Why do firms in some markets engage in apparently pointless and costly activities? And why doesn’t vigorous competition drive out inefficient practices?
The other day, a friend came over for dinner, kindly offered to wash up, and was overwhelmed by the bubbles he created by squirting some Fairy Liquid into the sink. It turns out he usually uses an eco-friendly washing up liquid called Ecover that hardly produces any bubbles at all.
Apparently bubbles are purely aesthetic and are made with foam boosters, which presumably cost soap makers money, whilst adding no cleaning power at all. So why are they used so prevalently, and why has it taken an eco-friendly product to stop using them?
It makes sense to add foam boosters if it makes consumers think that the liquid is doing a better job – but it seems a bit of a waste all round. Why wouldn’t firms just explain to consumers that foam boasters don’t equal cleaning power and save some money in the process?
The problem is, it doesn’t make sense for one firm to do this. Educating consumers requires spending money on an advertising campaign. And who benefits? Well, the firm spending the money does. But so do all other soap companies – they can then stop using foam boosters too and save some money. The first firm to go ahead and get rid of the foam boosters is that one that loses out. So, absent any other factors, there is no incentive to educate consumers.
On the other hand, for an eco-friendly product like Ecover, it makes slightly more sense. They are targeting consumers who care about the environment, and getting rid of foam boosters is only part of the strategy. Fairy Liquid could copy them in getting rid of foam boosters too, but they would have to do a lot of other things to convince environment-conscious consumers that they were as environmentally-friendly, and things that would probably cost Fairy more money, not less – like using renewable raw materials for its packaging.
Just one example of how an apparently competitive market can still result in wasted resources.