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Quotation of the Day…

… is from page 576 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

In short, the rise of brands promoted better quality by allowing consumers to distinguish and choose, and by forcing producers to take responsibility for what they made, reaping rewards when it was good and losing customers when it was not.  Quality standards for hamburgers, milk shakes and French fries were all revolutionized in the 1950s and 1960s by McDonald’s, whose methods and machinery were later copied by some of its leading competitors.  But the whole industry’s standards became higher than before because McDonald’s spent millions of dollars researching the growing, storage, and processing of potatoes.  Moreover, McDonald’s established a policy of making unannounced visits to its potato suppliers, as it did to its suppliers of hamburger meat, in order to ensure that its quality specifications were being followed, and it forced dairies to supply a higher quality of milk shake mix.

Brand names are one of the many ways that markets supply public goods – solve free-rider problems – internalize externalities.  If, say, dairies all sold milk in homogeneous containers, then Jones the dairy farmer would have less incentive to incur costs to improve or to maintain the quality of his milk: because his milk is indistinguishable, in consumers’  eyes, from other-producers’ milk, Jones personally pockets all the money he saves by not spending it on quality enhancement and assurance, while the costs of his actions are spread out among countless consumers and other dairy farmers.  The reason is that Jones’s low-quality milk reduces the average quality of the milk supply available to consumers, so consumers’ demand for milk falls from what it would have been were the quality of milk higher.  All dairy farmers suffer from the lower price they get for their milk.

Of course, what’s true for farmer Jones is true for all other dairy farmers.  All dairy farmers have incentives to skimp on quality.  So milk’s quality is kept low.

But now comes farmer Smith who markets his milk in branded packages with a unique design, logo, color scheme, and slogan (“Smith’s – The Yummiest Milk!”).  If Smith acts as Jones does, Smith suffers more than Jones does.  Smith would, like farmer Jones, pocket all the money saved by scrimping on maintaining his milk’s quality, but unlike Jones, Smith would also suffer the full consequence of his scrimping on quality.  Consumers, tasting Smith’s poor-quality milk and being able to identify it as coming from Smith’s farm, would reduce their demands for Smith’s milk and increase their demands for milk other than Smith’s.  Therefore, Smith has much less incentive than does Jones to supply poor-quality milk.  Smith’s branding keeps Smith honest.  And Smith himself has the incentive to devise and use this means of keeping himself honest.  No top-down command from government officials was necessary.

Because Smith will in fact supply milk of consistently good quality (with “good quality” here determined by consumers rather than by bureaucrats, dietary “experts,” or other officious intermeddlers), other milk suppliers will have incentives not only to devise and use ways to signal to consumers that their milk will be of consistently good quality, but, as a result of this signaling, actually to supply milk of consistently good quality.

These ways can vary, depending upon costs, benefits, and existing government regulations.  The ways of assuring consistently good quality milk might be branding of the sort used by farmer Smith.  But perhaps they will involve the use of grocery chains that take responsibility for testing and assuring the quality of the milk sold in their stores.  (With this latter method, the relevant brand becomes that of the supermarket rather than of the individual dairy farm.)  But the particular ways used to assure consistently good quality milk are less important than the fact that there are private market incentives to supply quality assurance and maintenance – as Tom Sowell’s description of McDonald’s efforts makes plain.

I’m sure that somewhere someone has tried to document or to measure the contribution to food safety of brand names (and other private quality-assurance methods) relative to the contribution of government regulation, such as that supplied in the U.S. by inspectors for the U.S.D.A. and various state and local bureaucrats.  But I’m unfamiliar with any such studies.  My strong prior is that the contribution of brand names and other private-sector institutions far outstrips that of government regulation.


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