Is Consumer really the King?

In free market economics, consumers dictate what goods are produced and are generally considered the center of economic activity. [Wikipedia]

Is the price of commodities and services determined by the consumers? Does the consumer have significant control over the prices of good they purchase through their ‘purchasing power’? Or is it just a farce?

Who is a consumer?

Consumer is an individual who has the necessary purchasing power to consume good and services.

On Consumerism

The prices in an economy are said to be dictated by the consumers. The law of demand states that ‘other things remaining the same, as more and more good are demanded, the prices rise and vice versa.’ In accordance to this law, when the consumers demand a great amount of a particular good or service, their prices tend to rise. The reasoning behind it being, when there is more demand, the producers raise the prices in order to acquire a larger profit arising out of the increased demand.

Consumer and ‘Choice’

The consumer is always at an advantage when there is competition because competition means choice. Their votes determine the fate of the manufacturer or service vendor. [Pai 2001]

The theory of consumer choice in Economics states that consumers take into account the following factors before making a purchase. They are

1) How much satisfaction they get from buying and then consuming an extra unit of a good or service

2) The price that they have to pay to make this purchase

3) The satisfaction derived from consuming alternative products

      4) The prices of alternatives goods and services

[Source: Tutor2u]

Rarely do consumers make this kind of analysis. Moreover these days, all sorts of attractive offers are given along with commodities and even services, which attract the consumer towards a particular commodity or service. In the R and D labs of the companies, huge chunks of monies are invested to create a brand image and to promote the product. The scary thing being, the advertisements go to which ever extent possible to attract the consumer.

Rather than the consumer going through the price of alternatives, the company in question provides a comparison table along with the advertisement; making it easier for the consumer. (Hopefully!)

If the consumer had the resources to make the above mentioned comparisons and then make a transaction based on that, probably the consumers would have been the King. Moreover, most of the information is kept as secret by the company. With regard to the existing informational asymmetries in the markets, the Right to Information Act passed by the Government of India is a welcome step.

Asymmetric Information and Consumers

Asymmetric information in markets is aggravated by the advertisements, as they portray the best in their respective products, by employing the best possible personnel. This not only distorts the true image of the product, but also places the consumer in a difficult position. [Thomas 2006]

Conclusions

Thus, in an economy characterized with sharp informational asymmetries, the presence of trans and multi national companies, a booming advertisement market coupled with more than 50 per cent of the Indian populace earning less then $2 a day, the consumers will really find it extremely hard in making informed choices.

References

1) Alex M Thomas, The Economics of Information, Undergraduate Economist, 2006.

2) M.R. Pai, Consumer Activism in India, 2001.

 

UPDATE

This article which was pointed out to me is an article too important to miss.

Montague’s hunch was that the brain was recalling images and ideas from commercials, and the brand was overriding the actual quality of the product.

While neuroscientist Montague’s ‘Pepsi Challenge’ suggests that branding appears to make a difference in consumer preference, BrightHouse’s research promises to show exactly how much emotional impact that branding can have.

Thanks to Riot, who pointed out this interesting yet shocking read.

22 thoughts on “Is Consumer really the King?

  1. Hi Alex

    How have you been….nice article like always. I have actually been thinking about the same issue for a while. Like for eg.returning to blogging i realised i now had to use my google id to log on. WHY SHOULD I? You know even on orkut your google id, google talk have all been linked….its not out of our choice is it????
    On many other instances I feel the buyers power is reducing and psychological tactics are being used to lure us.
    One more e.g. we have a big supermarket chain called TESCOs here, apparently they make it a point to stock colourful, expensive products, other stff like chips, chocs, fizzy drinks targetted at children in the bottom shelves…so that they can pick them up and force their parents into buying them.

    SO well written on a good topic.

    BTW I AM BACK!!!!

  2. Radhika,

    Psychological tactics it is. It is excruciatingly difficult not to depend on something or someone these days to do anything at all. It is a kind of restricted choice. Moreover, ‘the sellers manage to make the consumers feel as a king.’ This is where their marketing and advertising strategies play an important role.

    Waiting to see your post on this.

  3. NC,
    :)

    Thanks a lot for the pointer.

    Well, this seems to be complex. A very very debatable issue.

    Reliance stores are more efficient, give free goodies, superb advertisements and a good brand name.

    Competing with this is the Kerala Government. Hmmm.

    Be it government owned or private owned, consumer is the ‘uninformed king’!

  4. Riot,

    I am extremely thankful for the link.

