| The Economics of High-End Audio Equipment: Separating Fact from Fiction by Laurence A. Borden June 3, 2004 |
| “High-end audio gear is all over-priced.” “When it comes to audio equipment, price has no bearing on performance.” "These speakers are as good as others costing twice as much.” |
It seems as if rarely a week goes by without our hearing one or more of these
statements in the audio community. Perhaps because they are repeated so
often, many people seem to simply accept them as truisms. This tacit
acceptance is unusual because: (1) I can think of no other class of products
about which such claims are made, and (2) as will be explained below, the
statements seemingly violate well established economic principles.
In this article I will explore some of the factors which influence the pricing of
audiophile gear, and attempt to explain the apparent contradictions with
theory. I think it might be valuable to start with a review of some basic
economics. To those with a background in economics I offer my apologies,
as what follows will be an over-simplification.
In a free market economy like that in the United States, Great Britain, much of
Europe and many other countries, prices are determined by the market. At
first blush it may seem like prices are set by the manufacturer and/or dealer,
since it is they who put a price tag on the item. However, this is only half the
equation since, for a transaction to occur, consumers must agree to the
asking price. The price on an item that doesn’t sell is actually irrelevant. If an
insufficient number of consumers are willing to pay the asking price, the seller
(manufacturer or dealer) must lower the price, or risk going out of business (or
at least losing market share for that particular item). Conversely, if the asking
price is too low, demand will quickly surpass supply, such that the
manufacturer (or manufacturers of related goods) will raise the price.
The implications of all this are surprisingly straight forward. First, it tells us that
while temporary mispricings may occur, at equilibrium all products are
correctly priced. Put another way, overpriced items are those that don’t sell,
while correctly priced items are the ones that do sell. Thus, while a few
products, especially those recently introduced in the market, may be over-
priced, it is in essence a contradiction in terms for all (or even most) products
to be so. Second, since prices are determine by supply and demand, by
necessity prices are a reflection of buyers’ perceived value of the gear. (We’ll
come back to the issue of perceived value later on.) Last, it teaches us that
were there to exist products “as good as those costing twice as much,” these
latter products would, by definition, be overpriced. Since overpriced items
can exist only transiently, it is highly unlikely for there to be, at any particular
time, a plethora of gear as good as those costing substantially more.
To put this last point into context, consider the following scenario: Ford (or
GM, if you prefer) releases a new sports sedan with an MSRP of $25,000. A
well respected car magazine reviews the car and declares that it is better than
similar cars costing twice as much. What would happen? Auto enthusiasts
would be all a-buzz about the new car, and folks would soon be lining up at
Ford dealerships for test drives. Ford would begin selling the car as fast as
they could manufacture them, and BMW salesman would soon be as lonely as
the proverbial Maytag salesmen. (Yup, I watched far too much televison as a
kid!) For those of us with a passion for automobiles but limited means (in
other words, most car enthusiasts), this would be like a dream-come-true.
However, I daresay that very few enthusiasts are holding their breaths waiting
for it to happen, since it seems pretty unlikely. And yet, in the world of high-
end audio, we are lead to believe that a “deal-of-the-century” occurs almost
weekly! Moreover, instead of everyone flocking to the audio store carrying
this incredible product, the general reaction is typically a yawn, or perhaps a
rolling of the eyes - - clearly, quite a different reaction from our imaginary car
situation.
So now for the $64,000 question: Why is high-end audio seemingly in conflict
with well-established, and experimentally validated, economic principles? The
simplest answer might be, “because economic principles don’t apply to high-
end audio.” While we audiophiles tend to think of our hobby (and ourselves) in
a lofty manner, from the standpoint of economics there is little to distinguish it
from virtually any other market area. There are many products to choose from
(at a variety of price points), there is considerable competition, and there
exists only a modest barrier to entry. In light of this, I can think of no reason
whatsoever why well-established economic laws would not apply. We thus
need to look a bit more deeply for explanations.
I believe the most significant factor explaining the apparent deviation from
economic predictions is that personal tastes in audio vary considerably. All
audio systems are flawed in that they are unable to reproduce, with absolute
accuracy, that which is on the recorded medium (CD, SACD, DVD-A, vinyl, or
tape). Audio components come in many flavors, and audiophiles typically
choose systems that are strongest in those parameters that they consider
most important. (It is possible that even if a perfect system existed, some
audiophiles might still opt for one with pleasant colorations. But that’s a topic
for another day.)
