Thursday, August 25, 2016

"Why Behavioral Economics Is Really Marketing Science"

From Evonomics:

Philip Kotler is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management at Northwestern University. He received his Masters degree at the University of Chicago and his Ph.D. at MIT, both in economics. He did postdoctoral work in mathematics at Harvard University and in behavioural science at the University of Chicago.
Ironically, the discipline of marketing was started by economists!
Economists rarely mention marketing. Occasionally an article appears in the American Economic Review on advertising or promotion or warranties. But to most economists, marketing is a sideshow in the economy. It is filled with too many particulars and virtually no theory. A cynical economist would even hold that marketing activity hurts the efficiency of the economy. Promotions distort the true price and lead consumers to buy on brand name, not real value.

Ironically, the discipline of marketing was started by economists! Marketing textbooks first made their appearance in the 1900-1910 period. Their authors were economists who were institutionally oriented rather than theory-oriented. These economists wanted to examine the role that different distribution organizations – wholesalers, jobbers, agents, retailers – played in the economy. They also wanted to describe and analyze the different promotion tools – advertising, sales discounts, guarantees and warrantees—and determine whether they actually shifted demand.

Somehow classically-trained economists didn’t view marketing as an intrinsic economic activity. They couldn’t fit it into either macroeconomic theory or microeconomic theory. They didn’t see a role for mathematics in the discipline. Marketing was seen as much more of a psychological and sociological discipline than an economic discipline.

An irony today. If you picked up a recent copy of the Journal of the Academy of Marketing Science (JAMS), you can easily mistake it for the American Economic Review in terms of the articles’ mathematical sophistication – they are almost unreadable to the lay reader. Although traditional economists are not doing much mathematical analysis of marketing tools and strategies, marketing scientists are producing quite interesting and complex analyses of marketplace economics.

The greatest irony is that traditional economics is now facing a new competitor, namely behavioral economics. Behavioral economics attacks the crucial assumption that consumers engage in maximizing behavior. Aiming to maximize utility or profits is the key to building economic decision models. Otherwise, economists would have to work with another assumption, that consumers are basically “satisficing,” stopping short of spending time to maximize and being happy enough to achieve enough of what they want. But the mathematics aren’t there for this behavior and hence the claim of economics to be a science is also weakened.

Behavioral economists, instead of assuming that consumers and producers are maximizers, have to study how different marketing actors actually behave. This involves collecting empirical data. This will lead to recognizing many instances of non-rational or even irrational behavior. How do we explain people paying so much more for coffee at Starbucks or ice cream from Haagen Dazs?...