutes, curses aplenty at the problem and struggles to fix it, the client might conversely perceive that this latter mechanic has truly earned his/her £350 for the same results yet for a slower time!
This is how markets can sometimes fail to reward the best, and ‘the cream doesn’t always rise to the top’. In established and highly competitive markets, we may get to understand how difficult or long a job is or should really take, but we won’t always because not all jobs are standardised but bespoke. And if genuine high skill, calmness and effortlessness aren’t always recognised or rewarded properly – demonstrations of high skill and expedient work will be de-incentivised, whilst pretending to make something seem harder than it really is, taking longer than a task truly needs, sucking through one’s teeth and making a small problem appear bigger and more complicated than it really is so that clients will need to pay for more costly add-ons and labour than it really needs, making big fusses over small things, or loafing tactics at work, will be incentivised instead.
It’s again a problem stemming from an asymmetry of knowledge, where an expert can exploit the less-knowledgeable client (‘adverse selection’). It’s also a problem of clients not always rewarding experts appropriately if they demonstrate great expertise because they don’t have the expertise to recognise great expertise even when it’s demonstrated right in front of them.
Someone who works in an office might pretend that he/she’s still working on a task when the boss walks around, even though it was finished ages ago, because they don’t want any extra work landing their way!
Lawyers and other professionals might list on their itemised invoices tasks that they claim needed to have been done, and their clients might have to take their words for it – after all, if they knew what truly needed to be done, they probably wouldn’t have needed to hire a professional at all. So professionals can exploit this information asymmetry.
Stockbrokers and other advisers may have interests that aren’t aligned with their client’s, such as pushing products or work that’ll make them the most profit over what’s best for their clients.
Mechanics, plumbers and other tradespeople notoriously frequently overcharge unwary clients and do unnecessary work. They are therefore economically inefficient for doing unnecessary work (e.g. needlessly replacing tyres or light bulbs). The interests of the business and the client aren’t perfectly aligned – since what’s best for the business (which is having more profitable work done) isn’t always what’s best for the client (which is having the minimum amount of work done for the lowest price).
Insurance companies want to pay their customers the least or even nothing for claims because payouts cut into their profits, whereas the latter want the exact opposite. What’s in the best interests of banks/lenders is for borrowers (e.g. of credit card funds, overdrafts, short-term loans) to only pay off the minimum repayments, whilst what’s normally in the best interests of borrowers is to pay these debts off in full as soon as possible. What’s in the best interests of pharmaceutical companies is pushing drugs even if they have lots of side-effects, when what’s in the best interests of their users is often other solutions like a change of diet, exercise or just rest. There are many common, everyday situations where the interests and incentives of a business and its clients aren’t perfectly aligned, and that’s why consumers frequently get screwed over!
What would help bring their interests closer to being aligned is a business caring about its reputation in a highly competitive marketplace. A business should want to care about not having an unscrupulous reputation otherwise customers won’t come back and word will get around. This should encourage them to care about fostering ‘win-win’ relationships rather than ‘the more I win, the more you lose’ deals. Woof!
But when consumers have little choice in the market (in the case of monopolies or oligopolies), when there are information asymmetries (hence consumers won’t even realise they’re being taken for a ride), or when consumers discount their own long-term costs too steeply (when certain products give them quick gratification but long-term health costs) – businesses can still exploit their customers repeatedly. In Post No.: 0638, Fluffystealthkitten discussed how businesses don’t always have aligned interests concerning the long-term health of their customers.
Because retailers are trying to maximise their profits and buyers should be trying to minimise how much they’re paying – they can be locked in constant warfare and counter-warfare in the sense that, as we start to automatically assume that we’re always getting a better deal when we buy multi-packs, retailers will start to occasionally make multi-packs more expensive than buying the units individually on a per-unit basis (e.g. multi-pack tins of wet dog food can sometimes be more expensive per unit than loose equivalents from the same brands in the same shops at the same time).
Enough people assume that ‘a higher price of good always means a higher quality of good’ so retailers started to learn to put fancy branding and packaging onto stuff that’s actually cheap to manufacture, and then inflate the profit margins for it. This is more common with products that are hard to compare without a direct side-by-side comparison with competing products on the market – only blind testing (i.e. all brand information hidden) will tell us whether we personally think it’s worth the extra money. Many assume that 5-bedroom houses are always bigger and therefore more expensive than 4-bedroom houses in the same area, but this has led to some tiny bedrooms to ‘increase the value of a property’!
So our lazy assumptions or cognitive shortcuts – even ostensibly logical ones – constantly become exploited, and we must continually be alert to this in return, and adapt. This happens in other contexts too (e.g. once people learn that averting one’s eyes is supposed to be a sign of lying, they learn to intentionally gaze right into our eyes whilst lying).
Indeed, consumers seek to exploit loopholes too. Split ticketing on trains can work out cheaper than buying just one ticket to the exact same destination. Because insurers make assumptions about who’s going to be a greater risk – consumers can exploit the fact that fully comprehensive car insurance can sometimes be less expensive than third-party cover, or adding a second driver on a policy can make it cheaper.
Simple minds trust in simple rather than nuanced rules! Ultimately, it’s not about the brand name or whether something has been supposedly reduced in price or bundled together or not – it’s about asking oneself ‘do I actually need all that?’ and comparing what you’re getting for the price with what you’re getting for the price regardless of labels like ‘buy one get one free’ or ‘reduced price’. We’re best off not relying too lazily on assumptions one way or another. We should continually update our research because there are no hard-and-fast rules even if there are general rules. (‘Rules of thumb’ aren’t scientific ‘theories’ that can never be violated. Actually, with greater research, some scientific theories mightn’t stand the test of time either.)
Businesses try to make us irrational spenders because irrational spenders spend more than they need to. They attempt this by fuelling irrational fears through their adverts then selling the supposed solutions to them, or by getting us to buy on credit stuff we don’t need and cannot afford but ‘deserve’. Things on ‘sale’ might still be more expensive than elsewhere, but we can credulously rely on words like ‘clearance’, ‘exclusive’, ‘limited offer’, ‘free gift’ or ‘special buy’. Trading regulations vary around the world so even the word ‘discount’ is sometimes false. Well list prices are only recommended by the manufacturer hence any reduction relative to them means little because we should be comparing the prices of products relative to the wider market.
Buyers and sellers aren’t enemies and most deals being made are win-win deals, but that doesn’t mean that their interests are always perfectly aligned or they’re on the same side as each other. Particularly with large corporations (rather than small local shops where you can know a shopkeeper almost personally) – being a loyal customer isn’t usually rewarded because it’s new customers who get attracted in with the best deals (unless specific laws preclude such uneven pricing). Loyalty reward schemes are more for keeping us loyal to them than vice-versa because other shops might sell similar products for overall cheaper without the need to claim any money back afterwards through collected points/tokens.
So perform wider market research rather than just rely on the information, prices and anchors that a particular retailer provides. Then look at the total of what you’re getting for the total of what you’re paying, and on this basis work out if a deal is worth it to you.
Woof!
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