Using speakers as an example, audiophiles who favor dynamics often choose
high-sensitivity speakers, in particular horns; those who prefer an open,
natural midrange often choose dipolar planar speakers (for example, Quads);
those who like sparkling trebles might choose speakers with a metal dome or
ribbon tweeter; while those who prefer more relaxed highs may choose a soft-
dome tweeter. (These are obviously generalities.) Because of this
tremendous variation in taste, a component deemed “better than those
costing twice as much” by a particular individual, may simply not be to the
liking of another.
It should be noted that this situation is in no way unique to audio. Food
connoisseurs may declare a particular French restaurant (for example) the
best, but this would be of little interest to those who don’t care for French
cuisine. Similar analogies could be made for art, especially modern art
(ducking for cover...). Additionally, even amongst similar types of gear,
system synergy can play a significant role. That is, what sounds terrific in one
system may not sound so great in another. Thus, the lack of agreement as to
what sounds “best” leads to apparent contradictions with economic principles.
We have thus seen that one source of confusion results from differences in
audiophile’s sonic tastes. But still another problem arises from the multiplicity
of factors which influence the choice of one component over another - - a
concept economists call “utility.”
Let’s suppose that a majority of audiophiles agreed that a newly introduced
preamp sounds better than competing models, including those that cost
more. (This is about as likely as pigs flying, but play along.) If sonics were all
that matters, the new unit would quickly capture a large portion of market
share. However, despite how noble audiophiles think their cause, factors
other than sonics come into play. In actuality, buyers consider a plethora of
properties besides sonics, including appearance, build-quality/reliability;
customer support, and brand name recognition. Thus, while newly-introduced
product A may indeed sound as good as the more expensive product B, many
audiophiles may not consider product A to be as good as product B.
Naturally, this will influence how effectively product A can compete in the
market place with product B.
Two examples of this phenomenon are becoming increasingly prevalent,
namely Chinese-made gear, and products sold exclusively on the internet.
(These two categories are not mutually exclusive.) Both result in lower prices
to the consumer: the former because of less expensive manufacturing costs,
the latter due to the elimination of the middleman. While both seem to be
capturing market share, their acceptance is not universal. Thus, while they
may sound as good as more expensive products, they are not as good (at
least to some individuals) when other factors are considered.
Although it may seem somewhat circular, another factor contributing to the
apparent deviations from economic theory is the price. It will come as no
surprise to anyone that there are vast differences in people’s willingness to
spend money. While this is certainly due in part to how much money one has
at one’s disposal, psychological factors are equally important. For example,
some people are spenders, while others are savers. Additionally, and of
particular relevance to the issue at hand, some folks feel that more expensive
audio products are better, while others feel that it is crazy to spend more than
x amount of dollars on audio equipment.
Thus, the price of an item will influence its perceived performance, and this will
vary from person to person. A related issue is that of diminishing returns.
While virtually everyone agrees that it exists, there is no agreement as to the
point at which it sets in. In fact, were one to take a survey, I suspect one could
find virtually all price points covered.
One of my pet peeves is the delight audiophiles seemingly take in making
statements such as “preamp A is 90% as good as preamp B, for 50% of the
price.” For the life of me, I cannot grasp what 90% of audio performance
sounds like, or how one would determine it. What I find particularly odd is that
high-end audio seems to be the only field in which people attempt to quantify a
subjective experience. I have never heard anyone say “this restaurant’s prime
rib tastes 30% better than that restaurant’s,” or “this Picasso is 40% better
than that Matisse,” or “the Rolling Stones are 15% better than The Who,” or
(saving the best for last) “Tyra Banks is 35% hotter than Heidi Klum.” This
behavior serves to reinforce the notion that some audio gear is quantifiably
better than others, when in fact this is largely subjective. In summary,
individual attitudes toward money play a role a significant role in how one
evaluates audio gear.
The next factor to consider is the subjective nature of audio evaluation.
There is general (though not absolute) agreement within the audiophile
community that while measurements are useful, they do not provide a
complete picture of how a component will sound. More to the point,
irrespective of the value of measurements, I think it is safe to say that
evaluations of audio gear are invariably based on listening. Furthermore, for
reasons that are beyond the scope of the article, double blind methodologies
are rarely used.
Importantly, the subjective evaluations of an audio component are influenced
by many factors, both conscious and subconscious. These factors include,
among others, price (as mentioned above), appearance, the manufacturer’s
reputation, opinions expressed by others, the listening environment, the mood
of the listener, and his or her listening experience. The situation is
compounded by the notorious “shortness” of audio memory, which makes
difficult the comparison of different products, thus adding further variability to a
determination of what sounds best. Taken together, these factors render
evaluations of audio gear somewhat arbitrary and capricious. Accordingly, it
stands to reason that a particular audio product may receive vastly different
evaluations, irrespective of listener’s sonic preferences.
