Seeing prices go up doesn't mean there's demand for them. If demand is low, then this isn't a market failure, it can make perfect sense that products with low demand don't get large companies producing them and so the prices don't reflect economies of scale.
So let's look at the actual sales. I've sold a bit on Amazon and know some tools that can give you good estimates on how many sales an items has had.
https://www.amazon.com/gp/product/B00REF5PM2/, the generic currently selling for ~$30, is currently ranked 246,691 in Health & Personal Care (archived: https://archive.is/5RRNF) (this number fluctuates, so might be different when you look). According to http://junglescout.com/estimator , such a rank sells less than 5 a month. Other tools I've checked have similar results, under 5 a month.
https://www.amazon.com/dp/B000GCECRO/, the Tum brand, is ranked 33,992 in Health & Personal Care (https://archive.is/cP0k4). Junglescout estimates 122 sales a month. Another source I checked says 91 a month, so 100 a month is probably close. Now, maybe it would sell more if the price was lower? Sales rank when the price was lower seems to have been in the 10-20,000 range, or 200-300 sales a month.
Let's say there are 2000 sales a year, if you offer it at $5 and make $2 profit on each you're making $4,000 a year. That doesn't seem enough for a large company to deal with. (You should also account for sales at other locations, though. But you pointed to Amazon of proof of demand, when it can simply be proof of lack of supply and lackluster demand.)
I don't actually know what thresholds companies tend to have for keeping products alive. If you have better information on that it would be helpful.
It's great to have somebody who actually knows how the numbers at Amazon work elaborate on the subject :)
"Market failure" in this case means competition has not driven the price down to a socially-optimal level.
If I check out your own source by going to that link, Amazon provides a link to Medique 10133 Alcalak Sugar Free Tablets, 100-Pack, for $10.23. Furthermore, this seller easily found with Google has the same"$30 bottle" available for $4.29.
I didn't see that. If you check your source by reading the reviews on the page you linked to, you'll see that Medique 10133 Alcalak Sugar Free Tablets are not, in fact, sugar-free. The label on them says "May contain sucrose."
Okay, so even if Medique doesn't count, I gave three links containing cheap sugar-free antacid tablets, including two brands. I don't see how this is a market failure; the product is clearly available for a reasonable price.
Whether they can or wether they believe they can't are two different categories. The amount of sugar that a tablet contains is likely relatively low.
If enough think they can't, then (1) those people may be missing out on something that would be useful to them and (2) the company may be missing out on money it could have had from them. Even if it turns out that they're wrong.
I think you may have overcomplicated the tums issue. I think there's no demand for sugar free tums because if you don't eat sugar you are healthier and will probably never experience heartburn.
incentivized to provide products and services that people want.
s/want/are willing to pay for/.
all I can come up with is, People are stupid.
s/stupid/complicated/. but sometimes, yeah, stupid.
Consumers are stupid in that they're inconsistent and uncommunicative about their true willingness to pay. It's not clear before the kickstarter (or even after) how big the market is, or if pushing this product will have adverse effects on sales of related products.
Firms (and governments and other aggregations) are stupid in that individual incentives don't match group incentives. A given exec is punished more for a mediocre product launch than they are rewarded for a successful one. Kickstarters are way higher-risk than any established company would take - a large percentage never ship.
Everybody is stupid in the way our preferences change in the face of new options - maybe it turned out that people buy less Tums overall when both normal and sugar-free are on the shelf. That's a wild guess, but stranger things have happened in consumer product marketing lore.
Note that the amount of sugar in a tums tablet (0.75g - 1.4g) is not a problem, even for most diabetics, even if you need maximum dose (7 tablets) for a day or two. My actual guess is that they just weren't selling enough to justify the expense of the separate production and distribution costs, and reputation concerns kept them from charging much more for the sugar-free variety.
Kickstarter is part of the market so, from what you have described, Thinx is a market success story.
My point is that the existing companies failed to provide a product that consumers wanted, and VCs relied on the "fact" that the market is efficient to "prove" that Thinx could not succeed, since it did not bring anything to the table that the big companies couldn't have done themselves..
Thinx disrupts the existing business model.
Tampon producers make money by selling tampons that aren't reuseable. They might lose money if women's standard underwear absorbs all fluids and thus women don't need to buy tampons anymore.
I think the cup holders in cars argument was refuted by this comment to your original post: http://lesswrong.com/lw/h2a/the_cupholder_paradox/8nre
And more generally and perhaps more importantly, this one: http://lesswrong.com/lw/h2a/the_cupholder_paradox/8nsg
I already responded to both those comments, so you already know I don't think those comments are any refutation at all.
