Learning By Drinking

An article I am working on, hoping to publish somewhere…

Once upon a time, 35 years ago to be precise, the British
beer industry was dominated by five big breweries. It had been that way for a
long time, and it didn’t look like changing: fifty years had passed since any new
ale breweries had been founded. Sure, some people complained about the poor
quality of beer, but they were probably just dreaming about a non-existent
golden age and grumbling about progress. After all, if cask beers from small
breweries were really better than the brand-name, large-scale production of the
big brewers, why had the small breweries gone out of business? If people really
wanted a different kind of beer, surely companies would be competing to provide
it for them?

But then a strange thing happened. As many people know, some
of these grumblers got together to form the Campaign for Real Ale (CAMRA).
CAMRA held local beer festivals, published an annual Good Beer Guide, and local CAMRA groups published newsletters that helped
to keep information as well as ale flowing. And they didn’t stop there: CAMRA
campaigned for less restrictive pub licensing laws and selling practices, against
takeovers of smaller breweries, and against deceptive advertising. CAMRA tries
all kinds of tactics: “Lively and sometimes controversial campaigns are mounted
at local level, with backup from headquarters. MPs, councillors, trade unions,
licensees and workers might be involved. Tactics we have used include petitions,
threatened boycotts, publicity stunts, marches, laying wreaths outside closed
breweries and so forth.”

CAMRA now boasts a membership of 75,000. Three hundred new
breweries operate in the UK.
The Good Beer Guide claims that “In spite of the best efforts of the
global brewers who dominate British brewing, there is greater choice today than
at any time since the … early 1970s.” CAMRA has changed the British beer landscape. It turns out that there
was a demand for a different beer after all.

*  * *

Why write about a thirty-year old British beer-drinkers
organization? Because CAMRA’s success has a lot to tell
us about the world we inhabit as consumers. It shines a light on one of the
basic questions about our society: does a free market economy really give us
what we want? Many areas of our consuming lives are dominated by a few big
companies and their heavily advertised brands, just like the market for beer in Britain in 1970. And just like CAMRA, we can ask the question, does their success mean
that we really like them?

Another way of asking this question is “who is in charge
when it comes to brands?” There are two common answers. Here in the red corner representing
the anti-corporate constituency is Naomi Klein, who argued five years ago in No Logo that brands provide a front for
“corporate rule” and that we are being pushed around by “Brand bullies”. And
over here in the blue corner representing the free-market enthusiasts is The Economist, which claims that “Brands
do not rule consumers; consumers rule brands… When we like a brand we manifest
our loyalty in cash. If we don’t like it, we walk away. Customers are in
charge.”

CAMRA showed that there is a third possibility. Enterprising
landlords always had the right to set up “free houses” which could sell beer
from any brewer. So although the big breweries made it easier to drink their beer
than that of their smaller competitors, it is difficult to argue that beer
drinkers were being bullied. On the other hand CAMRA’s success proves that the
market was not giving people what they wanted: for many years, the British beer
industry really did provide low-quality, albeit predictable, fare and got away
with it.

Some free-market enthusiasts would argue that CAMRA is
simply the market at work, facilitating the sharing of information needed for
the market to work properly. But are activist, volunteer groups setting out to
discredit big companies (and with a Trotskyist ex-leader of the Socialist
Workers’ Party playing a leading role) needed for markets to work well? If so,
we are a far cry from the way that the invisible hand and consumer sovereignty
is supposed to work.

So consumers were not being bullied, but they were still
trapped by the big breweries. In principle they were in charge, but in order to
be in charge you have to have a way to issue orders. Until CAMRA came along something was stopping
British beer drinkers from demanding better beer and was keeping them in a
bad-beer trap. But what?

The answer matters because although the CAMRA story is
interesting—at least, I think it is—it would be interesting only in an
anecdotal, “isn’t that odd” kind of way if it was only an exception to the rule.
But there are good reasons to believe that the forces at work among British
beer drinkers are working in a lot of other areas of our consuming lives. The
CAMRA story is a tale of conflict between marketing-driven brand-name companies
and smaller suppliers who have to rely on word of mouth for their success. It
shows that the success of brands may not be a good thing, and it shows that
individual choice and the market may not be enough to get us out of the various
traps we find ourselves in.

The answer matters because faith in markets is now so
widespread. It is commonplace to hear that if people are eating at McDonald’s
while independent restaurants go out of business, or if people are watching
American sitcom re-runs while Canadian productions can’t find funding, then—like
it or not—this is a reflection of what consumers want. If we liked
Canadian-made TV shows we’d watch them without any help from the CRTC. If we
really cared about healthy downtowns, we wouldn’t be shopping at Wal-Mart. The argument
is used as a verbal cudgel to beat those who argue for government intervention
or who protest the global spread of brand-name companies and cultural
homogeneity. Even Paul Krugman—New York Times columnist, fierce George Bush
critic, and every US liberal’s favourite economist—argues that because “no one
forces you to eat at McDonald’s”, anti-globalization activists are hoping that
“individuals be prevented from getting what they want”.

