Virginia Postrel On Choice, Not Lowest Price

By now everyone’s read Virginia’s Economic Scene column from Thursday, but I wanted to chime in with my two cents because her argument, and Erik Brynjolfsson et. al.’s research on online commerce, are at the core of my arguments for market-based retail choice in electricity.

Online shoppers are not just buying the same stuff for less money. They are buying different stuff. And they are much more likely to be getting exactly what they want than are off-line shoppers. Wal-Mart has low prices, but carries six times as many items as the largest Wal-Mart store, the article says. “Amazon’s slogan is world’s biggest selection, not world’s cheapest prices,” said Professor Brynjolfsson, who has done pioneering research on information technology and productivity. …

Clearly, the implications of this research go far beyond Amazon or books. More and more economic value seems to be coming from giving consumers greater choice, off-line as well as online. Yet these intangible benefits, which represent real increases in the standard of living, are not picked up in most economic measures.

Much of the argument in favor of electricity restructuring/deregulation is based on the argument that prices will fall. Consumer behavior in a lot of different markets indicates that price is only one aspect of why consumers make a particular decision. With something like electricity, which we consume as an input into some other consumption, price is likely to be important. But other features, including reliability, can make electric service a differentiated product and therefore can make choice more important than if it were just a commodity we were buying.

Demand for electricity varies from hour to hour and season to season, and across customers. In such an environment, choice will increase consumer surplus, even when customers do not choose the lowest-price offering.