CONCLUSIONS
I have attempted to show that despite appearances to the contrary, high-end
audio gear conforms to the fundamental laws of economics. The apparent
discrepancies between price and quality result from a variety of factors,
including different opinions as to what sounds good, the sensitivity of our
judgement to factors such as price and preconceived notions, and the
influence of factors other than sound (for example, reliability and dealer
networks) in guiding our purchases.
Importantly, while economics teaches that “better” items costs more, it does
not teach that one person’s personal favorite will necessarily cost more than
another person’s favorite. That is, market prices are not determined by the
preferences of one audiophile, or even a few, but rather, by the aggregate.
It is also worth noting that from an economic standpoint, the only gauge of
“better” is price. That is, if the market is willing to pay $1,500 for amp A, but
only $1,000 for amp B, the market has decided that amp A is 50% better than
amp B. The market doesn’t care what one person thinks; it cares only about
what the collective purchasers are willing to pay.
It is my hope that this brief essay offered some insight into the factors that
influence the pricing of audio gear, and perhaps will help audiophiles better
understand their own impressions and purchases of audio gear. Please let
me know if I’ve succeeded. My mailbox is always open!
statements in the audio community. Perhaps because they are repeated so
often, many people seem to simply accept them as truisms. This tacit
acceptance is unusual because: (1) I can think of no other class of products
about which such claims are made, and (2) as will be explained below, the
statements seemingly violate well established economic principles.
In this article I will explore some of the factors which influence the pricing of
audiophile gear, and attempt to explain the apparent contradictions with
theory. I think it might be valuable to start with a review of some basic
economics. To those with a background in economics I offer my apologies,
as what follows will be an over-simplification.
In a free market economy like that in the United States, Great Britain, much of
Europe and many other countries, prices are determined by the market. At
first blush it may seem like prices are set by the manufacturer and/or dealer,
since it is they who put a price tag on the item. However, this is only half the
equation since, for a transaction to occur, consumers must agree to the
asking price. The price on an item that doesn’t sell is actually irrelevant. If an
insufficient number of consumers are willing to pay the asking price, the seller
(manufacturer or dealer) must lower the price, or risk going out of business (or
at least losing market share for that particular item). Conversely, if the asking
price is too low, demand will quickly surpass supply, such that the
manufacturer (or manufacturers of related goods) will raise the price.
The implications of all this are surprisingly straight forward. First, it tells us that
while temporary mispricings may occur, at equilibrium all products are
correctly priced. Put another way, overpriced items are those that don’t sell,
while correctly priced items are the ones that do sell. Thus, while a few
products, especially those recently introduced in the market, may be over-
priced, it is in essence a contradiction in terms for all (or even most) products
to be so. Second, since prices are determine by supply and demand, by
necessity prices are a reflection of buyers’ perceived value of the gear. (We’ll
come back to the issue of perceived value later on.) Last, it teaches us that
were there to exist products “as good as those costing twice as much,” these
latter products would, by definition, be overpriced. Since overpriced items
can exist only transiently, it is highly unlikely for there to be, at any particular
time, a plethora of gear as good as those costing substantially more.
To put this last point into context, consider the following scenario: Ford (or
GM, if you prefer) releases a new sports sedan with an MSRP of $25,000. A
well respected car magazine reviews the car and declares that it is better than
similar cars costing twice as much. What would happen? Auto enthusiasts
would be all a-buzz about the new car, and folks would soon be lining up at
Ford dealerships for test drives. Ford would begin selling the car as fast as
they could manufacture them, and BMW salesman would soon be as lonely as
the proverbial Maytag salesmen. (Yup, I watched far too much televison as a
kid!) For those of us with a passion for automobiles but limited means (in
other words, most car enthusiasts), this would be like a dream-come-true.
However, I daresay that very few enthusiasts are holding their breaths waiting
for it to happen, since it seems pretty unlikely. And yet, in the world of high-
end audio, we are lead to believe that a “deal-of-the-century” occurs almost
weekly! Moreover, instead of everyone flocking to the audio store carrying
this incredible product, the general reaction is typically a yawn, or perhaps a
rolling of the eyes - - clearly, quite a different reaction from our imaginary car
situation.
So now for the $64,000 question: Why is high-end audio seemingly in conflict
with well-established, and experimentally validated, economic principles? The
simplest answer might be, “because economic principles don’t apply to high-
end audio.” While we audiophiles tend to think of our hobby (and ourselves) in
a lofty manner, from the standpoint of economics there is little to distinguish it
from virtually any other market area. There are many products to choose from
(at a variety of price points), there is considerable competition, and there
exists only a modest barrier to entry. In light of this, I can think of no reason
whatsoever why well-established economic laws would not apply. We thus
need to look a bit more deeply for explanations.