* * *

To better understand the CAMRA story we turn to economist
George Akerlof. Just before CAMRA was founded he had an insight that explains
why markets often fail. Akerlof’s big idea is called “the market for lemons”—lemons
as in bad quality cars, not as in the fruit—and it has had a huge impact on
economics, winning him the Nobel Prize in 2002. Unlike some other big ideas it has
not made the jump into the realm of public discussion. It is time it did so,
because it has a lot to say about many of today’s most topical issues,
including the conflict between the big brands and smaller vendors.

Akerlof observed that, in many exchanges, buyers cannot tell
the quality of what they buy before they buy it, while sellers know the quality
of what they are selling. The used car market was his example; when you buy a
used car direct from its owner it is hard to tell if it is in good shape or
whether the brakes are just about to fail. On the other hand, sellers know how
well they have maintained their cars and have a better idea of whether there is
anything dodgy under the hood.

In situations like this, where one side knows more than the
other, there is a problem of trust. Buyers of used cars must ask themselves the
question “if he (or she) wants to sell
that car, do I really want to buy it?”

The logic goes like this.

  • Buyers will only pay a premium price if they are confident
    that they will get what they are paying for. If they can’t identify or verify
    quality then they will not offer top dollar because they know they might be
    buying a lemon instead (they can’t tell the difference). They don’t trust the
    seller.
  • As buyers will not offer a high price, sellers of good
    quality used cars will tend to hold on to their vehicles rather than selling
    them at an unwarranted discount. They are driven out of the market.
  • Realizing that sellers with good quality used cars will hold
    on to them, buyers will further lower the price they are prepared to offer.
    This drives the sellers of the second-best cars out of the market.
  • The spiral continues and the market unravels until the only
    cars that can be sold are those for which the quality is certain: lemons.

The morals of the story are that markets where trust cannot
be established are much less active than they would otherwise be—they are
“thin”—and that it is particularly difficult to buy and sell high quality goods
when their quality is not easily verified. Even when buyers would be happy to
spend money for good quality merchandise, and even when sellers could make some
money by providing it, the “lemons problem” means that many potentially
beneficial exchanges fail to take place. There is no magic in the market that
guarantees success for producers of good things unless they can establish a
level of trust in what they are supplying.

But there is more to the lemons problem than this.

In many markets where trust is difficult to establish, there
are “nearby” markets where it is less of a problem. The quality of a new car is
more easily verifiable than that of a used car, because the seller can offer
guarantees, and legally is held to account more than the private seller of a
used car. Faced with a choice between a predictable new car and a second hand
car that may be a lemon, the good choice is to go with the predictable.

It is not quite so simple, of course, as Akerlof knew very
well. The market for lemons is both less than and more than the truth. On one
hand, few goods are of completely unknown quality ahead of time: sellers can
offer guarantees, and buyers can tease out information in many different ways.
Plenty of used cars, even good quality ones, do get bought and sold. But on the
other hand, the forces Akerlof identified are present to some extent in almost every
market transaction. In fact, many aspects of consumer society are taken up with
trying to get around this basic problem of establishing trustworthiness.
Establishing trust is not impossible, but it is costly.

* * *

Hidden in the market for lemons is an explanation of why British
beer could stay as low-quality for years, and of how CAMRA could give independent
producers a chance to sell their products.

The competition between the big breweries and the
independents in the UK was really a battle between two ways of establishing trustworthiness and
reputation. Brands rely on direct communication to the consumer through large-scale
marketing campaigns and an obvious uniformity, while the independents have to
rely instead on word of mouth among an educated customer base to build their
reputation.

Once the big breweries had tightened their hold on the
market, small breweries were faced with an information Catch-22. They lacked a
base of well-informed consumers to establish their reputation, and consumers lacked
good quality products to be informed about. Consumers were not bullied, but
they were trapped. In a market dominated by brands, individual consumer choices
were not enough to re-establish a market for independent producers.

What was needed, and what CAMRA provided, was collective
action. A group of people who, by banding together, managed to give the market
enough of a kick to propel it from one kind of outcome, dominated by brands and
low customer information, to another in which better-informed drinkers could
make better-informed decisions. CAMRA solved the lemons problem faced by
independent breweries.

* * *

Malcolm Gladwell’s hugely successful book The Tipping Point explains how word of
mouth works. Gladwell takes his readers to meet a set of “connectors, mavens,
and salesmen”. These are people who, because of a gregarious nature, or an
inclination to collect information, or a natural persuasive ability, carry information
about good and bad products to the rest of us and spark what Gladwell calls
“word-of-mouth epidemics”. But powerful as these connectors are, and engaging
as Gladwell’s book is, we cannot always trust that individuals will provide the
information needed to sustain good products. Word-of-mouth information about a
beer, or about a restaurant, or about a new book, requires a certain density of
people who know about it to transmit the information to the rest of us, and
even though Gladwell shows that a surprisingly small number of people can
manage to be a conduit for a lot of information, a critical mass is still needed
to reach the “tipping point”. In any particular market left to the vagaries of
individual choices there is no guarantee that it will ever be reached.

