Providing Answers

Wharton’s Joel Waldfogel’s Views on New Economic Research — and Why Free Markets Aren’t Always Best

By Meghan Laska

Joel_Waldfogel_1

Can watching soap operas improve women’s rights in developing countries?

This is just one of the diverse topics that business and public policy professor Joel Waldfogel tackles in a monthly column he writes for Slate.com. “I think of myself as an empirical economist who works on industrial economics and law and economics, and then I have interests that are just for fun,” says Waldfogel. In the column, which falls under the “fun” category, Waldfogel typically explores new economic research that is both interesting and provides compelling answers to a real question.

This ability to provide such answers, whether for Slate.com readers or scholars and executives looking for provocative new ideas, is one reason colleagues across the country describe Waldfogel as “one of America’s most interesting economists.” The chair of the Business and Public Policy Department since 2006, Waldfogel’s current academic interests tend to fall into two main categories: the effects of agglomera- tion on product availability and intellectual property piracy issues. He also recently finished a book, The Tyranny of the Market: Why You Can’t Always Get What You Want, which debates long-held arguments that free markets are best for everyone.

For his Slate.com column, Waldfogel pores over recent working papers in eco- nomics and asks himself how many of those papers would interest a general audience. “My job is to take it and translate it in a way that’s faithful to the research, but write about it in a way that is interesting and hits on some important topics,” he says.

The soap opera paper, he says, is a great example. Titled “TV is Good for You,” the August 2007 column discussed a new study that showed that cable television—which has recently come to remote Indian villag- es and airs Indian soap operas—was helping to shape women’s attitudes there in positive ways with regard to autonomy, violence toward women and male gender preferences in children. “The soap opera study was fascinating to write about. If those results hold up then that is a really important finding that could help women’s rights in India,” he says.

“Bread and Butter” Interests

When he’s not writing for Slate, Waldfogel spends most of his research time on what he calls his “bread and butter” interests, one of which he recently turned into a book published in October by Harvard University Press and depicted by one reviewer as “a provocative statement on why free markets don’t necessarily make everyone better off.”

In describing The Tyranny of the Market, Waldfogel explains that about 10 years ago, he began looking at radio listening across different-sized cities. He found that “bigger markets have more stations and more variety, so there is something closer to what everyone likes. In general, people benefit one another by consuming in the same market, which is an agglomeration effect.”

But people don’t benefit equally, he found. When he divided the population by demographic groups, different patterns emerged. In cities with larger black populations, a higher share of blacks listened to the radio. And likewise, those cities with higher white populations had higher concentrations of Caucasian listening. So, he says, the bigger one’s own group, the greater the tendency for members of that group to listen to the radio.

“If members of different groups turn out to have different preferences, then you won’t be helped by people who don’t share your preferences. You are only helped by people like yourself who share your preferences. The question is, are there stations near what you like? I call this the ‘Who benefits whom’ phenomenon. As there are more people who share your preferences, you derive more benefit from products.”

In other products like daily newspapers, there’s typically only one product, he says. It can be positioned to appeal to one group or another. The larger one group is, the less the product is targeted to the other.

Waldfogel says this is the product market analog to what John Stewart Mill called the “tyranny of the majority” in the voting context. “If you decide what kind of product you will have by voting, then you will have a product that appeals to the median person. As you are farther away from that median person, the less happy you will be,” says Waldfogel.

“So a big part of Milton Friedman’s argument in Capitalism and Freedom is that markets are great because they avoid the strains on social cohesion that government entails. But markets don’t actually avoid that problem. When there are big fixed costs, markets only bring forth products with large followings.”

For example, Waldfogel says, “if you are unlucky enough to have a terrible disease, you would be much better off having one that affects many people because the costs according to the drug industry are such that it costs almost a billion dollars to bring a drug to the market. You can’t bring a drug to the market unless there are a lot of people who also need that drug.”

What consumers get depends on how many people share what they want, which is not the traditional way that econ-omists have thought about markets, he notes. “Most people have said that we can get what we want because we want it, but that is only true in theory and when production can take place on a relatively small scale and without big fixed costs.”

There are a few solutions, including increasing markets through international trade or the Internet, as well as technological progress to lower fixed costs. Waldfogel explains that if the market is enlarged people need not rely on nearby buyers to provide the demand to bring things to market. Waldfogel addresses this issue in The Tyranny of the Market, using research from a paper he co-authored with Wharton real estate professor Todd Sinai. The paper looked at African Americans’ tendency to use the Internet, finding that in general, “there is a digital divide in which black people overall use the Internet less. However, that divide is smaller in places where blacks are more isolated, as they go online to find the products they want.”

Another solution is government intervention. He points to regional air service as an example. “It used to be tough to get direct flights between smaller cities. One technological change was regional jets that have become more common, making regional air travel more feasible, but there also are subsidies that were left intact when the airline industry was deregulated for smaller markets that help cover the costs of air travel for intercity service. Similarly, there are orphan drug laws that subsidize the development of drugs for small disease populations.”

