Consumers Are More Important Than Some Think

ABSTRACT:This paper adds to the literature that studies the effects of improvements in consumer skills on the degree of vendor competition. Historically, competitive models have largely taken consumer skills for granted, along with consumer self-interest, in the gathering, processing, and evaluation of raw information. Self-interest was expected to be sufficient for reaching optimal decisions. But we study the likely effect improved consumer skill levels can have upon intensity of competition, leading to the conclusion that the more skillful consumers are in performing their buying function, the lower vendor prices will tend to be; just as an overall increase in producer costs puts an upward pressure on prices. Of equal importance, is the higher likelihood that competition will be maintained. This not only leads to potential benefits for all consumers, both skilled and unskilled, it suggests opportunities for public policy to improve consumer skills at the elementary-secondary school level, which lead to social benefits.Historically, economists have emphasized the role of consumers, especially in recessions, as being mere consumers, whose task is to consume the flow of goods which leads to overall economic activity and employment. But there is another role that consumers, acting in their own best interests perform, which should be recognized, encouraged, and enhanced because it to leads, surprisingly, to added benefits for all members of society.The Invisible HandLong familiar to students of economics is the theory that if producers and consumers act in their own self-interests, competition tends to yield the lowest prices of products, as if an "invisible hand" were guiding the process to do the greatest social good. First set forth by the Scottish economist Adam Smith in the 18th century, and although it has its critics, it has become the crown jewel of basic economic wisdom, recognized even by some collectivist societies. Economists have conventionally emphasized producers as being the primary heroes in this process, rarely drawing attention to the consumer. This misplaced emphasis is a mistake.Not well recognized is that Smith's hand is at work among consumers. While conscious of the fact that productive efficiencies tend to lower product prices, the reader may not be aware of the importance of improved consumer skills in the production-distribution process. Shoppers, acting in their own yes, "greedy" self-interest, markedly reinforce the work of the hand in bringing lower prices, better services, and improved care for all. Any improvement in shopping skills is of benefit to society. This activity enables the most efficient suppliers to remain in business, reminding us again that greed may be good. Since the invisible hand is diligently at work in consumer activities, we should be thankful for greedy consumers.CompetitionDefining competition is a tough task. At its foundations, however, is the notion that the buyer recognizes a "need" and searches for alternative ways to satisfy it. If there is more than one alternative (other products, other sellers), the buyer faces competition among vendors. If the seller is confronted by more than one buyer, there is competition among buyers. If a natural disaster like a hurricane causes a temporary shortage of certain goods, buyers naturally attempt to outbid each other for the community's scarce supplies, with as we know a marked jump in prices. People are outraged by this result, and often describe it with the pejorative "price gouging," oblivious to the fact that they are in effect attempting to outbid each other. …