Sunday, August 23, 2009

Albert O. Hirschman, Exit, Voice, and Loyalty: Chapter 6, "On Spatial Duopoly and the Dynamics of Two-Party Systems"

By considering changes in quality not as absolute but as a trade off between preferences of different sets of consumers, Hirschman is able to analyze two-party political systems in terms of voice and exit.

In a monopolistic situation, where its share of the market can't be changed by exit, an organization will seek to produce a contested good at a quality that minimizes discontent.

In a situation where consumers at one end of the quality continuum have no substitute product, but the consumers at the other end are highly likely to defect to a substitute, voice is likely to be exercised only by the customers with nowhere to go. In this situation, profit (or market share) maximization would lead an organization to satisfy the volatile consumers no matter how great the discontent at the other end. But since minimizing discontent does come into play, a party will actually pursue a program at some distance from the desires of voters at the center of a two-party system.

Hotelling model of two-party system: parties will tend to move to the center, leaving voters on the outlying ends of the spectrum poorly served. Despite its pre-eminence, this thesis has not generally been borne out by the behavior of American political parties, which have positioned themselves at some distance on either side of the political center. One way of accounting for this failure lies in the model's neglect of elasticity of demand -- once a party moves far enough away from its base voters, it could begin to lose some of them. (To me, reduced turnout seems the most likely mechanism for this). Hirschman, however, does not find this criticism compelling, and offers a different explanation: the "captive" voters at the extreme ends of the continuum bring their parties closer to them by use of voice.

Albert O. Hirschman, Exit, Voice, and Loyalty: Chapter 5, "How Monopoly Can Be Comforted by Competition"

Economists' usual concern about monopolies is exploitation: they can limit production to maximize profit. Competition is an effective remedy for this problem. But another issue with monopolies is their potential for slack and decay. In this case exit may comfort a monopolist by relieving it of ts most burdensome customers (thus defusing the potential of voice to remedy the monopolist's deficiencies).

"Lazy" monopolists who welcome exit are found frequently when their market is based on location and a significant disparity in mobility exists between the majority of customers and the more quality-sensitive minority.

Sometimes monopolies can even promote selective exit. Hirschman's example here is from autocratic South American governments which encourage exile for political dissidents. He notes the consequences of this situation by comparing the autocratic politics of Latin America with the consensus-driven politics of Japan, where exit has been made more difficult by geography and a lack of destinations in which an exile could easily assimilate.

Wednesday, August 19, 2009

Albert O. Hirschman, Exit, Voice, and Loyalty: Chapter 4, "A Special Difficulty in Combining Exit and Voice"

In some cases, ease of exit entrenches poor quality . Institutions that are relatively impervious to the effects of exit (nationalized Nigerian railway, public schools, corporate management with respect to stockholders are given as examples) are less likely to restore quality if their most active and resourceful customers leave, because these are the customers who could most effectively exercise voice.

Hirschman makes an analysis of exit as a function of consumer surplus. Consumers with a large surplus -- those for whom the product actually holds much greater value than the market price -- exit most quickly when quality declines. A price increase has the opposite result -- consumers with a small surplus are the first to exit.

Hirschman identifies consumers who have a large surplus with those most concerned with quality, and also with consumers who can most effectively exercise voice, or at least have the most to gain by doing so. (This is key to the analysis of the result of a decline in quality).

Consumers concerned with quality will be most willing to exit when better quality (although probably more expensive ) good is available. Price-sensitive consumers will be most willing to exit when a cheaper (although lower quality) good is available. As a result, quality-conscious consumers will be quit to exit in response to deterioration when a better, albeit more expensive, good is available but slow to exit when inferior, although cheaper, goods are available.

Since quality conscious consumers are most likely to exercise voice, this has an important impact on a large class of "quality of life" public services which depend heavily on voice for the maintenance of quality: the gap in the quality of these services between the high and low end will tend to increase. This is especially true in societies with a high level of social mobility. Where exit upward to superior service regimes is restricted, however, consumers have more at stake in improving the quality of their existing services, and the gap will not grow as wide.