I believe the most significant factor explaining the apparent deviation from
economic predictions is that personal tastes in audio vary considerably. All
audio systems are flawed in that they are unable to reproduce, with absolute
accuracy, that which is on the recorded medium (CD, SACD, DVD-A, vinyl, or
tape). Audio components come in many flavors, and audiophiles typically
choose systems that are strongest in those parameters that they consider
most important. (It is possible that even if a perfect system existed, some
audiophiles might still opt for one with pleasant colorations. But that’s a topic
for another day.)
Using speakers as an example, audiophiles who favor dynamics often choose
high-sensitivity speakers, in particular horns; those who prefer an open,
natural midrange often choose dipolar planar speakers (for example, Quads);
those who like sparkling trebles might choose speakers with a metal dome or
ribbon tweeter; while those who prefer more relaxed highs may choose a soft-
dome tweeter. (These are obviously generalities.) Because of this
tremendous variation in taste, a component deemed “better than those
costing twice as much” by a particular individual, may simply not be to the
liking of another.
It should be noted that this situation is in no way unique to audio. Food
connoisseurs may declare a particular French restaurant (for example) the
best, but this would be of little interest to those who don’t care for French
cuisine. Similar analogies could be made for art, especially modern art
(ducking for cover...). Additionally, even amongst similar types of gear,
system synergy can play a significant role. That is, what sounds terrific in one
system may not sound so great in another. Thus, the lack of agreement as to
what sounds “best” leads to apparent contradictions with economic principles.
We have thus seen that one source of confusion results from differences in
audiophile’s sonic tastes. But still another problem arises from the multiplicity
of factors which influence the choice of one component over another - - a
concept economists call “utility.”
Let’s suppose that a majority of audiophiles agreed that a newly introduced
preamp sounds better than competing models, including those that cost
more. (This is about as likely as pigs flying, but play along.) If sonics were all
that matters, the new unit would quickly capture a large portion of market
share. However, despite how noble audiophiles think their cause, factors
other than sonics come into play. In actuality, buyers consider a plethora of
properties besides sonics, including appearance, build-quality/reliability;
customer support, and brand name recognition. Thus, while newly-introduced
product A may indeed sound as good as the more expensive product B, many
audiophiles may not consider product A to be as good as product B.
Naturally, this will influence how effectively product A can compete in the
market place with product B.
Two examples of this phenomenon are becoming increasingly prevalent,
namely Chinese-made gear, and products sold exclusively on the internet.
(These two categories are not mutually exclusive.) Both result in lower prices
to the consumer: the former because of less expensive manufacturing costs,
the latter due to the elimination of the middleman. While both seem to be
capturing market share, their acceptance is not universal. Thus, while they
may sound as good as more expensive products, they are not as good (at
least to some individuals) when other factors are considered.
Although it may seem somewhat circular, another factor contributing to the
apparent deviations from economic theory is the price. It will come as no
surprise to anyone that there are vast differences in people’s willingness to
spend money. While this is certainly due in part to how much money one has
at one’s disposal, psychological factors are equally important. For example,
some people are spenders, while others are savers. Additionally, and of
particular relevance to the issue at hand, some folks feel that more expensive
audio products are better, while others feel that it is crazy to spend more than
x amount of dollars on audio equipment.
Thus, the price of an item will influence its perceived performance, and this will
vary from person to person. A related issue is that of diminishing returns.
While virtually everyone agrees that it exists, there is no agreement as to the
point at which it sets in. In fact, were one to take a survey, I suspect one could
find virtually all price points covered.
One of my pet peeves is the delight audiophiles seemingly take in making
statements such as “preamp A is 90% as good as preamp B, for 50% of the
price.” For the life of me, I cannot grasp what 90% of audio performance
sounds like, or how one would determine it. What I find particularly odd is that
high-end audio seems to be the only field in which people attempt to quantify a
subjective experience. I have never heard anyone say “this restaurant’s prime
rib tastes 30% better than that restaurant’s,” or “this Picasso is 40% better
than that Matisse,” or “the Rolling Stones are 15% better than The Who,” or
(saving the best for last) “Tyra Banks is 35% hotter than Heidi Klum.” This
behavior serves to reinforce the notion that some audio gear is quantifiably
better than others, when in fact this is largely subjective. In summary,
individual attitudes toward money play a role a significant role in how one
evaluates audio gear.
