Originally published in June, 2004.
“High-end audio gear is all over-priced.”
“When it comes to audio equipment, price has no bearing on performance.”
“These speakers are as good as others costing twice as much.”
It seems as if rarely a week goes by without our hearing one or more of these statements in the audio community. Perhaps because they are repeated so often, many people seem to simply accept them as truisms. This tacit acceptance is unusual because: (1) I can think of no other class of products about which such claims are made, and (2) as will be explained below, the statements seemingly violate well established economic principles.
In this article I will explore some of the factors which influence the pricing of audiophile gear, and attempt to explain the apparent contradictions with theory. I think it might be valuable to start with a review of some basic economics. To those with a background in economics I offer my apologies, as what follows will be an over-simplification.
In a free market economy like that in the United States, Great Britain, much of Europe and many other countries, prices are determined by the market. At first blush it may seem like prices are set by the manufacturer and/or dealer, since it is they who put a price tag on the item. However, this is only half the equation since, for a transaction to occur, consumers must agree to the asking price. The price on an item that doesn’t sell is actually irrelevant. If an insufficient number of consumers are willing to pay the asking price, the seller (manufacturer or dealer) must lower the price, or risk going out of business (or at least losing market share for that particular item). Conversely, if the asking price is too low, demand will quickly surpass supply, such that the manufacturer (or manufacturers of related goods) will raise the price.
The implications of all this are surprisingly straight forward. First, it tells us that while temporary mispricings may occur, at equilibrium all products are correctly priced. Put another way, overpriced items are those that don’t sell, while correctly priced items are the ones that do sell. Thus, while a few products, especially those recently introduced in the market, may be over-priced, it is in essence a contradiction in terms for all (or even most) products to be so. Second, since prices are determine by supply and demand, by necessity prices are a reflection of buyers’ perceived value of the gear. (We’ll come back to the issue of perceived value later on.) Last, it teaches us that were there to exist products “as good as those costing twice as much,” these latter products would, by definition, be overpriced. Since overpriced items can exist only transiently, it is highly unlikely for there to be, at any particular time, a plethora of gear as good as those costing substantially more.
To put this last point into context, consider the following scenario: Ford (or GM, if you prefer) releases a new sports sedan with an MSRP of $25,000. A well respected car magazine reviews the car and declares that it is better than similar cars costing twice as much. What would happen? Auto enthusiasts would be all a-buzz about the new car, and folks would soon be lining up at Ford dealerships for test drives. Ford would begin selling the car as fast as they could manufacture them, and BMW salesman would soon be as lonely as the proverbial Maytag salesmen. (Yup, I watched far too much televison as a kid!) For those of us with a passion for automobiles but limited means (in other words, most car enthusiasts), this would be like a dream-come-true. However, I daresay that very few enthusiasts are holding their breaths waiting for it to happen, since it seems pretty unlikely. And yet, in the world of high-end audio, we are lead to believe that a “deal-of-the-century” occurs almost weekly! Moreover, instead of everyone flocking to the audio store carrying this incredible product, the general reaction is typically a yawn, or perhaps a rolling of the eyes – – clearly, quite a different reaction from our imaginary car situation.
So now for the $64,000 question: Why is high-end audio seemingly in conflict with well-established, and experimentally validated, economic principles? The simplest answer might be, “because economic principles don’t apply to high-end audio.” While we audiophiles tend to think of our hobby (and ourselves) in a lofty manner, from the standpoint of economics there is little to distinguish it from virtually any other market area. There are many products to choose from (at a variety of price points), there is considerable competition, and there exists only a modest barrier to entry. In light of this, I can think of no reason whatsoever why well-established economic laws would not apply. We thus need to look a bit more deeply for explanations.
I believe the most significant factor explaining the apparent deviation from economic predictions is that personal tastes in audio vary considerably. All audio systems are flawed in that they are unable to reproduce, with absolute accuracy, that which is on the recorded medium (CD, SACD, DVD-A, vinyl, or tape). Audio components come in many flavors, and audiophiles typically choose systems that are strongest in those parameters that they consider most important. (It is possible that even if a perfect system existed, some audiophiles might still opt for one with pleasant colorations. But that’s a topic for another day.)
Using speakers as an example, audiophiles who favor dynamics often choose high-sensitivity speakers, in particular horns; those who prefer an open, natural midrange often choose dipolar planar speakers (for example, Quads); those who like sparkling trebles might choose speakers with a metal dome or ribbon tweeter; while those who prefer more relaxed highs may choose a soft-dome tweeter. (These are obviously generalities.) Because of this tremendous variation in taste, a component deemed “better than those costing twice as much” by a particular individual, may simply not be to the liking of another.