Cup-holders are not a complex engineering problem (as the first comment said), and the preferences of the European and Asian markets are irrelevant for cars that are, please recall, built specifically to be sold in the United States. Nobody sells identical cars in Europe and in the United States. They often don't even sell the same models in the US.
The response (of the second comment) boils down to "you are silly if you think you know enough to criticize the work of people who make cup-holders for a living". If you accept that as a valid response, that could be used to shut down all critical activity. It's the same as responding to #BlackLives Matter by saying "You can't criticize the police for shooting people unless you're a policeman."
How many people consume enough Tums for the calories in them to be a significant issue? I could probably count on my hands the number of Tums I've eaten in my lifetime. Though I'm not the target market I suppose.
Anyway what is the conclusion of this article? Of course the market isn't 100% efficient. Companies are made up of humans which can make mistakes. And pushing a new product to market is very difficult. The best we can do is try to lower the barrier to entry, so smart people who do think of new underwear or sugar free tums, can start those businesses easily. No idea how to do that.
So, Thinx did a kickstarter and has now sold hundreds of thousands of thousands of absorbent underwear for about $30 each.
I fail to see how this is a market failure. At most this was a bad bet by VCs.
No profit to be had?
Maybe. Without knowing the details it's hard to tell. And again, at most this was a bad decision by Tums. The market is selling the sugar-free Tums at the appropriate price, is it not?
I fail to see how this is a market failure. At most this was a bad bet by VCs.
You are focusing on the actions of the VCs. That isn't the failure. The failure was by the big players already in the market.
I'm theorizing that the VCs believed that the fact that the big companies did not make any such product proved there was no profitable demand for it, because the market worked. These are not miracle high-tech underwear; they could have been developed years ago. The belief that the market works demands some explanation why they weren't.
Maybe. Without knowing the details it's hard to tell. And again, at most this was a bad decision by Tums. The market is selling the sugar-free Tums at the appropriate price, is it not?
$46 a bottle is "the appropriate price"? The phrase is meaningless if it means "whatever price the market is selling it at", so don't use the phrase as if it had a normative aspect. Of course people sell it at some price. The market failure is that competition has not driven the cost down close to the cost of production. "Market failure" doesn't always mean "a failure to sell a product". In this case it means failure of competition to lower costs.
I'm theorizing that the VCs believed that the fact that the big companies did not make any such product proved there was no profitable demand for it, because the market worked.
That doesn't look like a viable hypothesis because if it were true, such people would not be VCs at all.
Generally speaking, you seem to expect perfection in business agents. Clearly, this is not so in reality. "The market" is not each individual agent, it is the sum of them all. Moreover, the market works by self-correcting which implies that there are a LOT OF MISTAKES being made all the time. The market is successful because it provides negative feedback to those who make mistakes, so on the average it does what it does quite well, but it would be an error to think that each individual decision is optimal.
The market failure is that competition has not driven the cost down close to the cost of production.
Nope. Reality is primary, theories are secondary. In real life the markets drive the price down to the cost of production only occasionally. If your theory says they should, it's the theory that needs to be adjusted.
That doesn't look like a viable hypothesis because if it were true, such people would not be VCs at all.
That statement makes no sense and has no support. What, you're imagining that I said that VCs think all profitable things are already being done? That is not what I said. What I said, which is true, is that VCs don't jump into established markets that already have huge dominant players.
In real life the markets drive the price down to the cost of production only occasionally.
"Close to", not "to". The difference is enormous--it's the difference between free market theory and Marxism.
The theory of the free market is that markets do so; failure to do so is called a failure of the market. It is a theoretical term, so saying "theories are secondary" is nonsense.
Restated:
In real life the markets drive the price down close to the cost of production only occasionally.
Citation needed.
What I said, which is true, is that VCs don't jump into established markets that already have huge dominant players.
Unfortunately for you, what you actually said is easily visible a bit upthread. Let me refresh your memory:
I'm theorizing that the VCs believed that the fact that the big companies did not make any such product proved there was no profitable demand for it, because the market worked.
The cost of production is basically an asymptotic limit in the long term. Whether it's "close to" or "to" is irrelevant, you are not going to get there anyway.
It is a theoretical term, so saying "theories are secondary" is nonsense.
Oh, dear. Let us consider phlogiston. It is a theoretical term, isn't it?
The problem is that theories are useful only insofar they reflect reality. You can make your theory contort in various ways, but unless these contortions match the reality, they shouldn't be entertained.
To repeat myself, if your theory predicts something that does not happen (regardless of whether it uses "theoretical terms" or not), you need a better theory.
In real life the markets drive the price down to the cost of production only occasionally. If your theory says they should, it's the theory that needs to be adjusted.
