Newswise — The dramatic rise of income inequality since 1970 has largely been caused by advances in marketing, says a law professor at Washington University in St. Louis.
“Marketers have become better at creating and exploiting market distortions in legal ways,” said Gerrit De Geest, the Charles F. Nagel Professor of International and Comparative Law in the School of Law.
“The legal system, in principle, prevents the deliberate creation of market failures, but it has not evolved at the same speed.”
De Geest is author of the forthcoming book “Rents: How Marketing Causes Inequality.”
In it, he argues that although marketing is meant to improve markets by bringing products to the right customers, it often does the opposite — creating “value” to businesses by making prices less transparent, splitting informed and uninformed consumers, making products incomparable, locking in consumers, exploiting psychological biases, creating network externality effects, or preventing price wars.
“Few markets have not been turned into less competitive ones by marketers, trained at modern business schools,” De Geest said. “This has significantly increased the amount of artificial profits (or ‘rents’) in the economy.
“Suppose you need new ink for your printer,” he said. “Your printer is so designed that it only works with cartridges of the manufacturer. You pay $29.99 for a product that would cost maybe $5 in a perfectly competitive market. The manufacturer has deliberately created a ‘lock-in effect’ that gives it a monopoly position on the ink market.”
This marketing strategy is called the “razor-blade model,” named after Gillette’s razors with disposable blades.
“Or suppose,” he said, “that a drug costs $3 and that you put exactly the same product for $9 on the shelves. No informed consumer would ever pay $9. So, marketers make sure the more expensive drug has a different brand name such as Bayer or Tylenol, a different design, and a slightly different product description.
“Now, some consumers — but as it turns out, not the pharmacists themselves! — will pay $9, mistakenly believing the expensive product is better. I analyze numerous other marketing strategies and conclude that their ‘success,’ for the businesses that implement them, comes down to the deliberate creation of market failures.
“What is puzzling to me, as a law professor, is how all these methods can ever be legal,” De Geest said. “If the razor-blade method is, at its core, a monopolization strategy, why is it legal under antitrust law? If Bayer’s brand strategy is at its core a subtle way to mislead people, why is it not considered a ‘deceptive practice’ under consumer protection law? In each case, there are technical reasons that make these strategies fall through the cracks of the legal system. Marketers have discovered legal ways to monopolize and deceive, and they apply them massively.
“What you overpay for ink or aspirin does not go to the workers of these companies but to the investors,” De Geest said. “As a result, artificial profits tend to get concentrated in the hands of very few people — the top 5 percent, top 1 percent or even top 0.01 percent of the population.”
In the book, he argues that these examples are not outliers.
“The impact of marketing methods has steadily grown over the time span 1970 to 2015,” he said. “Today, the vast majority of product and services market has been affected in some way by marketers.”
He has developed a new method for estimating the total amount of rents in the economy.
“I conclude that rents are now at least 35 percent of the economy,” De Geest said. “This means that out of every $100 you spend, on average $35 goes to profits that could not have been made in perfectly competitive markets. That was ‘only’ 20 percent in 1970. I also estimate that the rents related to real estate, oil and minerals have only increased from 5 percent to 8 percent in that time span, which suggests that most of the rents increase is caused by distortions in general product and services markets.
“These numbers suggest that modern markets are way more distorted than many people — including law professors, lawmakers and judges — assume.”