Thursday, December 1, 2011

Austrian Economics Forum Fall '11 #4--Selling Costs, Quality and Competition

As you have noticed, I have fallen woefully behind in my commentary for the Austrian Economics Forum, The Austrian Readings Group that meets at North Carolina State University.  This was, in part, due to the birth of the third child.  Since then, my writing has dipped off a bit.  In fact, I was unable to attend the fourth session of the semester, because she was born that day.  So I asked Alex Gill, the Graduate Student who basically put together and runs the AEF, to write up a summary of what happened that session.  In his words…

This week we discussed Chapter Four, "Selling Costs, Quality, and Competition."  Kirzner spends much of the chapter arguing against i) Chamberlin’s (early) views on product quality determination and his distinction between production costs and selling costs and ii) Marshall’s (and Hicks’s) views on advertising.  Most of the chapter was non-controversial to the group since his arguments seem to follow rather directly from his notions of entrepreneurship and competition he developed thus far.  For instance, on product quality he writes:
     In the decision about which quality of product is to be produced the really significant aspect is not how to economize with given resources in attaining given ends, but the alertness with which the producer recognizes the kinds of goods consumers are eager to buy, the kinds of goods available technology and resources can create, and the kinds of resources that can be marshaled.  It is the successful identification of relevant ends and means (rather than the efficient utilization of means to achieve ends) which marks the “right” decision on product quality. (p. 139)

No surprises here.  In similar fashion, he argues that the distinction between production costs (“necessary for a particular product to be forthcoming”) and selling costs (which “alter the demand curve for that product”) is false.  We can’t discuss demand for a nonexistent product, and we can’t distinguish between actions that enhance demand and actions that change the product.  For the same reasons, it is a mistake to argue that advertising provides “a separate, distinct service” from the advertised product itself.  In the course of his argument, though, Kirzner seems to contradict himself when he explicitly concedes (p. 155) that a “substantial portion of advertising may…be viewed as providing a service quite distinct from the advertised product.” 

This statement, in fact, was the starting point for the forum’s discussion.  Kirzner’s theory states that “selling effort” does not allow the separation of information into categories based on relevance or irrelevance with regard to demand determination.  Indeed, the group could not even maintain that an individual could reliably make this distinction in his or her own mind.  When Kirzner says that “some of that information is to be considered as inseparable from the product itself,” perhaps he should have replaced the “some” with “all.”  After brief digressions on the relative merits of Kirzner and Ayn Rand’s personalities and RBC theory, we turned to page 168:

     For us, the crucial question (in evaluating the claim that advertising “monopolistically” differentiates the product in the eyes of the consumer) must always be whether the advertising activities engaged in by the differentiating “monopolist,” are or are not open also to his competitors. (p. 168)

Then can trademarks be anticompetitive?  Not if the trademark is viewed as a contract between the producer and the consumer and competitors are allowed to form their own trademarks.  In a sense, a trademark monopolizes a particular logo, but it also conveys information to the consumer.  A producer who uses another’s trademark is engaging in fraud and misrepresenting the origin of a product.

As would be expected at a gathering like this, the conversation then turned to intellectual property issues in general. 

I was able to attend the last two AEF meetings and will write up and post those after I finish grading Final Exams!


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