Economists are very fond of the argument of the following form:
“if Thing X that you think is bad in a particular market was really bad, some firm have an incentive to enter and offer a product without thing X and get tons of customers. Therefore, Thing X must not really be bad.”
And it is a powerful argument. But not nearly as powerful as it’s sometimes made out to be. The economics literature is full of stories in which bad things happen in stable equilibria. And I suspect that there are many more such stories that have not yet been written down. On the credit card thing in particular, there is the Laibson & Gabaix (2006) paper that I cited in the earlier post. The practices are bad and there is no incentive for an entrant to enter and offer a product that doesn’t use them.
I didn’t say it’s not bad, but that people don’t mind it at the point they take out the cards.
My argument wasn’t against your post in general (I’m something of a fan of nudge-style economics, though I worry about regulatory capture) but that the apparent lack of choice is misleading: if people wanted choice, it would provide itself. Rather, the problem is that people don’t really prefer, at moment of choosing, simple terms over tricky ones, and that this is probably due to hyperbolic discounting.
Edit: and because of this, they can’t, at time of purchase, want the terms banned. You might seek an ex-post coalition against them, but that’s hardly in keeping with impartiality and the rule of law: they already know they’re the losers, so their viewpoint will hardly represent the average customer.
In short: I’m not saying that bad equilibrium can’t be stable in a free market, but that unpopular ones aren’t.
Economists are very fond of the argument of the following form:
“if Thing X that you think is bad in a particular market was really bad, some firm have an incentive to enter and offer a product without thing X and get tons of customers. Therefore, Thing X must not really be bad.”
And it is a powerful argument. But not nearly as powerful as it’s sometimes made out to be. The economics literature is full of stories in which bad things happen in stable equilibria. And I suspect that there are many more such stories that have not yet been written down. On the credit card thing in particular, there is the Laibson & Gabaix (2006) paper that I cited in the earlier post. The practices are bad and there is no incentive for an entrant to enter and offer a product that doesn’t use them.
I didn’t say it’s not bad, but that people don’t mind it at the point they take out the cards.
My argument wasn’t against your post in general (I’m something of a fan of nudge-style economics, though I worry about regulatory capture) but that the apparent lack of choice is misleading: if people wanted choice, it would provide itself. Rather, the problem is that people don’t really prefer, at moment of choosing, simple terms over tricky ones, and that this is probably due to hyperbolic discounting.
Edit: and because of this, they can’t, at time of purchase, want the terms banned. You might seek an ex-post coalition against them, but that’s hardly in keeping with impartiality and the rule of law: they already know they’re the losers, so their viewpoint will hardly represent the average customer.
In short: I’m not saying that bad equilibrium can’t be stable in a free market, but that unpopular ones aren’t.