By ADAM DAVIDSON
Recently my wife and I went on an epic hunt to uncover everything possible about baby formula. We scoured more Web sites than I’d like to admit to and learned about all the options: powder, liquid, milk-based, soy, D.H.A.- and A.R.A.-fortified. (I’m still not clear on what A.R.A. is, exactly.) Then we learned that none of it actually matters. Since the Infant Formula Act of 1980, the F.D.A. makes sure that all formula is pretty much the same, no matter which one you buy.
Despite knowing this, I still insist on paying twice as much for Enfamil, which its maker claims is “scientifically designed.” (Aren’t they all?) I splurge because Mead Johnson is a 107-year-old company that has been promoting a single baby-formula brand for more than 50 years. I figure that it’s less likely to squander its name by skirting the rules or engaging in shoddy manufacturing than a company with less to lose. This peace of mind costs me about $7 per day.
Economists have a name for these cues that companies employ to convey their hidden strength: signaling. We see various forms of it everywhere, from the wristwatches of wealthy bankers to the nuclear arsenals of developing countries. Technology companies keep massive financial reserves to show potential competitors that they won’t back down in a fight. Why do people pay so much, in dollars and sweat, to go to a top-tier college? It might offer a superior education, but it definitely shows future employers that they are smart and willing to work hard. (Though it can also suggest that the student comes from a wealthy background. That, for some, is an even more powerful signal.) Sixty years ago, Edmund Hillary and Tenzing Norgay signaled their perseverance by climbing Mount Everest. Now, for upward of $60,000, relative amateurs can achieve the same thing, albeit with the help of state-of-the-art breathing equipment, climbing gear and a team of Sherpas.
Signaling is also often associated with consumer goods. In many ways, it was useful. How does anyone really know that they’ve picked the right baby formula, soda or car? They don’t, and manufacturers know that. That’s why our economy is filled with highly promoted branding campaigns that, however superficial or annoying, can be enormously helpful guides. In 1982, Coca-Cola demonstrated its market power with a star-studded commercial, featuring Bob Hope and Joe Namath, to introduce Diet Coke. Pepsi recently paid a fortune to hire Nicki Minaj as a spokeswoman. Even for consumers who don’t listen to her music or trust her expertise in the carbonated-beverage sector, the mere act of paying for a pop-star endorser sends a subconscious signal that their product is so successful that, well, they can afford Nicki Minaj. It also signals that the company is too heavily invested to turn out a shoddy product. For many, that’s a reason to choose the soda over the generic stuff.
In a way, the Minaj endorsement surprised me. I had assumed that kind of signaling was destined to be a relic of the pre-Internet age — a time when people couldn’t pull up an objective review on their phones while perusing the soda aisle. According to some economists, however, signaling seems to be increasing throughout our economy. Why are we listening to signals when we can do the research ourselves?
The Internet is, among other things, a massive, chaotic marketplace. Too much information, it turns out, is a lot like no information. “If we researched every single purchase, we wouldn’t have time to make any purchases,” says Anna Kirmani, a marketing professor at the University of Maryland. “I have better things to do with my time.”
Signaling can be a shorthand to identify whom you want to buy from. That’s why we may need it now more than ever. Hemant Bhargava, a business professor at the University of California, Davis, told me that he has been thinking about signaling as he decorates his new home. Though he is looking for good deals, he still worries about vendors outside the major brands. Bhargava recently found one chandelier for $750 on Amazon and $650 on a cheaper site. He went with Amazon. “The lower price, it bothered me,” he said, indicating that he saw the discount as a signal that the company was willing to cut every cost imaginable. He ended up paying an extra $100 for some peace of mind.
Is it better to live in an economy where there’s so much chaos that we spend more to ensure our chandelier shows up unbroken or our baby formula isn’t tainted? “Oh, definitely,” Bhargava says. Sure, there’s certainly a lot of wasteful signaling, but Bhargava says that the crucial difference is that now we can each choose, purchase by purchase, moment by moment, whether we want to research a product or just trust some signal instead. After all, the chances are good that somebody else has already done the hard work of researching any product we’re interested in. “If there is a critical-enough mass of informed buyers, that is sufficient” to pressure manufacturers to make better-quality goods, Bhargava says. “That group of informed consumers creates a force. It doesn’t have to be everybody.”
According to classical theories, signaling thrives when consumers don’t have access to reliable information. But signaling actually works far better in an information-rich society than in a poor one. Port-au-Prince, Haiti, for example, is filled with numerous beautiful commuter buses that are painted with all sorts of bright, bold images — of naked women, Catholic saints, voodoo symbols, soccer players, musicians. Maintaining these paint jobs is enormously expensive. The buses need to be taken out of commission for at least a couple of weeks, and the painters demand hundreds of dollars, often more than a year’s wages in Haiti.
Yet bus owners feel the need to get a fresh paint job once or twice each year because few people will pay to ride an unpainted bus. The extravagant decorations suggest that an owner cares about his business — that he spends money maintaining his engines, tires and brakes (no small matter in a country with steep mountains and lousy roads). My hunch, however, is that many owners, short of cash, are likely to invest in a visible new paint job over invisible brake maintenance. With no external authority — government inspectors or consumer-watchdogs or online consumer forums — there’s no way to know if the signal is accurate.
The information-rich world is obviously better for consumers, but Bhargava says that it still offers considerable advantages for producers too, as demonstrated by my baby formula and his chandelier. While online competition generally drives down commodity prices, consumers have proved willing to pay more for their favorite specialty products. And there are many of them. Back when brand signaling tended to travel through broad channels like TV ads or the sides of buses, companies narrowed their offerings. They tended toward a few bland, least-common-denominator goods, like watery beer and one kind of minty toothpaste. The Internet and advances in manufacturing now allow for a much wider range of products aimed at narrower consumer interests. I might pay more for a craft beer and a bar of deluxe chocolate, but I’ll be happier than when I was saving money buying Bud Light and a waxy Hershey’s bar.
Signals, of course, can be misleading, and excessive Internet research often leads to confusion. The psychologist Barry Schwartz says he believes that many of us suffer from the paradox of choice — the more options we have, the less happy we might be. I’m not convinced it’s that simple. I feel more shopping anxiety now than I did when I just bought whatever my brand loyalty told me. But I also know I don’t have to worry about so many other purchases that I used to fret about. I just discovered that Amazon users seem to really hate Crest Pro-Health Clean Mint toothpaste. I’ll buy the better-rated one, but I do hope those ratings force Crest to reformulate or kill the one nobody likes. And I bet they will.
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