The market for lemons means that brands can drive out
word-of-mouth products as long as they are “good enough” to make the search for
reliable information too costly. If a branded product can get a foothold in the
market, it takes some customers out of the market for word-of-mouth goods. By
doing so, it increases the cost of word-of-mouth information for all consumers and
so makes the lemons problem a little worse. The effect is a spiral, with each
turn cutting into the word-of-mouth culture that maintains independent producers
and adding to the market share of brand-name companies.

In some cases, word of mouth can keep an independent market
healthy, but in other cases brands drive word-of-mouth goods to the periphery,
where only the most enthusiastic will even hear about them, or even eliminate
them all together. The predictability of brand-name goods can literally dumb
down the market, even if we continue to make good individual choices. Despite
what The Economist says, a victory
for brands does not prove a real “preference” by individual consumers. It may
simply show that the brand is no so bad that it is worth the effort of finding
out about alternatives.

Despite its recent woes, McDonald’s is a brand archetype. McDonald’s
restaurants scream predictability, from the identikit restaurant design to the
employees’ uniforms and scripted dialogue (“would you like fries with that?”)
to the production-line cooking techniques to the global marketing efforts. A
tourist in a new city may never have heard of any of the local restaurants, and may not know their
quality, but certainly does know what the food will be like at McDonald’s. It
may not be great, but it is “good enough”. Food in some tourist areas is
notoriously bad because the repeat business needed to establish a reputation for
quality is just not there. Restaurants that provide good value cannot find a
market for the food they sell. Such areas are prime territory for the
guaranteed predictability of the franchise.

Ron Galloway, director of the new film Why Wal-Mart Works & Why That Makes Some People Crazy, claims
that "138 million people vote with their feet to go to Wal-Mart. And
Americans are pretty smart. And I think Wal-Mart, if Wal-Mart were really doing
something genuinely wrong, the American people would be able to figure it out
and not go." But it has nothing to
do with how smart we are as individuals. Instead, it is simply that in the face
of the economies of scale and large-scale marketing, maintaining knowledge
about alternatives becomes increasingly difficult.

Once you see how the market for lemons works, less obvious
examples are all around. Networking is often a vital step in getting a good job.
The ability of “old boys clubs” and
networks based on common universities and schools has sustained many an insider
group, and outsiders (women, racial minorities) who do not have access to these
networks can be excluded, even when the people doing the hiring have no
intention to discriminate. It simply makes good sense to choose the known over
the unknown. The market for lemons is an argument in favour of affirmative
action: even the most well-intentioned hiring procedure that is based on
information about the individual can leave us with well-connected but only
“good enough” people in good jobs, while potentially excellent candidates
without good connections can be left in the cold.

Getting credit to start a company is another area where
contacts are important. Investors and banks look for real evidence that a loan
can be repaid, and personal recommendations or contacts provide an invaluable
source of such evidence. Those from the wrong side of the track looking for a
loan to start a company may have to look long and hard, no matter how good
their ideas are.

Or how about the market for movies? We have heard a lot
about the increased availability of online review sites and other ways of
finding information at your fingertips. Such developments are real, but let’s
not forget the other side of the story. New technology also allows producers to
“open wide” in many theatres simultaneously following a barrage of publicity,
so making word of mouth information more difficult to get. This provides a way
of promoting a brand-based predictability. The inclusion of bankable stars and
the production of sequels are other ways of emphasizing the reliability of the
product and cutting into the influence of word of mouth.

Any market where there are “acquired tastes” is vulnerable
to being dumbed down by brands. The phrase “acquired tastes” suggests fine
wines and smelly cheeses, but CAMRA shows that the phrase applies just as much
to cheaper products. Groups of enthusiasts help to keep such areas alive, and
play a fundamental role in maintaining variety. At the high end, gourmet groups
may manage to maintain a flow of information so that independent producers
(“boutique” products) can still find a niche without being as militant as
CAMRA. At the other end of the market, it is unlikely at this stage that a real
market for locally-produced soft drinks can be re-established: the cheapness of
the mass-produced product means that any independent variant must be
substantially better to make it worth searching out.

Seen in this light, collective action among consumers
becomes all the more important. And brand-name companies are aware of this. As
the success of consumer campaigns such as those against Nike and Nestlé have
shown, people do take information into account when they make their decisions,
as long as that information is available. But it requires collective action to
make this information available to individual consumers, and to make it part of
how we decide what to buy and what not to buy.

If we continue to trust more and more areas of society to
the supposed power of individual consumer choice, there is no guarantee that we
will end up in a good place. The success of brand-name companies is no evidence
of popularity. There continues to be a need for people to band together. Such
efforts can have an effect, as CAMRA has done, and make us collectively
smarter.

Bookmark the permalink.

Comments are closed