It should be noted that this situation is in no way unique to audio. Food connoisseurs may declare a particular French restaurant (for example) the best, but this would be of little interest to those who don’t care for French cuisine. Similar analogies could be made for art, especially modern art (ducking for cover…). Additionally, even amongst similar types of gear, system synergy can play a significant role. That is, what sounds terrific in one system may not sound so great in another. Thus, the lack of agreement as to what sounds “best” leads to apparent contradictions with economic principles.
We have thus seen that one source of confusion results from differences in audiophile’s sonic tastes. But still another problem arises from the multiplicity of factors which influence the choice of one component over another – – a concept economists call “utility.”
Let’s suppose that a majority of audiophiles agreed that a newly introduced preamp sounds better than competing models, including those that cost more. (This is about as likely as pigs flying, but play along.) If sonics were all that matters, the new unit would quickly capture a large portion of market share. However, despite how noble audiophiles think their cause, factors other than sonics come into play. In actuality, buyers consider a plethora of properties besides sonics, including appearance, build-quality/reliability; customer support, and brand name recognition. Thus, while newly-introduced product A may indeed sound as good as the more expensive product B, many audiophiles may not consider product A to be as good as product B. Naturally, this will influence how effectively product A can compete in the market place with product B.
Two examples of this phenomenon are becoming increasingly prevalent, namely Chinese-made gear, and products sold exclusively on the internet. (These two categories are not mutually exclusive.) Both result in lower prices to the consumer: the former because of less expensive manufacturing costs, the latter due to the elimination of the middleman. While both seem to be capturing market share, their acceptance is not universal. Thus, while they may sound as good as more expensive products, they are not as good (at least to some individuals) when other factors are considered.
Although it may seem somewhat circular, another factor contributing to the apparent deviations from economic theory is the price. It will come as no surprise to anyone that there are vast differences in people’s willingness to spend money. While this is certainly due in part to how much money one has at one’s disposal, psychological factors are equally important. For example, some people are spenders, while others are savers. Additionally, and of particular relevance to the issue at hand, some folks feel that more expensive audio products are better, while others feel that it is crazy to spend more than x amount of dollars on audio equipment.
Thus, the price of an item will influence its perceived performance, and this will vary from person to person. A related issue is that of diminishing returns. While virtually everyone agrees that it exists, there is no agreement as to the point at which it sets in. In fact, were one to take a survey, I suspect one could find virtually all price points covered.
One of my pet peeves is the delight audiophiles seemingly take in making statements such as “preamp A is 90% as good as preamp B, for 50% of the price.” For the life of me, I cannot grasp what 90% of audio performance sounds like, or how one would determine it. What I find particularly odd is that high-end audio seems to be the only field in which people attempt to quantify a subjective experience. I have never heard anyone say “this restaurant’s prime rib tastes 30% better than that restaurant’s,” or “this Picasso is 40% better than that Matisse,” or “the Rolling Stones are 15% better than The Who,” or (saving the best for last) “Tyra Banks is 35% hotter than Heidi Klum.” This behavior serves to reinforce the notion that some audio gear is quantifiably better than others, when in fact this is largely subjective. In summary, individual attitudes toward money play a role a significant role in how one evaluates audio gear.
The next factor to consider is the subjective nature of audio evaluation.
There is general (though not absolute) agreement within the audiophile community that while measurements are useful, they do not provide a complete picture of how a component will sound. More to the point, irrespective of the value of measurements, I think it is safe to say that evaluations of audio gear are invariably based on listening. Furthermore, for reasons that are beyond the scope of the article, double blind methodologies are rarely used.
Importantly, the subjective evaluations of an audio component are influenced by many factors, both conscious and subconscious. These factors include, among others, price (as mentioned above), appearance, the manufacturer’s reputation, opinions expressed by others, the listening environment, the mood of the listener, and his or her listening experience. The situation is compounded by the notorious “shortness” of audio memory, which makes difficult the comparison of different products, thus adding further variability to a determination of what sounds best. Taken together, these factors render evaluations of audio gear somewhat arbitrary and capricious. Accordingly, it stands to reason that a particular audio product may receive vastly different evaluations, irrespective of listener’s sonic preferences.
