Saturday, March 03, 2012

Why quality collapsed in the bubble years: Akerlof and the last good toaster

Six years ago, I mourned for the demise of the last good toaster. I could find lots of cheap toasters, but they didn't last long.

It wasn't just toasters. Between about 1999 and 2009 the quality of a lot of goods seemed to collapse -- even as consumer prices fell. I wrote cranky posts about the "occult inflation of shrinking quality", but I seemed to be a chorus of one. It wasn't just toasters that disappointed, we couldn't buy a decent DVD/VCR or pencil sharpener or window unit air conditioner. Similar quality problems emerged with drywall and heparin [1] and, notoriously, just about every computer manufacturer on earth save one.

For us it felt like a market failure. We were willing to pay more money for higher quality, but there didn't seem to be a relationship between price and quality. Brands like SONY and Panasonic didn't mean much any more.

A few brands kept their reputation. Canon and Nikon held on, and a phone maker led by a difficult genius made a reliable battery charger and eventually became the world's most valued corporation.

I wonder if it was Apple's example that changed the picture. Because reading John Roberts [3], it seems we fell into Akerlof's quality trap (emphases mine) ...

... Trade may break down almost completely (Akerlof, 1970). If eliminating the asymmetry of information is not possible, then buyers will refuse to pay more than the expected value of goods, averaged across the different quality levels they expect to be offered. Then the best quality goods may not be offered at all, because they command only a middling price that does not reflect their true value. Consequently the distribution of qualities that are actually offered is worse than what is potentially available. Since the selection of products on offer is not representative of the underlying distribution of quality, but is instead an adverse selection, buyers will rationally lower their willingness to pay even further. Then, even more potential sellers of relatively high-quality items may no longer be willing to sell at the lower price. The overall result may be that nothing but very low quality items are available -- only lemons are on offer -- and markets fail to exist for high-quality products, although buyers are anxious to have such goods and would willingly pay enough for them to compensate the sellers if they were sure to get what they paid for. [3]

In a world where quality seemed to be unobtainable at any price, Apple offered relatively higher quality [4] products at a relatively higher price. I think they broke the cycle [5]. It probably helped that after the debt/real estate bubble burst consumers paid more attention to the costs of unreliable goods.

It's quite a story - a textbook illustration of research that earned Askerlof a share of the 2001 Nobel Prize in Economics. So why haven't we read about this from anyone but a crankish blogger? Where are the economists?

[1] The investigation continues incidentally - More Suppliers Linked to Heparin Contamination -
[2] I've been told that it's now very hard to buy a reliable dish washer 
[3] Roberts, J. The Modern Firm. Oxford University Press 2004. p 82-83
[4] Apple, with a few exceptions, doesn't make very high quality products. Their software is notoriously buggy, and they made generations of laptops with flaky hinges. Compared to the competition though, they were sterling. 
[5] The cycle-breaking alone brought them success, but the mind-blowing innovation of the iPhone and iPad took them to the top.

Update: Shortly after posting this, I discovered that in 2007 I made the same connection to asymmetric information theory that Roberts detailed in his text. Maybe I should have been an economist.


chrismealy said...

It's Akerlof.

John Gordon said...

Yikes! Thanks for the correction. Roberts had it right in the book, the typo was all mine.

Anonymous said...

So IS THERE A GOOD TOASTER OUT THERE not made in China!? I paid more than $100.00 for a Cuisinart toaster and it is a JOKE! Toasts TOTALLY unevenly! VERY FRUSTRATING since we use it all the time. The toaster is the most used item in my kitchen. Used 1 - 2 times a day by each my hubby and I. Please help! Standing and watching it does no good as it still does nothing about evenness.

Anonymous said...

Go to Toastercentral. They refurb and sell good, old, USA-made toasters and waffle irons and even deep fryers. I wouldn't bother buying a modern toaster - I'm still using the Sunbeam my Mom had in the '50s!

Paritosh said...

Good article and I share and bemoan the collapse of manufacturing these consumer goods in countries which were renowned for their quality. Some of the famous companies write "Made in Germany" on current products, but from the flimsy appearance, I suspect it may be made in erstwhile GDR..
Re the toaster, you may wish to consider a toaster oven from Tiger instead - it's made in japan, or so they say.

Paritosh said...

Good article and I share and bemoan the collapse of manufacturing these consumer items in countries which were renowned for these quality. Some of the famous companies from Germany print "made in Germany" on current products, but from the flimsy appearance, i suspect they are made in erstwhile GDR.
Re the toaster, you may wish to consider a small toaster oven instead from Tiger. It's still made in japan, or so they say.