So what is the right balance between a free market and government interventions? Waldfogel maintains that “there has almost been a religious faith in the market and I agree that the market is wonderful, but what the market does on its own does not define the limits of what we want done in our society. Economic theory predicts that markets will ‘get it wrong’ sometimes, and so we can’t dismiss all sorts of government intervention out of hand. A decision to use the market versus government interventions will have consequences and we ought to be open to a discussion about what set of outcomes we prefer. We shouldn’t always just leave it up to the market.”

A Love of Music

Joel_Waldfogel_2Waldfogel has also tackled intellectual property piracy issues, an interest born of his love of music. As he watched the Napster era unfold, he began to wonder how music production might be affected if people stopped paying for it. Would certain types of music stop being made?

“I wasn’t all that concerned about classical music because I figured those guys weren’t downloading it,” he quips, noting that he personally likes traditional alternative pop and is a self-described “Radiohead guy.”

“But I wondered just how valuable music was to people and how much social welfare we would forgo if the music industry suffered. From an economist perspective, there was all this area under the demand curve and I wanted to know what would happen if all this music went away,” he says.

Waldfogel observes that most people in the music industry say with certainty that free music sharing is harmful to them, but he points out that there is an active academic debate about this. “It’s been relatively hard to document the harm and some prominent studies actually don’t find harm,” he says.

In his own research on the issue, Waldfogel has found that people who download more unpaid music tend to buy less. “I see some behavior that would be harmful to the industry, but at the same time a lot of what is downloaded is stuff that consumers would not otherwise have purchased. So there is something for everyone in those findings.”

“If you look around at the number of people wearing iPods all the time, you’d think we are at an all-time high in how useful music is to people and how much value people are getting out of it, yet at the same time revenue to the music industry is way down,” he says, adding that the music industry is working on figuring out a clever solution to this discrepancy.

While his research shows both positive and negative consequences arise from music downloading, his work on free movie viewing shows very different results. Unlike music where a person can download hundreds of songs and listen to them all day while doing other things, movies require undivided attention. So even if they are free, people still need blocks of time to enjoy them.

“Even students have limited time they could spend watching movies, so maybe it’s not surprising that in data I’ve gathered, people who watch one more movie without paying watch about one less paid movie. It’s literally a one-for-one displacement, which is a really high rate,” he says, noting that for music, one unpaid song reduces by only a quarter the number of paid songs, a one-for-four displacement.

And last spring, Waldfogel surveyed Penn students about their Internet television viewing from sites like Youtube.com as well as network-authorized websites like ABC.com to see if people who spent more time on such sites decreased the time they spent watching traditional television. “I found that people who have increased web consumption across the past two television seasons have very little in the way of decreased conventional TV consumption, and if you consider web viewing of network authorized sites like ABC.com, then the overall viewing of network controlled distribution channels actually goes up,” he says.

An explanation for the difference between outcomes for movies and television consumption is that the Internet has become a “giant Tivo,” says Waldfogel. “You can go to the web any time and watch almost any TV show on your computer any time you want. This makes it possible to watch programming you otherwise would not have been able to watch, then whetting your appetite to watch other episodes of that show. Where with a movie, once I see a movie I typically don’t want to see it again or go out and buy it. It’s plausible that free distribution of TV shows could actually stimulate interest in traditional TV.”

Yuletide Economics

While Waldfogel spends most of his time on more serious topics such as markets and IP piracy issues, he does have a favorite pet project that began with his introduction to the gift-giving rituals of Christmas.

“I’m Jewish, and I first encountered Christmas through my wife, [Wharton management professor] Mary Benner, and her very generous family. I ended up getting a lot of well-intentioned gifts, but they weren’t things I would have chosen for myself, which got me wondering if this was a widespread phenomenon,” he recalls.

So in the early 1990s, he began surveying his students at Yale, where he was teaching at the time. What he discovered was that the difference in what the giver spent and what the receiver valued was a “dead-weight loss.”

“If I go out and buy a $100 sweater for you, and it’s only something that you would value at $30, then I have essentially destroyed $70 worth of value and that is a dead-weight loss,” explains Waldfogel.

He maintains that the gifts that really concern him are those given under circumstantial obligations like birthdays where you have no idea what the person really wants. “I think a gift card or gift to a charity in that person’s name would be a really good idea.”

Over time, Waldfogel has done more surveys, which have confirmed those results. Not surprisingly, he’s found that in doing this type of research, he’s gotten a lot less gifts over the years. “Maybe that is payback for not appreciating their gifts or maybe it’s payback for my bad behavior in writing about it,” he quips.

A Vibrant Community

While Waldfogel’s PhD is in economics from Stanford University and he began teaching economics at Yale University, it was his business interests that brought him to Wharton in 1997.

“The first five years of my career were spent working on law and economics, and I still have some interest in that,” he says. “But I also became interested in industrial economics and how businesses and markets work. Wharton has much more of a focus on actual phenomena as opposed to ideas divorced from phenomena.”

“My colleagues at Wharton have a vibrant applied economics community that stretches across its departments—Real Estate, Insurance, Operations and Information Management, Finance. It’s a fun place to be and is very active.”

His closest colleague at Wharton, of course, is his wife Mary, an assistant professor in the Management Department. “Mary is important to me in many ways, but one of those ways is that she has a different academic discipline. Her area is organization theory, and because of her I benefit from a lot of different perspectives about economics and business.”

Meghan Laska is a senior associate director in Wharton’s Office of Communications.

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