The next factor to consider is the subjective nature of audio evaluation.
There is general (though not absolute) agreement within the audiophile
community that while measurements are useful, they do not provide a
complete picture of how a component will sound. More to the point,
irrespective of the value of measurements, I think it is safe to say that
evaluations of audio gear are invariably based on listening. Furthermore, for
reasons that are beyond the scope of the article, double blind methodologies
are rarely used.
Importantly, the subjective evaluations of an audio component are influenced
by many factors, both conscious and subconscious. These factors include,
among others, price (as mentioned above), appearance, the manufacturer’s
reputation, opinions expressed by others, the listening environment, the mood
of the listener, and his or her listening experience. The situation is
compounded by the notorious “shortness” of audio memory, which makes
difficult the comparison of different products, thus adding further variability to a
determination of what sounds best. Taken together, these factors render
evaluations of audio gear somewhat arbitrary and capricious. Accordingly, it
stands to reason that a particular audio product may receive vastly different
evaluations, irrespective of listener’s sonic preferences.
CONCLUSIONS
I have attempted to show that despite appearances to the contrary, high-end
audio gear conforms to the fundamental laws of economics. The apparent
discrepancies between price and quality result from a variety of factors,
including different opinions as to what sounds good, the sensitivity of our
judgement to factors such as price and preconceived notions, and the
influence of factors other than sound (for example, reliability and dealer
networks) in guiding our purchases.
Importantly, while economics teaches that “better” items costs more, it does
not teach that one person’s personal favorite will necessarily cost more than
another person’s favorite. That is, market prices are not determined by the
preferences of one audiophile, or even a few, but rather, by the aggregate.
It is also worth noting that from an economic standpoint, the only gauge of
“better” is price. That is, if the market is willing to pay $1,500 for amp A, but
only $1,000 for amp B, the market has decided that amp A is 50% better than
amp B. The market doesn’t care what one person thinks; it cares only about
what the collective purchasers are willing to pay.
It is my hope that this brief essay offered some insight into the factors that
influence the pricing of audio gear, and perhaps will help audiophiles better
understand their own impressions and purchases of audio gear. Please let
me know if I’ve succeeded. My mailbox is always open!
| Feedback from reader Dave Burna: |
June 15, 2004
Larry, I wanted to take a moment to respond your article, The Economics of
High-End Audio Equipment: Separating Fact from Fiction, dated 3 June
2004. First, I should disclose my position on the issue: I do think that there are
bargains (under-priced commodities) that exist in the retail audio market, and
that these are not singular "discontinuities" in the macroeconomic supply-&-
demand model.
However, I'd like to discuss two set of issues here:
1. I'd wish to add to your list of "non-economic" human elements that might
lead to (sometimes misguided yet) false claims of "bargain products." (this is
actually in support of your position).
2. Outlining an economic-based rationale for why the audio marketplace does
not come close to a "perfect market," and therefore can deviate easily from
the classic supply-&-demand theory.
The Difficulty In Finding "The Best" Audio Components (or "My Dad
Can Beat Up Your Dad")
It's hard, hard work to figure out the inherent basic characteristics of a single
audio component, let alone how it interacts in the context of a full system
/listening environment.
System synergies, as most long-time audiophiles will agree, play such a
significant role in the resultant sound, that a speaker or amp that sounds
transcendent in one system may sound horrific in an equally “high-end” but
different system. Add to that the work required to create a truly scientific
listening environment that will isolate effectively the impact that a single
change in components have in that system, and it’s not difficult to imagine that
this rigorous type of listening test is rarely performed.
Without this level of rigor, it can be quite difficult, if not problematic, to
generalize based on a less-than-thorough “comparison” of audio
components. All one can truly say is “this component in this system on this
occasion bested that component in that system on that occasion.” You’ve
already accurately described the problems with the “shortness” of audio
memory and the problems that further inferences or “leaps of faith” can cause.
Ignoring even arguments about possible reviewer biases, agendas, or
conflicts of interest (all of which can happen) you left off several additional
psychological factors:
1. Elimination of cognitive dissonance: Because I paid for this component, I
generally want to believe that this component is an incredible bargain. To do
so, I may subconsciously downplay its weaknesses and emphasize its
strengths.
2. A need for self-actualization or self-aggrandizement. A reviewer may
(again, subconsciously) seek the approval of their peers in the audio
community, wanting to be the first to discover a “hidden gem” and sing its
praises, garnering credibility for being on the “leading edge”.
