Sketching out the game theory, in markets with repeated interactions there's a great reward to honesty. A local baker wouldn't do well by giving customers food poisoning by slacking on hygiene. Even absent regulation customers would stop visiting for daily lunches after a while.
However in single trade markets, there's a great temptation to be dishonest. A big city realtor selling to overseas buyers has a potentially incredible reward for being dishonest about the value of a property. And absent regulation (and enforcement) it can be very lucrative to be a liar.
> A local baker wouldn't do well by giving customers food poisoning by slacking on hygiene. Even absent regulation customers would stop visiting for daily lunches after a while.
Historically this wasn't really the case, as I understand things.
Obviously if your hygiene standards were so low that every customer got ill immediately every time, that would be easily detected.
But if you just overlook the occasional rat droppings in the flour sack, or put the occasional handful of sawdust to bulk out the sausage filling? So one or two customers get sick per month? And they were sickly people anyway, people in good health can shrug such things off? And every food vendor is similarly bad, so it's always plausible something else got them sick?
It would be pretty hard for that to get traced back to you.
Yeah there're a few embedded assumptions in my example in addition to regular custom.
It needs to be clear to the consumer that the baker was the source of the food poising, the baker needs to get enough revenue from regular customers to offset the temptation of cheating occasional customers by making the kitchen low hygiene, and the cost of making the place hygienic needs to be reasonable.
> Historically this wasn't really the case, as I understand things
A modern counterexample is the street food vendors in New Dehli, where regulatory enforcement is lax and food poising is frequent. I suspect this is because big cities have more occasional customers but other factors probably come into play as well.
Okay, but what happens when you inevitably end up with a conglomerate monopoly or duopoly on the majority of consumer goods in a given sector? That's the natural outcome of an unregulated market, at which point honesty fully goes out the window.
Monopolies with repeated consumer interaction still want people to maintain high levels of consumption in their products.
For example a tobacco monopoly wouldn't make cigarettes that are immediately sickening to their consumers because of bad filters. They'd prefer for consumers to happily buy cigarettes for a decade or two before getting unwell so they can have more sales.
This only works IF you work under the assumption consumers know, or even have the ability to know, if they're being lied to.
Well... they don't. Cars are incredibly complex machines, 99% of consumers do not have the knowledge to properly understand how a car works. They have jobs, they have a family, they have better things to do.
So they rely on the car manufacturer to be honest. You'll never see a consumer pop the hood and count the pistons to make sure their V6 is actually a V6. They just believe the manufacturer.
Your poisoning example only works because it's obvious. Imagine another food analogy. Imagine there is no FDA. How do you know what goes into the food you eat? Could you even find out? If you strived to find out the ingredients and nutritional content of your average grocery haul, how long will it take?
A few tens of thousands hours, perhaps. Right after you work like a dog to buy the equipment to burn the food. And then hire private investigators to stake out the factory. And then fly to Mexico to view what pesticides they use.
Sketching out the game theory, in markets with repeated interactions there's a great reward to honesty. A local baker wouldn't do well by giving customers food poisoning by slacking on hygiene. Even absent regulation customers would stop visiting for daily lunches after a while.
However in single trade markets, there's a great temptation to be dishonest. A big city realtor selling to overseas buyers has a potentially incredible reward for being dishonest about the value of a property. And absent regulation (and enforcement) it can be very lucrative to be a liar.