Book Review: Exit, Voice, and Loyalty
Hirschman, Albert O. Exit, Voice, and Loyalty: Responses to Declines in Firms, Organizations, and States. Cambridge, MA; Harvard University Press, 1970.
This was a good book. It was filled with counter-intuitive conclusions, such as a monopoly is more secure when it has minor competitors than when it is pure. Here are some of the concepts that struck me as I was reading:
1. Those with the least price sensitivity will be the first to switch to a competitor. They derive a high, marginal utility surplus, and so are able to bear the costs of switching much more easily.
2. An industry with a combination of public and private options can very often be worse than a pure state of either. In a solely public environment, those who are unhappy with the situation have to remain in it, and will therefore actively seek to change it (the voice). In a solely private situation, leaving a failing enterprise for a substitute in itself shift demand from lesser to greater. In a mixed environment, however, those who are unhappy with the public situation will shift to the private, and their influence will be lost on the public institution.
3. Hirschman explains why two party systems still have ideological divides. Those who are powerless to exit (because the other party is "worse" than the one to which he subscribes), have the strongest incentive to keep the party in line. Thus the extreme of the party creates internal propaganda (and even external) to keep the party from shifting too far towards the center. (See RINOs.)
4. Loyalty is the final concept in this book, and it is one which does not fit the homo economicus model. Theoretically, when quality drops and there is a better value alternative, the exit should be en masse. That, however, would destroy any organization that slipped at all. Loyalty is, therefore, the sacrifice of short term good for long term good. A loyal customer purchases an overpriced or substandard product, so as to purchase that product again when it has reverted to its normal price and quality.
Labels: Book reviews