Market Failure: Sugar-free Tums

Seeing prices go up doesn't mean there's demand for them. If demand is low, then this isn't a market failure, it can make perfect sense that products with low demand don't get large companies producing them and so the prices don't reflect economies of scale.

So let's look at the actual sales. I've sold a bit on Amazon and know some tools that can give you good estimates on how many sales an items has had.

https://www.amazon.com/gp/product/B00REF5PM2/, the generic currently selling for ~$30, is currently ranked 246,691 in Health & Personal Care (archived: https://archive.is/5RRNF) (this number fluctuates, so might be different when you look). According to http://junglescout.com/estimator , such a rank sells less than 5 a month. Other tools I've checked have similar results, under 5 a month.

https://www.amazon.com/dp/B000GCECRO/, the Tum brand, is ranked 33,992 in Health & Personal Care (https://archive.is/cP0k4). Junglescout estimates 122 sales a month. Another source I checked says 91 a month, so 100 a month is probably close. Now, maybe it would sell more if the price was lower? Sales rank when the price was lower seems to have been in the 10-20,000 range, or 200-300 sales a month.

Let's say there are 2000 sales a year, if you offer it at $5 and make $2 profit on each you're making $4,000 a year. That doesn't seem enough for a large company to deal with. (You should also account for sales at other locations, though. But you pointed to Amazon of proof of demand, when it can simply be proof of lack of supply and lackluster demand.)

I don't actually know what thresholds companies tend to have for keeping products alive. If you have better information on that it would be helpful.

"Market failure" in this case means competition has not driven the price down to a socially-optimal level.

If I check out your own source by going to that link, Amazon provides a link to Medique 10133 Alcalak Sugar Free Tablets, 100-Pack, for $10.23. Furthermore, this seller easily found with Google has the same"$30 bottle" available for $4.29.

Diabetics can't have the tablets with sugar

This is false.

I think you may have overcomplicated the tums issue. I think there's no demand for sugar free tums because if you don't eat sugar you are healthier and will probably never experience heartburn.

incentivized to provide products and services that people want.

s/want/are willing to pay for/.

all I can come up with is, People are stupid.

s/stupid/complicated/. but sometimes, yeah, stupid.

Consumers are stupid in that they're inconsistent and uncommunicative about their true willingness to pay. It's not clear before the kickstarter (or even after) how big the market is, or if pushing this product will have adverse effects on sales of related products.

Firms (and governments and other aggregations) are stupid in that individual incentives don't match group incentives. A given exec is punished more for a mediocre product launch than they are rewarded for a successful one. Kickstarters are way higher-risk than any established company would take - a large percentage never ship.

Everybody is stupid in the way our preferences change in the face of new options - maybe it turned out that people buy less Tums overall when both normal and sugar-free are on the shelf. That's a wild guess, but stranger things have happened in consumer product marketing lore.

Note that the amount of sugar in a tums tablet (0.75g - 1.4g) is not a problem, even for most diabetics, even if you need maximum dose (7 tablets) for a day or two. My actual guess is that they just weren't selling enough to justify the expense of the separate production and distribution costs, and reputation concerns kept them from charging much more for the sugar-free variety.

Kickstarter is part of the market so, from what you have described, Thinx is a market success story.

I think the cup holders in cars argument was refuted by this comment to your original post: http://lesswrong.com/lw/h2a/the_cupholder_paradox/8nre

And more generally and perhaps more importantly, this one: http://lesswrong.com/lw/h2a/the_cupholder_paradox/8nsg

How many people consume enough Tums for the calories in them to be a significant issue? I could probably count on my hands the number of Tums I've eaten in my lifetime. Though I'm not the target market I suppose.

Anyway what is the conclusion of this article? Of course the market isn't 100% efficient. Companies are made up of humans which can make mistakes. And pushing a new product to market is very difficult. The best we can do is try to lower the barrier to entry, so smart people who do think of new underwear or sugar free tums, can start those businesses easily. No idea how to do that.

So, Thinx did a kickstarter and has now sold hundreds of thousands of thousands of absorbent underwear for about $30 each.

I fail to see how this is a market failure. At most this was a bad bet by VCs.

No profit to be had?

Maybe. Without knowing the details it's hard to tell. And again, at most this was a bad decision by Tums. The market is selling the sugar-free Tums at the appropriate price, is it not?

This looks like an information problem.

It is useful to remember that the market is an abstraction of aggregated transactions. The basic supply and demand graphs they teach us in early econ rely on two assumptions: rational agents, and perfect information.

I expect the imperfect information problem dominates in cases of new products, because producers have a hard time estimating return, and customers don't even know it exists. VCs are largely about developing a marginal information advantage in this space. Interestingly, all of the VCs I have personally interacted with (sample size: 5) say they pick teams over ideas.

When the people at Thinx were asked why the dominant companies hadn't done it already, what was their answer? If they couldn't answer, that would indicate to the VC the team didn't gather enough information to justify their claims (and thus were unprepared). I would expect the answer is some combination of competing with their own products, and demand is not big enough to be profitable with their scaled manufacturing methods.

On the subject of Tums: what is the socially optimal point for sugar-free Tums? How do we know the socially optimal outcome isn't regular Tums and mouthwash?

Fun post, thanks!

Often in this kind of speak success is because of individual rationality and failure is because of lack of technology and communal stupidity.

Downvoted: If we're going to have a ban on politics, let's have a ban on politics.