Khaled Hal Saad

An “experience good” is a product or service whose true quality and fair price are only apparent until after you buy it. Products like a tri-tip sandwich at Farmer’s Market or cell phone service are both experience goods. Even if you’ve done a load of research, you’ll never know how good the reception will be on a new phone or provider until you’ve bought and used it.

Today’s case will focus on the actions of marketers and how they feed their experience goods to our detriment. We Americans are the world’s biggest consumers, and us 18 to 24-year-olds are most coveted. Yet, we’re not the most sophisticated or experienced ones. Using a credit card for convenience and rewards is smart, paying interest on that debt at 25 percent is not. Next week I’ll suggest how students should consume experience goods, for now we’ll focus on the companies and taxi drivers who sell us those goods.

When stepping out of customs in the Moscow airport, one is mobbed by taxi drivers who offer a ride to the center of town for $50. Actually, mobbed is an understatement; I was stalked for 15 minutes until I met up with my contact. It turns out to get to the center of town using a bus costs a paltry $2. Yet no one at the airport bothers to you about the bus. The taxi drivers’ aggressive advertising is socially wasteful, since it is steering you away from a cheaper and more efficient alternative. Tourist traps like these are very common, but it turns out many marketers closer to home exhibit this same behavior.

Like the taxi driver, marketers sometimes compensate for the inferiority of their products by advertising heavily. Witness the dominance of ads for McDonald’s over those for broccoli. There are many broccoli producers that don’t bother to advertise as much, perhaps expecting well-informed consumers to approach them. The result is that we are bombarded by ads that try to reach consumers who might be better off without the advertising.

Sometimes the problem isn’t too much advertising, it’s too little. Some companies purposely omit information that helps us in the decision to consume a product. A sobering example is the tobacco industry that used to omit the fact their products are addictive and dangerous, not merely sexy, to consume. A more modern example is Wal-Mart, a company that proudly proclaims, accurately, that they are the “leading employer” of Hispanics and African-Americans. Jesse Jackson pointed out in response to this boast that slave plantations were also once the “leading employers” of African-Americans. Tobacco companies and Wal-Mart both omit or distort facts about their products that in turn distort your decision to purchase.

Of course, selecting, interpreting, and sharing only certain facts isn’t unique to advertising. Politicians are naturals at marketing their agendas by using a select set of facts and assumptions. Lawyers and economists can also convince us to believe two contrasting ideas by sometimes using the same facts and statistics.

It takes a clear-headed mind and some search costs to see through the fog of marketing of all forms. Stay with me one more week as I suggest how.

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