When Free Markets Don't Work

Economists on the right say that the market knows best, and left alone will produce optimal results. I'm not an economist, but this assertion cannot be true, and I see it every day on my commute back from work. I'm an avid NPR listener, and Boston is fortunate to have two great public radio stations, WBUR and WGBH. Most of the time they have different shows, and usually I listen to one of the two (anything to avoid the horrible WCRB, I'll leave that to another post). But on weekdays between 4pm and 7pm they have the same exact lineup: 2.5 hours of news followed by Marketplace. Surely, listeners would be better served if they could, say, choose between news on WBUR and music on WGBH. And surely, with the rival station having the exact same programs at the exact same time, listeners choose more or less randomly between the two - there's no reason to prefer one over the other (unless it's fund raising time, which is a different story altogether.)

This makes perfect sense in an unregulated market. Suppose that 70% of the people prefer to listen to news, while 30% prefer music. If both stations broadcast the news, they'll get 35% rating each. If one of them switches to music, its rating will go down to 30%. Hence, neither station is motivated to change their programs. The end result is that the consumers lose.

A similar example happens with the location of shops. Have you noticed that once there's a tailor shop or a grocery shop in a city block, another one will pop right next to it? Imagine a sandy beach, mile long, and imagine you're the sole ice cream vendor on the beach. Assume that the sunbathers are equally spread along the beach, and want to walk the shortest distance possible to get their ice cream. The optimal place for your booth will be right in the middle. When a second vendor comes, the optimal place for him is just next to you! This way he'll get half the beach (for instance, if he's on your right, all the people in the right side of the beach will prefer to go to his booth). Once you're both in the middle of the beach, none of you is motivated to move your booth - moving it will only decrease your sales. But with regulation, the city can force both of you to space your booths. If they are located at the 1/3 and 2/3 milestones on the beach, you'll still divide the space equally between the two of you, but shorten the average distance that a sunbather needs to walk to get ice cream by almost 50%.

I heard this example once on the radio... probably on an NPR station :-) A quick search in Wikipedia found out this is actually called Hotelling's law.