3. Audio hysteria: I’m not sure that this is a technical term in psychology, but it
should be! A reviewer’s enthusiasm for a product can lead him to (usually
temporarily) praise an audio find exceedingly, especially at the expense of a
more rational, nuanced response.
4. Conspicuous consumption: I won’t explain this in detail, assuming readers
will understand this argument.
Why The Audio Market Is Not A “Perfect” Market (or "Caveat Emptor")
OK, Larry, having provided more fuel for your “rational market” theory for
audio, I’m now going to take the opposite position and demonstrate why it’s
entirely possible, in fact likely, that bargain audio products (aka: “market
discontinuities”) exist. This takes a little (but only a little) economic theory to
explain, so bear with me.
People often misrepresent or overstate what the "Supply-&-Demand" theory
predicts. In a microeconomic sense, the theory predicts that the effects of
supply-&-demand will dominate only under a tightly defined set of conditions,
sometimes called “perfect” or “rational” market conditions. This includes
characteristics of perfect information, well-defined user preferences,
consistent producer decisions, negligible market costs of entry/exit, and
(usually) easily differentiated products. There are other characteristics, but
that’s sufficient for this discussion.
So there’s the key point: in our “messy” world, “perfect” markets don’t really
exist.
Now, in a macroeconomic sense, some people will assert that some of these
competing market effects will “cancel each other out” – if the market is large
enough, the supply-&-demand effects will predominate and the net result will
behave according to classic economic theory.
However, because of the imperfections inherent in the high-end audio
marketplace, “discontinuities” (bargains as well as overpriced items) can and
do exist:
1. The high-end audio market is small. While there are a large number of
manufacturers, many produce quite a small number of units during a calendar
year. Supply is limited.
2. Many high-end manufacturers are not market savvy. They can be skilled
craftsman and technicians working in small environments. Often, they are not
motivated by money, but primarily by a lifelong interest in audio and a desire
to create…..and thank God for that!! As a result, many do not charge what
could be considered the going market rate for their products. That’s not to say
they are bad businessmen, rather that issues of maximizing revenue or
promoting growth are not as prominent as working to do something they love
and maintaining control over their work environment/company.
3. Limited access to goods adversely impacts buyers’ ability to purchase.
There are some people who will take a chance on buying components
unheard based on a review or word-of-mouth, many will not (wise choice!). It
may mean a special trip (plane or car) just to audition some products. I know
(I recently did this) but for many/most, this is obsessive behavior and/or not
cost-effective for them.
4. Imperfect information abounds. Individual dealers, reviewers, friends,
acquaintances – they may all have hidden agendas. Many products have no
available reviews at all! Some (but not all) small vendors allow in-home trials,
but with shipping costs and time commitments, this is hardly a small
undertaking either. Acquiring information by word-of-mouth takes time,
dedication, and often the willingness to travel to industry conventions or audio
club gatherings…..with no guarantee that this “information” is any better than
personal in-home evaluation of components.
5. For manufacturers, the cost of entry/exit may be small, but not necessarily
the costs to acquire the knowledge/skill needed to produce state-of-the-art
audio gear. And these costs may be small, but for a Mom-&-Pop shop, they
are certainly not zero.
6. Dealer networks restrict the access of goods. I’m in no way arguing that
dealer networks are bad for the high-end industry. In fact, I would say that they
knowledge and expertise provided by the best dealers is essential to the long-
term viability of audio. However, while they fill a necessary and valuable
function, they do restrict access to goods and services. You can’t simply
amble down to Best Buy and purchase a set of Kharma speakers (though I’d
love to see what a chain store could do to reduce the incremental costs to
produce one more set of these babies for me!).
7. For those familiar with patent law, the use of patents allow manufacturers to
restrict access of goods, thus demanding a premium in the marketplace to
compensate them for their R&D efforts and up-front investment. Again, like
the dealer argument, I would asset that patents are an indispensable part of
this marketplace. Still, any restriction of supply will act to skew prices and
therefore consumer preferences.
8. Marketing costs are expensive. This is the analogue to #4, in that
manufacturers have a difficult time getting information about their products out
to the (small number of) audiophiles that are interested in their wares. Even
when they can, these costs are hardly small. In fact, this may argue against
the idea that the costs of entry into a market are small in the first place: a two-
person shop can hardly afford the cost to rent a booth a CES or another high-
end audio conference in order to meet dealer contacts, schmooze with the
audio press, and expose potential customers to their creations.