I have attempted to show that despite appearances to the contrary, high-end audio gear conforms to the fundamental laws of economics. The apparent discrepancies between price and quality result from a variety of factors, including different opinions as to what sounds good, the sensitivity of our judgement to factors such as price and preconceived notions, and the influence of factors other than sound (for example, reliability and dealer networks) in guiding our purchases.
Importantly, while economics teaches that “better” items costs more, it does not teach that one person’s personal favorite will necessarily cost more than another person’s favorite. That is, market prices are not determined by the preferences of one audiophile, or even a few, but rather, by the aggregate.
It is also worth noting that from an economic standpoint, the only gauge of “better” is price. That is, if the market is willing to pay $1,500 for amp A, but only $1,000 for amp B, the market has decided that amp A is 50% better than amp B. The market doesn’t care what one person thinks; it cares only about what the collective purchasers are willing to pay.
It is my hope that this brief essay offered some insight into the factors that influence the pricing of audio gear, and perhaps will help audiophiles better understand their own impressions and purchases of audio gear. Please let me know if I’ve succeeded. My mailbox is always open!
Feedback from reader Dave Burna:
June 15, 2004
Larry, I wanted to take a moment to respond your article, The Economics of High-End Audio Equipment: Separating Fact from Fiction, dated 3 June 2004. First, I should disclose my position on the issue: I do think that there are bargains (under-priced commodities) that exist in the retail audio market, and that these are not singular “discontinuities” in the macroeconomic supply-&-demand model.
However, I’d like to discuss two set of issues here:
1. I’d wish to add to your list of “non-economic” human elements that might lead to (sometimes misguided yet) false claims of “bargain products.” (this is actually in support of your position).
2. Outlining an economic-based rationale for why the audio marketplace does not come close to a “perfect market,” and therefore can deviate easily from the classic supply-&-demand theory.
The Difficulty In Finding “The Best” Audio Components (or “My Dad Can Beat Up Your Dad”)
It’s hard, hard work to figure out the inherent basic characteristics of a single audio component, let alone how it interacts in the context of a full system/listening environment.
System synergies, as most long-time audiophiles will agree, play such a significant role in the resultant sound, that a speaker or amp that sounds transcendent in one system may sound horrific in an equally “high-end” but different system. Add to that the work required to create a truly scientific listening environment that will isolate effectively the impact that a single change in components have in that system, and it’s not difficult to imagine that this rigorous type of listening test is rarely performed.
Without this level of rigor, it can be quite difficult, if not problematic, to generalize based on a less-than-thorough “comparison” of audio components. All one can truly say is “this component in this system on this occasion bested that component in that system on that occasion.” You’ve already accurately described the problems with the “shortness” of audio memory and the problems that further inferences or “leaps of faith” can cause. Ignoring even arguments about possible reviewer biases, agendas, or conflicts of interest (all of which can happen) you left off several additional psychological factors:
1. Elimination of cognitive dissonance: Because I paid for this component, I generally want to believe that this component is an incredible bargain. To do so, I may subconsciously downplay its weaknesses and emphasize its strengths.
2. A need for self-actualization or self-aggrandizement. A reviewer may (again, subconsciously) seek the approval of their peers in the audio community, wanting to be the first to discover a “hidden gem” and sing its praises, garnering credibility for being on the “leading edge”.
3. Audio hysteria: I’m not sure that this is a technical term in psychology, but it should be! A reviewer’s enthusiasm for a product can lead him to (usually temporarily) praise an audio find exceedingly, especially at the expense of a more rational, nuanced response.
4. Conspicuous consumption: I won’t explain this in detail, assuming readers will understand this argument.
Why The Audio Market Is Not A “Perfect” Market (or “Caveat Emptor”)
OK, Larry, having provided more fuel for your “rational market” theory for audio, I’m now going to take the opposite position and demonstrate why it’s entirely possible, in fact likely, that bargain audio products (aka: “market discontinuities”) exist. This takes a little (but only a little) economic theory to explain, so bear with me.
People often misrepresent or overstate what the “Supply-&-Demand” theory predicts. In a microeconomic sense, the theory predicts that the effects of supply-&-demand will dominate only under a tightly defined set of conditions, sometimes called “perfect” or “rational” market conditions. This includes characteristics of perfect information, well-defined user preferences, consistent producer decisions, negligible market costs of entry/exit, and (usually) easily differentiated products. There are other characteristics, but that’s sufficient for this discussion.
So there’s the key point: in our “messy” world, “perfect” markets don’t really exist.
