Sunday, December 17, 2006

iReputation

This Christmas, I'm finally jumping on the bandwagon and asking for an iPod. A conversation with Becky got me thinking as to why the economy often bears witness to consumer trends. Some might claim that people are stupid and buy whatever ads tell them to buy. Or that they are superficial and competitve, buying a thing because everyone else buys it. These are both only part of the story (if they are a player at all) and often leave the question unanswered.

An often cited explanation is what economists call path dependence. A new product hits the market, a few people but it and like it, products are made and perfected to work with it, encouraging more people to buy the same product. People buy iPods more than their equivlent because of the plethora and quality existing other products (from iTunes to adapters).

Another explanation is related but distinct enough to mention on its own accord (and is also the reason I requested an iPod). Every year, countless cutting edge products enter the market, most of which often fails in unpredictable ways or doesn't live up to expectations. And even if it does what it is supposed to do, it is hard to tell how useful the new, expensive device will be.

Thus, reputation matters. I personally am looking to jump on the bandwagon because testimony after testimony suggests an iPod is a quality product I'll use all the time--you won't know how you lived without it. I know nothing of mp3 players--iPod's competitor. I'll bet that reputation plays a large part in why some products triumph over others which are very technologically very similar. It's not that people are mindless consumers. Indeed this explanation shows most of them are thoughtful and cautious buyers, a tendency that increases as the price does.

4 comments:

Anonymous said...

Maybe, but it's also likely that part of the story is Information Cascading.

There is a fascinating literature in finance by Ivo Welch among others, that talks about how after the first few people make a choice, no matter how incorrect it may be, it is likely that others will rationally follow.

Welch has a nice website that you might want to google on the subject, if you want a counterpoint.

Anonymous said...

I wouldn't call people stupid for believing ads. Maybe gullible, definitely optimistic. Consider the ads for toys. You see sets, dioramas, and extra props, and so on all designed to make the toy look as exciting and fun as possible. Now the average kid doesn't have a set, diorama, or extra props so they won't be able to play like the kids on TV. So they become bored and get excited about the next shiny thing on the tube.

Or food packages, professional artists work hard to make that heat-n-eat meal look delicious even though there's no way in HELL you can make that way. The flavor isn't changed, but presentation matters. Price and advertising at war for your purchases.

If you don't think ads are big players please tell us about a successful product that had little or no advertising.

"buying a thing because everyone else buys it"
If that didn't have a grain of truth to it, then CCGs and MMORPGs wouldn't exist. Ever hear of the phrase "keeping up with the Jones"? They have something so you have to get something as good or better to prove you're as good as them. How many times have you seen a friend or classmate with a new item and you thought to yourself, "you know, I can use something new myself". It could be as simple as considering a new computer mouse because your friend got one. Competition brings with it a sense of shame, and shame helps the economy.

When you mentioned products that fail in unpredictable ways, were you thinking of the Zune? I keep hearing what a disappointment it was and how it didn't do what people expected it to do. Sure you can share songs, but they only last 3 days. You can't even use it as a flash drive, only for music.

Or course the iPod isn't perfect. When its battery dies, you can't replace it. The iPod is a $200+ throwaway technology. I got my Rio the better part of a decade ago and it still works.

The iPod's success is complicated. Part of it came from Apple's rep as being easy to use. Then there's the appearance and marketing campaign. At least it was in the beginning. Its continued success, I'd say your on the button.

But I disagree on the claim that most consumers are thoughtful and cautious buyers. If only by the amount of credit card debt and bankruptcies it causes. How many times have you made an impulse purchase or got something new just for the sake of getting something new. Everyone consumes without much thought or caution at one time or another. It's just a matter of degrees.

Jason

David said...

Ali, I've been taking a look (not much though because my internet chirps in and out) at the site you directed me to and it looks much like the economist's path dependence. Still, its nice to know other disciplines note the same ideas.

Jason, people play the games you mentioned because other people play them and thus that improves the quality of the game. This is not a superficial reason (and even then it is not that simple...if everyone plays a bad game or a game others' don't like then others don't play it). By logical extension, everyone would play WoW. They clearly do not, meaning "because everyone else bought them" is an incomplete explanation.

I've heard of "keeping up with the Joneses" and I'm not too impressed with it. If you see Bob buy a Lexus and then Greg buy the same car, you would instantly claim Greg is trying to prove himself to Bob. But it is equally (more, actually) that Greg bought it because Bob showed him his version and Greg decided he liked it and it was for him. Greg most likely also gave it a good review. If what you were saying is true--that jealously and pettiness motivated big purchases--then we would see much more uniformity in the market (this agrument serves better for some products in some Asian countries where, I'm told, many have almost the same white van).

To say that people buy things on impluse thus they are wreckless also makes little sense. Note that most impluse buys are very cheap. It is more likely that people know what they can and cannot afford and since those tiny things by the cash register cost so little, people buy it because they know they can afford it. Yes, buying that particular item could have been "impluse" but stopping there would ignore the larger idea that people budget and the careful choices people make with their own money.

Credit card debt is yet more misleading grounds that people are wreckless with their money. Yes, people make mistakes and are sometimes inconsistent when it comes to time, but also remember that debt has backing (often a house). Just because people are "smoothing their consumption" (an economic term meaning to spend the same throughout a person's life) does not mean they lack foresight on virtually every purchase. The simple fact that people respond so well to prices (following the first law of demand) suggests there is far more to my argument than to yours.

jenna said...

"(this agrument serves better for some products in some Asian countries where, I'm told, many have almost the same white van)."

Uhh, no they don't...

Actually you'd be amazed at the variety of products available and widely purchased here in Taiwan (granted, that's because it's all "made here", heh heh).

As for mp3 players, the popular thing here is an mp3 player that looks like an iPod, works like an iPod, is the same quality (so I've seen) and yet is cheaper. But unlike the USA where everyone seems to have some model on the ubiquitous iPod, you see a plethora, an absolute melange, of other products and styles toted here.

Probably because here, standards of living are similar but actual products are cheaper. People have the ability to experiment more without the safety of a 'brand name' to back up their purchase.