    Montague’s hunch was that the brain was recalling images and ideas from commercials, and the brand was overriding the actual quality of the product.

    While neuroscientist Montague’s ‘Pepsi Challenge’ suggests that branding appears to make a difference in consumer preference, BrightHouse’s research promises to show exactly how much emotional impact that branding can have.

    [Carmichael 2004]

    This is really very shocking. I wonder how many people know about such studies happening.

  5. Alex,

    Interesting point. With so many choices in the market nowadays, you would actually think that ‘consumer is king’. But freedom of choice is dependent heavily on symmetrical information which is not present in the market. A good quality product may lose out to a strong brand just because of this.Seriously, is there any other reason why Coke or Pepsi is preferred over natural juices?

    The regular frequency with which we are subjected to these ads determines our response to products. Quality is not the main determinant, anyway, though sometimes it can be(like how the CSR report on the Cola affected its sales, atleast briefly). Even consumer empowerment is a kind of branding exercise where the buyer only feels like a king; he’s merely a poor buyer conned into making choices from “selectively calibrated” options.

  6. Pradeep,

    Seriously, is there any other reason why Coke or Pepsi is preferred over natural juices?

    I too wonder. It has to be the brand consciousness which it has created among the youth.

    The regular frequency with which we are subjected to these ads determines our response to products.

    Very true.

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  8. I believe consumers need to make a conscious effort to replace passive emotionalism with active analysis. Information asymmetry manifests itself not only in how uninformed the individual customer is, but also in how informed the institutional vendor is. To clarify, I think the key distinction is not between buyers and sellers, but between individuals and institutions. The dupermarket loyalty card (I’m told in Canada they’re called dupermarkets :-) is a powerful data mining tool in that it aggregates item-resolution transaction information in machine-readable form (since the transactions are enacted using machines). The individual consumer, by contrast, has little in the way of aggregated, machine-readable data about retail product offerings. Online shopping is only a marginal contribution to market transparency, if it is one at all. There is a big difference between a (likely robots=noindex) “add to cart” web page containing a single item for sale (a single data point), and an SQL prompt from which ‘bulk data’ can be queried. The former has a nickname…’webstacle.’ Advertising, while it doesn’t subtract from information available to consumers, doesn’t add to it as much as ad industry PR types would have us believe. It seems to serve mainly as a distraction. There is a theory that, all other things being equal, a less repetitive message contains more information. What is more repetitive than advertising? Advertising is not an example of informational generosity.

    Rather than the consumer going through the price of alternatives, the company in question provides a comparison table along with the advertisement; making it easier for the consumer. (Hopefully!)

    This has become a much-touted practice in auto insurance, but does it contribute to market transparency? The price of most insurance policies is a function of many variables, and the pricing models are of course closely-guarded trade secrets. Also, insurance is one of those industries in which the customer is not always right, and some customers definitely are considered undesirable. It should come as no surprise that “sometimes Progressive isn’t the lowest rate.” On the other hand, elsewhere in the insurance sector, term life insurance (a product defined in fairly simple terms), online commerce is credited (by the freakonomics guys) with transparentizing the price structure overnight. My conjecture is that this may have been the shot across the bow that prompted the invention of the webstacle.

    I believe that only consumers will aggregate information for use by consumers, at least in an objective way. Any volunteers?

    Shameless plug:

    http://scratchpad.wikia.com/wiki/Pubwan

  9. Lori,

    Your comment provided good insights.

    “I believe that only consumers will aggregate information for use by consumers, at least in an objective way. “

    This will work till the consumers become producers (aggregators of information). :)

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  11. advertisements probably unmask the hegemonistic logic of a welfare state like no other media, albeit unintentionally
    that is why we need to keep our senses sharp…to detect the underlying presumptions about consumer behaviour that advertisements make

    and i do believe that any ‘thinking’ individual will question the choices that the modern consumers have
    after all, at the other end of bounty lies exploitation!!!!

  12. Need an Oxford/Cambridge Dictionary to digest the above comment. Alex, put up a nice dictionary for poor ppl like me.

  13. also, as far as i can fathom, there is only one word which is borrowed from theory….’hegemony’

    and, it is ironic that cambridge dictionary has been mentioned as i happen to be an editor with their press!!!!!!!

    earnest apologies for blowing my trumpet, but just couldn’t resist the temptation

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  16. Im currrently doing a paper for my degree on the debate of whether ‘consumer is king’ or if in reality it depends on their rights.
    If anyone knows of any websites or articles which would be helpful would be much appreciated. :)

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