In real life, you can find the $30 bottle available for $4.29. I don't know if that's exactly the cost of production, but it's low enough that we can stop talking about how this is a market failure because the product can only be sold at high prices.
I posted the link on this page already. Unless you're trying to insinuate that because the link doesn't work, the product was discontinued.
If so, you should have done a search, which would have found that the product was not discontinued and they just reorganized their site so that URLs now include the directory /products/: http://www.planetrx.com/products/sunmark-sugar-free-extra-strength-calcium-antacid-orange-creme-80-chewable-tablets
They are also available at Wal-Mart for $5.65. Here is a different brand for $3.49, and a different brand, different flavor for $6.40 for 100 tablets.
This looks like an information problem.
It is useful to remember that the market is an abstraction of aggregated transactions. The basic supply and demand graphs they teach us in early econ rely on two assumptions: rational agents, and perfect information.
I expect the imperfect information problem dominates in cases of new products, because producers have a hard time estimating return, and customers don't even know it exists. VCs are largely about developing a marginal information advantage in this space. Interestingly, all of the VCs I have personally interacted with (sample size: 5) say they pick teams over ideas.
When the people at Thinx were asked why the dominant companies hadn't done it already, what was their answer? If they couldn't answer, that would indicate to the VC the team didn't gather enough information to justify their claims (and thus were unprepared). I would expect the answer is some combination of competing with their own products, and demand is not big enough to be profitable with their scaled manufacturing methods.
On the subject of Tums: what is the socially optimal point for sugar-free Tums? How do we know the socially optimal outcome isn't regular Tums and mouthwash?
Often in this kind of speak success is because of individual rationality and failure is because of lack of technology and communal stupidity.
In theory, the free market and democracy both work because suppliers are incentivized to provide products and services that people want. Economists consider it a perverse situation when the market does not provide what people want, and look for explanations such as government regulation.
The funny thing is that sometimes the market doesn't work, and I look and look for the reason why, and all I can come up with is, People are stupid.
I've written before about the market's apparent failure to provide cup holders in cars. I saw another example this week in the latest Wired magazine, a piece on page 42 about a start-up called Thinx to make re-usable women's underwear that absorbs menstrual fluid--all of it, so women don't have to slip out of the middle of meetings to change tampons. The piece's angle was that venture capitalists rejected the idea because they were mostly men and so didn't "get it".
I'd guess they "got it". It isn't a complicated idea. The thing is, there are already 3 giant companies battling for that market. The first thing a VC would say when you tell him you're going to make something better than a tampon is, "Why haven't Playtex, Kotex, or Tampax already done that?"
So, Thinx did a kickstarter and has now sold hundreds of thousands of thousands of absorbent underwear for about $30 each.
The failure in this case is not that VCs are sexist, but that Playtex, etc., never developed this product, although there evidently is a demand for it, and there is no evident reason it couldn't have been produced 20 years ago. The belief that the market doesn't fail then almost led to a further failure, the failure to develop the product at the present time, because the belief that the market doesn't fail implied the product could not be profitable.
I just now came across an even clearer case of market failure: Sugar-free Tums.
Sugar-free Tums are Tums calcium antacid tablets made with aspartame instead of sugar. Lots of people want sugar-free antacids. Diabetics can't have the tablets with sugar, people who are health-conscious don't want them, and most acid reflux happens at night, after you've already brushed your teeth, and chomping every night on sugar tablets which get crushed into chalk and impacted between all your teeth until morning is a sure way to get cavities.
Sugar-free antacids haven't been available for about a year and a half. I was always puzzled that only Tums ever produced sugar-free antacids, and Tums stopped making them sometime, I think, in late 2014.
Maybe there's no demand for them? No profit to be had?
Check this out: Bottles of 80 sugar-free Tums were originally $4 a bottle. By April 2015, Amazon vendors were selling their old stock for $17 a bottle. In January 2016, they were $60 a bottle. Now a generic manufacturer has started selling sugar-free calcium tablets for just $30 for a bottle of 80, and Tums sugar-free has dropped to between $41 and $51 dollars a bottle (10 Amazon sellers).
ADDED: It is not a "market success" that sugar-free Tums get sold at some price. "Market failure" in this case means competition has not driven the price down to a socially-optimal level. That's what the term means. It doesn't mean nobody is selling the stuff; it means the allocation of goods and services is inefficient. If you claim the market works, that doesn't mean people sell stuff. It means the actions of selfish agents in a free market result in a socially optimal outcome. That has almost not happened with sugar-free Tums. The explanation of why a high price is unlikely to be socially optimal is beyond the scope of this post.