The Free Market
Hoodwinked by Technology?
The Free Market 17, no. 11 (November 1999)
Even when the market produces amazing new technology, it can become a basis for criticism. There are two main excuses used today to justify intervention in the technology market. The first argues that manufacturers build a planned obsolescence into their designs. The second argues that a path dependency subsidizes some firms artificially at the expense of others. Let's take them in order, with examples.
Panasonic has introduced the first DVD-Audio players in the United States, promising surround sound, four times the frequency range of compact disks and a higher resolution that reduces background noise. Vastly increased storage space allows for the inclusion of video clips, photos, and text on the same disk with the music.
Music aficionados with extensive CD collections need not worry that the new player will make their investment obsolete- DVD-Audio players will be able to play DVD movies, CDs, and video CDs as well. However, a DVD-Audio disk will not play at all in a CD player.
A competing technology is Sony and Philips's Super Audio CD, which also provides enhanced sound, video, and graphics capability. Super Audio promoters are trumpeting the - backward compatibility- of the technology. Ordinary CD players can read Super Audio CDs, though a Super Audio player will be necessary to take advantage of the special enhancements.
A third competitor is simply the older CD technology. Consumers may reject both new technologies in favor of perceived cost or quality benefits of traditional CDs. But do consumers have that power? Are they helpless in the face of relentless advertising campaigns and technobabble, or can they reject a new technology if they do not perceive a true advancement? This question has led some to doubt the efficacy of the market in filling the needs of consumers.
Some speculate that the new audio technology is merely a useless gimmick to get people to replace their entire music collections. Certainly when CDs first arrived on the market in the 1980s, LP records were quickly displaced and millions of CD players were sold. Most consumers evidently believed that CDs provided a significant increase in durability, portability, and sound quality over LPs. However, some audiophiles have called the latest innovations into question, pointing out that DVD-Audio may well reproduce sounds up to 100kHz, but humans cannot hear anything over about 20kHz. Might the current innovations be another way for the greedy recording industry and audio equipment makers to stick it to music lovers?
In a free-market system, the consumer is sovereign, and entrepreneurs who think they can manipulate demand will soon suffer the harsh disciplinary action of their customers. Technologies that do not present the consumer with any significant cost or quality advantage will quickly disappear. The large video laser disks that appeared several years ago never attained a large market share in the United States, while DVD technology has enjoyed enormous success. In the computer data storage market, a number of technologies never gained widespread popular acceptance. If audio DVDs or Super CDs fail to present advantages substantial enough to persuade music lovers to switch from traditional CDs- if they truly are useless gimmicks- they too will drop out of the public view.
The idea of - planned obsolescence- suggests that firms intentionally reduce the usefulness of their own products by bringing out subsequent products that require replacement of the old. The mere existence of a new technology is somehow supposed to require consumers to make a costly switch. Audio DVD and Super CD technologies, the planned obsolescence idea implies, could overtake traditional CDs even in the absence of significant functional advantages.
Yet coercion is absent in a free market. Inventing a new audio recording technology is no assurance that music collectors will adopt it. Though some grumble at the appearance of the next generation of computer processors, no one is compelling computer users to upgrade. No one in the fashion industry can require customers to adopt the latest design. New technology or changing fashion will not be accepted simply because a firm wishes it; the innovation must meet particular wants of customers. Most certainly, customers do not want to devalue their stock of audio equipment and recordings without a very good reason. Wrote Katherine Cochrane, a ten-year veteran of the CD industry, The idea of planned obsolescence is so contrary to& experience that I' d say it's completely wrong.
What about " path dependency?"
For some, the rivalry between audio DVD and Super CD recalls the contest between Betamax and VHS video recording formats. Many of us have listened to passionate defenders of the virtues of Betamax, the clear loser in the format war. The market, they argue, chose the less effective product in a winner-takes-all combat. Could the new audio recording technology result in a similarly hoodwinked public? Could the market choose the wrong technology?
The " path dependence" idea suggests that small relative efficiencies, or even an accident, resulting in the use of a particular technology today can lead the market down a path which proves to be tragically inefficient as time passes. Among other examples, defenders of the concept cite the alleged slowness of the QWERTY keyboard (engineered with frequently used keys spaced apart to keep the hammers on mechanical typewriters from sticking together) relative to the newer Dvorak keyboard. Why don' t typists all switch to a more efficient keyboard? Because compatibility is key: no one uses Dvorak because there are no Dvorak keyboards, and no one makes Dvorak keyboards because no one is trained to use them.
This led Paul Krugman to the conclusion, " In a QWERTY world, markets cannot be relied upon to get things right." Proposed solutions to path dependence include government technology czars who, with infinite wisdom and superior foresight, will choose the best technology path for those of us who obviously cannot make such important decisions for ourselves. DVD-Audio or Super Audio CD? The government will decide.
Closer examination of the path dependence idea, however, encourages extreme caution in its application. The Dvorak keyboard showed advantages over the QWERTY keyboard— in unscientific tests conducted by lieutenant commander Dvorak! Other experiments showed the superiority of the QWERTY layout. Though Betamax defenders make lists of the superior characteristics of the Betamax format, most video viewers found that VHS provided certain key advantages, such as longer playing time, that Betamax did not. Individual consumers prove not to be so empty-headed after all, and in fact we have far better reason to trust their decisions than those of imperious government technology czars. A technology czar, with less at stake in his decision and a propensity for being bribed, would likely exacerbate any path dependence tendency that does exist by continually setting us on the wrong path.
Concerns that the consuming public will not choose the "correct" technology or that they are prone to being duped by industrial connivers are unfounded. Market onlookers who attempt to assess product characteristics in order to determine if consumers are in fact choosing the best technology are misunderstanding some important points. Consumers individually and subjectively compare product qualities and weigh the value of specific product attributes. A list of objective product comparisons made by commentators on the sidelines simply cannot substitute.
Despite clear advantages to improving technology, governments have often attempted to restrict entrepreneurial innovation. Indirectly, concepts such as planned obsolescence and path dependence can lead to public misunderstanding and antagonism toward entrepreneurs, and pressure for more regulation.
In the music recording industry, computer industry, or any other, we have every reason to believe that an entrepreneur operating in a free-market setting will seek the well-being of the customer. Any entrepreneur attempting to coerce his customers into purchasing something they do not desire will rapidly discover that, in a free market, the consumer is sovereign.
Timothy D. Terrell is an adjunct scholar of the Mises Institute who teaches economics at Liberty University. Further Reading: Ludwig von Mises, Human Action, Scholar's Edition (Auburn, Ala.: Mises Institute, 1998); Stan J. Liebowitz and Stephen E. Margolis, Path Dependence: From QWERTY to Windows 95, Regulation 18 (1995): 33- 41.
Cite This Article
Terrell, Timothy D. "Hoodwinked by Technology?" The Free Market 17, no. 11 (November 1999).