It is said that one man’s trash is another man’s treasure. Likewise, one man’s market imperfection is another man’s market opportunity. Market imperfections do not prevent markets from operating – they are a driving force in the market process. As Hayek once said, in the ideal economic model of “perfect competition”, there is no real competition!

A commonly cited market imperfection is “imperfect information.” Lack of information is indeed a problem, but both companies and consumers have an incentive to find ways to solve this problem. One way to achieve this is through branding. Let’s say you’re on a road trip and need a quick stop to eat. You have two options – a local burger joint called Billy’s Burgers, or a McDonald’s. You know nothing about the former restaurant – it could be a hidden gem, or it could keep you tied to your toilet for the next three days. You’re just passing through town, so you’re not going to be a repeat customer; This is a one time transaction. You might not want to risk that Billy might be a lunatic. Meanwhile, with McDonald’s, you know exactly what you’re going to get. It’s going to be basically the same as every other McDonald’s you’ve ever tried The same goes for other major chain restaurants. The brand name communicates valuable information to consumers, eliminating the problem of incomplete information.

But times have changed. We don’t need to rely so much on branding to complement our information. Nowadays, everyone knows about Yelp, Google reviews and other similar review aggregators If you were to go on that road trip now, you might just pull up the Yelp reviews for Billy’s Burgers. You want to see the results of hundreds, if not thousands, of others who have passed through this city. You’ll be able to see the full menu with photos posted by both the restaurant and customers. Suddenly, your ability to choose between McDonald’s and Billy’s may be much more informed.

In fact, a Harvard Business School working paper looked at Yelp’s impact on the restaurant industry. The author, Michael Luca, found that a one-star rating increase on Yelp led to a 5% to 9% increase in revenue – but this effect was limited to independent restaurants. Chain restaurants saw no significant impact from Yelp reviews. It makes intuitive sense – I’ve often consulted Yelp and similar apps when deciding on an independent restaurant or a food truck. I didn’t even think to look at Yelp to find a rating for a given Chipotle or Applebee’s. why me I already know what to expect from these places. And I’ve also found that because of Yelp, I’m much more likely to seek out and eat at independent or specialty restaurants instead of chains, because Yelp has made it so much easier to find gems among the grit.

What does all this have to do? I think there are three takeaways.

Markets are not about achieving and maintaining an equilibrium, free from friction or imperfection. Markets are an ever-moving process, acting in response to that friction and imperfection.

The solution used yesterday may not be the same as the solution used today. Where branding was once the key to imperfect information, crowdsourcing has now also emerged as a valuable tool. Tomorrow may introduce a new solution that is completely different – the process will continue to evolve, in ways that are not always obvious at the moment.

Because the process is always evolving, there is no fixed, “correct” answer for how to handle market imperfections over time. It should be extremely reluctant to use our regulations. Once you do that, you say that a single institution (the state) must create a one-size-fits-all solution for everyone. Once implemented, a political solution will inevitably create some winners and losers, which will inevitably create interest groups among the winners who have reasons to maintain this new status quo. If a better solution emerges, markets can easily migrate to it, as we’ve seen with branding giving way to crowdsourcing. But the political structure forces you to fight special interest groups and vested interests before you can achieve new options. This can leave a suboptimal solution long after it ceases to be useful—if it was ever useful to begin with.


Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.

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