Now, in a macroeconomic sense, some people will assert that some of these competing market effects will “cancel each other out” – if the market is large enough, the supply-&-demand effects will predominate and the net result will behave according to classic economic theory.
However, because of the imperfections inherent in the high-end audio marketplace, “discontinuities” (bargains as well as overpriced items) can and do exist:
1. The high-end audio market is small. While there are a large number of manufacturers, many produce quite a small number of units during a calendar year. Supply is limited.
2. Many high-end manufacturers are not market savvy. They can be skilled craftsman and technicians working in small environments. Often, they are not motivated by money, but primarily by a lifelong interest in audio and a desire to create…..and thank God for that!! As a result, many do not charge what could be considered the going market rate for their products. That’s not to say they are bad businessmen, rather that issues of maximizing revenue or promoting growth are not as prominent as working to do something they love and maintaining control over their work environment/company.
3. Limited access to goods adversely impacts buyers’ ability to purchase. There are some people who will take a chance on buying components unheard based on a review or word-of-mouth, many will not (wise choice!). It may mean a special trip (plane or car) just to audition some products. I know (I recently did this) but for many/most, this is obsessive behavior and/or not cost-effective for them.
4. Imperfect information abounds. Individual dealers, reviewers, friends, acquaintances – they may all have hidden agendas. Many products have no available reviews at all! Some (but not all) small vendors allow in-home trials, but with shipping costs and time commitments, this is hardly a small undertaking either. Acquiring information by word-of-mouth takes time, dedication, and often the willingness to travel to industry conventions or audio club gatherings…..with no guarantee that this “information” is any better than personal in-home evaluation of components.
5. For manufacturers, the cost of entry/exit may be small, but not necessarily the costs to acquire the knowledge/skill needed to produce state-of-the-art audio gear. And these costs may be small, but for a Mom-&-Pop shop, they are certainly not zero.
6. Dealer networks restrict the access of goods. I’m in no way arguing that dealer networks are bad for the high-end industry. In fact, I would say that they knowledge and expertise provided by the best dealers is essential to the long-term viability of audio. However, while they fill a necessary and valuable function, they do restrict access to goods and services. You can’t simply amble down to Best Buy and purchase a set of Kharma speakers (though I’d love to see what a chain store could do to reduce the incremental costs to produce one more set of these babies for me!).
7. For those familiar with patent law, the use of patents allow manufacturers to restrict access of goods, thus demanding a premium in the marketplace to compensate them for their R&D efforts and up-front investment. Again, like the dealer argument, I would asset that patents are an indispensable part of this marketplace. Still, any restriction of supply will act to skew prices and therefore consumer preferences.
8. Marketing costs are expensive. This is the analogue to #4, in that manufacturers have a difficult time getting information about their products out to the (small number of) audiophiles that are interested in their wares. Even when they can, these costs are hardly small. In fact, this may argue against the idea that the costs of entry into a market are small in the first place: a two-person shop can hardly afford the cost to rent a booth a CES or another high-end audio conference in order to meet dealer contacts, schmooze with the audio press, and expose potential customers to their creations.
I hope that I have made a compelling argument for the “imperfections” inherent in the high-end audio marketplace. Mind you, this only “proves” that discontinuities are possible in the context of conventional microeconomic theory. With enough time to evaluated them all, I would assert that there are at least some products that any individual might prefer that are out-of-line with the existing market pricing structure (either under- or over-priced). Since wide differences in personal tastes and preferences, those “bargain” products may differ from person-to-person. However, it seems plausible that, for a “majority” of the audiophiles, some products may present a value that is out-of-line with its market price.
dave Burna (dB, a unit measure of noise)
Response From Larry Borden
I am both delighted and flattered that my article prompted such a cogent, informative, and well organized response. In the interest of space, I will keep my own comments brief.
Regarding the role of psychological factors, I am in complete agreement and in fact, am just (with a colleague) completing an article on that very topic. Keep your dial tuned to DAGOGO!
As for the economic arguments you put forth, I am similarly in agreement. Economic theory is based on a set of conditions which rarely exist; this is true not only in audio, but in many (if not all) industries. For the reasons you cited, as well as some others, there will on occasion be some real audio “bargains.” That said, I stand by my original premise that high-end audio is not completely without rhyme or reason, and that much of the confusion stems from the points I addressed.
In closing, I offer my sincerest thanks for your contributions, and for supporting DAGOGO.
- (Page 1 of 1)