The Role of Market Forces in Protecting Against Phishing

From Don Boudreaux. Excerpts:

"In his review of George Akerlof’s and Robert Shiller’s Phishing for Phools, Peter Klein – a student of Oliver Williamson – suggests that

George Akerlof could walk down the hall and speak to his UC Berkeley colleague and fellow Nobel Laureate Oliver Williamson for a better understanding of how markets work. Williamson, of course, is famous for explaining how market actors protect themselves against opportunistic behavior from other market actors through contracts, joint ownership of assets, reputation, exchange of “hostages,” and similar practices. It is markets, not government, that enable cooperation and joint production in the face of information and incentive problems.

Peter’s suggestion is wise. Phishing for Phools contains virtually no recognition of the many ways that market institutions arise to protect people from the consequences of information inadequacies and asymmetries.  Akerlof and Shiller are correct, as I agreed in this earlier post, that entrepreneurs will seek to profit off of consumers’ inadequate knowledge.  But Akerlof and Shiller are incorrect to end their analysis with entrepreneurs exploiting consumers’ informational (and psychological) deficiencies; Akerlof and Shiller are incorrect to describe this exploitation as a “phishing equilibrium.”  It’s not an equilibrium because some entrepreneurs’ successful phishing of consumers for phools – or even the prospect of consumers being phished for phools – creates profitable opportunities for other entrepreneurs to help consumers avoid being phished for phools.

Take the department store.  One of its functions is to screen for, and to warrant, the quality of the merchandise that it offers to consumers.  Its buyers specialize in sorting unacceptable-quality from acceptable-quality merchandise and, thereby, ensuring that the store carries only the latter.  Department stores that succeed in supplying this quality-assurance service have the value of their name brands tied closely to their continuing success at assuring the minimum level of merchandise-quality that their customers come to expect from them.

This quality-assurance function is performed by department stores as a profit-seeking maneuver – one that helps to protect consumers from being “phished for phools.”  Yet I recall nowhere in Phishing for Phools this function of the department store being mentioned.

More broadly, brand names themselves serve to ensure quality for consumers who find it too costly directly to observe pre-purchase the quality of the goods and services that they are considering for purchase.  The value of the brand name – “McDonald’s”, “Green Giant”, “BB&T”, “Honda”, “Krups”, “Liz Claiborne”, “Hilton”, “Chateau Lafite Rothschild”, “Amazon.com” – depends upon the owner of the brand name continuing to supply the minimum quality that has come to be expected from goods and services sold under that brand name.  The self-interest of the owners of brand names generally impels them to continue to supply the minimum expected quality of their goods or services."

"Ironically, many of the market institutions that serve to assure product quality – that serve to protect consumers from being phished for phools – are institutions much derided by most of the people who likely find Akerlof’s and Shiller’s book to be an accurate and sobering description of market realities.  Such people do not understand brand names, and so they assume that brand names are a devious way of duping consumers rather than a market institution that protects consumers.  Ditto for such people’s assessment of advertising and of large-scale retailing by department stores and supermarkets."