I hope that I have made a compelling argument for the “imperfections” inherent
in the high-end audio marketplace. Mind you, this only “proves” that
discontinuities are possible in the context of conventional microeconomic
theory. With enough time to evaluated them all, I would assert that there are at
least some products that any individual might prefer that are out-of-line with
the existing market pricing structure (either under- or over-priced). Since wide
differences in personal tastes and preferences, those “bargain” products may
differ from person-to-person. However, it seems plausible that, for a “majority”
of the audiophiles, some products may present a value that is out-of-line with
its market price.
Regards,
dave Burna (dB, a unit measure of noise)
Larry, I wanted to take a moment to respond your article, The Economics of
High-End Audio Equipment: Separating Fact from Fiction, dated 3 June
2004. First, I should disclose my position on the issue: I do think that there are
bargains (under-priced commodities) that exist in the retail audio market, and
that these are not singular "discontinuities" in the macroeconomic supply-&-
demand model.
However, I'd like to discuss two set of issues here:
1. I'd wish to add to your list of "non-economic" human elements that might
lead to (sometimes misguided yet) false claims of "bargain products." (this is
actually in support of your position).
2. Outlining an economic-based rationale for why the audio marketplace does
not come close to a "perfect market," and therefore can deviate easily from
the classic supply-&-demand theory.
The Difficulty In Finding "The Best" Audio Components (or "My Dad
Can Beat Up Your Dad")
It's hard, hard work to figure out the inherent basic characteristics of a single
audio component, let alone how it interacts in the context of a full system
/listening environment.
System synergies, as most long-time audiophiles will agree, play such a
significant role in the resultant sound, that a speaker or amp that sounds
transcendent in one system may sound horrific in an equally “high-end” but
different system. Add to that the work required to create a truly scientific
listening environment that will isolate effectively the impact that a single
change in components have in that system, and it’s not difficult to imagine that
this rigorous type of listening test is rarely performed.
Without this level of rigor, it can be quite difficult, if not problematic, to
generalize based on a less-than-thorough “comparison” of audio
components. All one can truly say is “this component in this system on this
occasion bested that component in that system on that occasion.” You’ve
already accurately described the problems with the “shortness” of audio
memory and the problems that further inferences or “leaps of faith” can cause.
Ignoring even arguments about possible reviewer biases, agendas, or
conflicts of interest (all of which can happen) you left off several additional
psychological factors:
1. Elimination of cognitive dissonance: Because I paid for this component, I
generally want to believe that this component is an incredible bargain. To do
so, I may subconsciously downplay its weaknesses and emphasize its
strengths.
2. A need for self-actualization or self-aggrandizement. A reviewer may
(again, subconsciously) seek the approval of their peers in the audio
community, wanting to be the first to discover a “hidden gem” and sing its
praises, garnering credibility for being on the “leading edge”.
3. Audio hysteria: I’m not sure that this is a technical term in psychology, but it
should be! A reviewer’s enthusiasm for a product can lead him to (usually
temporarily) praise an audio find exceedingly, especially at the expense of a
more rational, nuanced response.
4. Conspicuous consumption: I won’t explain this in detail, assuming readers
will understand this argument.
Why The Audio Market Is Not A “Perfect” Market (or "Caveat Emptor")
OK, Larry, having provided more fuel for your “rational market” theory for
audio, I’m now going to take the opposite position and demonstrate why it’s
entirely possible, in fact likely, that bargain audio products (aka: “market
discontinuities”) exist. This takes a little (but only a little) economic theory to
explain, so bear with me.
People often misrepresent or overstate what the "Supply-&-Demand" theory
predicts. In a microeconomic sense, the theory predicts that the effects of
supply-&-demand will dominate only under a tightly defined set of conditions,
sometimes called “perfect” or “rational” market conditions. This includes
characteristics of perfect information, well-defined user preferences,
consistent producer decisions, negligible market costs of entry/exit, and
(usually) easily differentiated products. There are other characteristics, but
that’s sufficient for this discussion.
So there’s the key point: in our “messy” world, “perfect” markets don’t really
exist.
Now, in a macroeconomic sense, some people will assert that some of these
competing market effects will “cancel each other out” – if the market is large
enough, the supply-&-demand effects will predominate and the net result will
behave according to classic economic theory.
However, because of the imperfections inherent in the high-end audio
marketplace, “discontinuities” (bargains as well as overpriced items) can and
do exist:
1. The high-end audio market is small. While there are a large number of
manufacturers, many produce quite a small number of units during a calendar
year. Supply is limited.
2. Many high-end manufacturers are not market savvy. They can be skilled
craftsman and technicians working in small environments. Often, they are not
motivated by money, but primarily by a lifelong interest in audio and a desire
to create…..and thank God for that!! As a result, many do not charge what
could be considered the going market rate for their products. That’s not to say
they are bad businessmen, rather that issues of maximizing revenue or
promoting growth are not as prominent as working to do something they love
and maintaining control over their work environment/company.
