The Reputation Effect
One of the things about people who seem biased against markets is that they seem to ignore the effect reputations can have on helping to ensure that markets work. If a firm builds up a reputation that is costly then that can act as a signal to consumers that the firm is producing goods of a given level of quality. If the reputation is costly to build and it results in enhancing profits then the firm will also take steps to help protect its reputation. Phil Miller points to such an example,
“Our children are guinea pigs in these products,” said Nancy Cowles of Kids in Danger, a Chicago-based advocacy group. “We need to demand that these Chinese products be improved and made safe.”
So if the government doesn’t protect consumers, who will? The companies who sell the goods will, of course.
While the nation’s three biggest toy retailers — Wal-Mart, Toys ‘R’ Us and Minneapolis-based Target — hire third-party inspectors in China to test for lead paint and choking hazards, there’s no federal law requiring them to do so.
Why do this? A firm like Toys ‘R’ Us has a reputation that it wants to protect as such it will take steps to protect this reputation. Of course, having a reputation isn’t some sort of magic bullet. If the cost-benefit analysis suggests that a firm would be better off taking a hit to its reputation then the firm might opt for that outcome. Still, when a firm is actively seeking to protect its reputation and in a way that will enhance its reputation then calling for additional government intervention might not only be unwarranted, but wasteful as well.