Consumer sovereignty: What is it, and does it exist?

Consumer sovereignty is the idea that in economic transactions the "Customer is King", ie. that the producer is forced to mould everything around the customer and satisfy his needs as closely as possible in order to survive. The consumer hence gets exactly what he wants, and the producer is happy because consumers return to him due to his excellent service.

Whether or not that sounds much like what you experience when you play your role as a consumer, I shall let you decide.

In socialism (in which the means of production are administered entirely by the state), there is no concept of consumer sovereignty. While it is possible that the benevolent socialist state may research the exact needs of its citizens and strive to serve them as closely as possible, history shows this is rarely the theory, much less the reality. In the converse, a total free market (in which the government does not regulate the economic sphere at all), we find a concentration of power in the hands of producers. As is to be demonstrated, this power leads to abuse of the consumers and dissolution of the idea of consumer sovereignty.

In the so-called "mixed" eceonomy in which we to a greater or lesser extent live, there are laws which exist to shift power from the producer to the consumer, hence reinforcing the sovereignty of the latter. Anti-monopoly laws are the most obvious manifestation of this. Where monopolies (or oligopolies) exist, we find that the producers in these markets are able to become less efficient, meet the demands of customers less exactly, and even go so far as form price-fixing cartels. Clearly none of this benefits the public, for all of Ayn Rand's moral defence of it.

An even more wanton abuse is likely in the existence of markets with few producers. The power of producers makes it possible for their research and development departments to be the source of demand, not the actual needs of consumers. For example, who among us demanded polyunsaturated margarine before it appeared in supermarket chiller cabinets? The producer is in the position of being able to put things before us that may or may not actually benefit us, telling us they will, and reaping profits.

The thing which moves power to consumers is competition. The further to the left on the scale of competition1 we go, the more consumer sovereignty tends to be adhered to. When a company has many rivals, it is forced first to minimize its costs by becoming efficient, but then to increase quality to make consumers favour it over its competitors. The consumer is much less open to abuse in this situation, and will tend to have his needs met more exactly.

Consumer sovereignty is best respected, then, in an economy which, while not too strictly controlled (so that power is in the hands of the state and not the consumers), nor allowed to be too free (so that power is in the hands of the producers and not the consumers). The profit-signalling mechanism is still the best way for producers to know they are getting things right, but they must not be allowed to make super-normal profit by abusing their customers.

1. The scale of competition ranks markets according to how competitive they are, going from perfect competition to monopoly. It ranks them on factors such as number of companies in the market, the size of these companies, the ability of the companies to affect the price of the product, and whether the product is differentiated from company to company.