3. Limited access to goods adversely impacts buyers’ ability to purchase.
There are some people who will take a chance on buying components
unheard based on a review or word-of-mouth, many will not (wise choice!). It
may mean a special trip (plane or car) just to audition some products. I know
(I recently did this) but for many/most, this is obsessive behavior and/or not
cost-effective for them.
4. Imperfect information abounds. Individual dealers, reviewers, friends,
acquaintances – they may all have hidden agendas. Many products have no
available reviews at all! Some (but not all) small vendors allow in-home trials,
but with shipping costs and time commitments, this is hardly a small
undertaking either. Acquiring information by word-of-mouth takes time,
dedication, and often the willingness to travel to industry conventions or audio
club gatherings…..with no guarantee that this “information” is any better than
personal in-home evaluation of components.
5. For manufacturers, the cost of entry/exit may be small, but not necessarily
the costs to acquire the knowledge/skill needed to produce state-of-the-art
audio gear. And these costs may be small, but for a Mom-&-Pop shop, they
are certainly not zero.
6. Dealer networks restrict the access of goods. I’m in no way arguing that
dealer networks are bad for the high-end industry. In fact, I would say that they
knowledge and expertise provided by the best dealers is essential to the long-
term viability of audio. However, while they fill a necessary and valuable
function, they do restrict access to goods and services. You can’t simply
amble down to Best Buy and purchase a set of Kharma speakers (though I’d
love to see what a chain store could do to reduce the incremental costs to
produce one more set of these babies for me!).
7. For those familiar with patent law, the use of patents allow manufacturers to
restrict access of goods, thus demanding a premium in the marketplace to
compensate them for their R&D efforts and up-front investment. Again, like
the dealer argument, I would asset that patents are an indispensable part of
this marketplace. Still, any restriction of supply will act to skew prices and
therefore consumer preferences.
8. Marketing costs are expensive. This is the analogue to #4, in that
manufacturers have a difficult time getting information about their products out
to the (small number of) audiophiles that are interested in their wares. Even
when they can, these costs are hardly small. In fact, this may argue against
the idea that the costs of entry into a market are small in the first place: a two-
person shop can hardly afford the cost to rent a booth a CES or another high-
end audio conference in order to meet dealer contacts, schmooze with the
audio press, and expose potential customers to their creations.
I hope that I have made a compelling argument for the “imperfections” inherent
in the high-end audio marketplace. Mind you, this only “proves” that
discontinuities are possible in the context of conventional microeconomic
theory. With enough time to evaluated them all, I would assert that there are at
least some products that any individual might prefer that are out-of-line with
the existing market pricing structure (either under- or over-priced). Since wide
differences in personal tastes and preferences, those “bargain” products may
differ from person-to-person. However, it seems plausible that, for a “majority”
of the audiophiles, some products may present a value that is out-of-line with
its market price.
Regards,
dave Burna (dB, a unit measure of noise)
| RESPONSE FROM LARRY BORDEN |
I am both delighted and flattered that my article prompted such a cogent,
informative, and well organized response. In the interest of space, I will keep
my own comments brief.
Regarding the role of psychological factors, I am in complete agreement
and in fact, am just (with a colleague) completing an article on that very
topic. Keep your dial tuned to DAGOGO!
As for the economic arguments you put forth, I am similarly in agreement.
Economic theory is based on a set of conditions which rarely exist; this is
true not only in audio, but in many (if not all) industries. For the reasons you
cited, as well as some others, there will on occasion be some real audio
“bargains.” That said, I stand by my original premise that high-end audio is
not completely without rhyme or reason, and that much of the confusion
stems from the points I addressed.
In closing, I offer my sincerest thanks for your contributions, and for
supporting DAGOGO.
Sincerely,
Larry
informative, and well organized response. In the interest of space, I will keep
my own comments brief.
Regarding the role of psychological factors, I am in complete agreement
and in fact, am just (with a colleague) completing an article on that very
topic. Keep your dial tuned to DAGOGO!
As for the economic arguments you put forth, I am similarly in agreement.
Economic theory is based on a set of conditions which rarely exist; this is
true not only in audio, but in many (if not all) industries. For the reasons you
cited, as well as some others, there will on occasion be some real audio
“bargains.” That said, I stand by my original premise that high-end audio is
not completely without rhyme or reason, and that much of the confusion
stems from the points I addressed.
In closing, I offer my sincerest thanks for your contributions, and for
supporting DAGOGO.
Sincerely,
Larry
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