Exit, Voice, and Loyalty Framework
Basic premise: an organization deteriorates in quality
- (firm, club, State, etc)
Hirschman assumes this is random or unintentional, i.e. not malevolent
Exit, Voice, and Loyalty Framework
- Consumers/members/citizens can respond in 3 ways:
“Exit”: leave the organization (for another)
“Voice”: influence the organization without leaving (i.e. complain, protest, persuade, lobby)
“Loyalty”: remain silent, suffer the deterioration
Exit
Economists focus almost exclusively on exit
Ideal of perfect competition
- If a firm raises price (suffers high costs), simply switch to one of its countless competitors!
Exit is silent!
- Requires no confrontation
- Simply abstain from showing up again!
In markets, buyers and sellers are constantly forming and destroying many relationships
- "If my grocer does not have what I want, I fire them!"
Exit
Exiting provides no informational content for the organization
Demonstrates only the warning sign of a decline in quality
Firms see decline in revenues resulting from fewer sales
Quality-Elasticity of Demand
- Consider a “quality elasticity of demand” concept:
How responsive is your buying behavior to a change in quality (rather than price)?
- Consider two types of customers:
Quality-Elasticity of Demand
“Alert customers” have quality elastic demand, very sensitive to changes in quality
- These customers will leave at the smallest drop in quality
“Inert customers” have quality inelastic demand, not very sensitive to changes in quality
- Takes a much larger fall in quality for these customers to leave
Quality-Elasticity of Demand
Seems optimal for a firm to have a mix of both “alert” and “inert” customers during a decline:
Alert customers exit and provide the warning sign to firms
Inert customers stay and provide a “cushion” for firm to stay afloat while rectifying the problem
Quality-Elasticity of Demand
- Firm with only alert customers would go out of business very quickly
- Any decline in quality would cause all alert customers to exit
- Firm experiences sudden drop in revenues to 0
- Firm “never knew what hit it” and has no chance to rectify the problem
Quality-Elasticity of Demand
- Firm with only inert customers would never fix the problem
- Customers would stay amid decline in quality
- Firm gets no feedback that something is going wrong
Exit and Superfluous Competition
Exit and a very competitive marketplace creates a potential problem:
Hyper quality-conscious buyers always believe they can exit and find a better option
- “Grass is always greener” illusion
If every minor decline in quality drives one to search for a better product, one may never stop searching!
Voice
Political scientists focus almost exclusively on voice
- protests, boycotts, rallies, debate and persuasion, social media, etc
Voice is inherently political and confrontational
Voice
Political scientists seem to assume a functioning democracy requires a maximally active, vocal citizenry
But what about voter apathy, rational ignorance, rational irrationality?
Hirschman: a lot of slack exists, but people will care and get active only when truly threatened
Voice, In Markets
Voice, In Markets
Voice
Like exit, Seems again to be an optimal mix of very vocal vs. quiet members
Vocal members alert the organization to a problem
Quiet members allow organization flexibility and patience to address the problem
Relationship Between Exit and Voice
- Different organizations are likely to have different dominant modes of reaction (exit vs. voice)
Relationship Between Exit and Voice
Voice and exit may be inversely related in a lot of organizations
Voice might be used more where exit is not possible
The stronger voice is, the less likely exit needs to be used
- Demand will become less elastic with respect to quality
- i.e. people put up with more if they feel they are being heard
The weaker voice is (e.g. stifling dissent), more likely exit will be used
Problems Combining Exit and Voice
Albert O. Hirschman
1915-2012
“Suppose at some point, for whatever reason, the public schools deteriorate. Thereupon, increasing numbers of quality-education-conscious parents will send their children to private schools. This "exit" may occasion some impulse toward an improvement of the public schools; but here again this impulse is far less significant than the loss to the public schools of those member-customers who would be most motivated and determined to put up a fight against the deterioration if they did not have the alternative of private schools,” (pp.44-45)
Hirschman, Albert O, 1970, Exit, Voice, and Loyalty
Problems Combining Exit and Voice
Albert O. Hirschman
1915-2012
“When the management of a corporation deteriorates, the first reaction of the best-informed stockholders is to look around for the stock of better-managed companies. In thus orienting themselves toward exit, rather than toward voice, investors are said to follow the Wall Street rule that 'if you do not like the management you should sell your stock." According to a well-known manual this rule 'results in perpetuating bad management and bad policies.' Naturally it is not so much the Wall Street rule that is at fault as the ready availability of alternative investment opportunities in the stock market which makes any resort to voice rather than to exit unthinkable for any but the most committed stockholder,” (p.46)
Hirschman, Albert O, 1970, Exit, Voice, and Loyalty
Monopoly and X-inefficiency
“The best of all monopoly profits is a quiet life” - Sir John Hicks
In economic theory, one of the many benefits of competition is it keeps would-be-monopolists on their toes
“X-inefficiency”: lack of competition causes monopoly to be complacent or lazy (inefficiently raises costs of production)
The "Comfort" of Competition
“The best of all monopoly profits is a quiet life” - Sir John Hicks
Hirschman: the reverse can actually be a problem too!
Users who are most quality-sensitive (elastic) will be the first ones to exit and not buy from a deteriorating firm
These may be the very people who would be the most vocal and demand change!
Firm is left with least quality-sensitive (inelastic) customers who can tolerate mediocrity
The "Comfort" of Competition
“The best of all monopoly profits is a quiet life” - Sir John Hicks
Hirschman: might a lazy monopolist with no exit-option be better than competition?
If exit is ineffective, monopolist retains all of its most quality-conscious users
These users are locked in, voice becomes stronger
- they are precisely the ones who will speak up and demand change
The "Comfort" of Competition
“The best of all monopoly profits is a quiet life” - Sir John Hicks
- Lazy monopolists would welcome competition as a release from effort and effective criticism!
- (reduce voice, most quality-sensitive would exit instead)
The "Comfort" of Competition
“The best of all monopoly profits is a quiet life” - Sir John Hicks
Hirschman: which is worse, a monopolist with everyone locked-in, or a weaker monopolist that is able to survive the departure of its most vocal critics?
A more frequent danger of monopoly is not that it will exploit customers to max profits, but that it is unable to combat declining quality, mediocrity, and incompetence!
The "Comfort" of Competition
Albert O. Hirschman
1915-2012
“In the economic sphere such ‘lazy’ monopolies which ‘welcome competition’ as a release from effort and criticism are frequently encountered when mobility differs strongly from one group of local customers to another. If, as is likely, the mobile customers are those who are most sensitive to quality, their exit, caused by the poor performance of the local monopolist, permits him to persist in his comfortable mediocrity,” (p.59).
The "Comfort" of Competition
Albert O. Hirschman
1915-2012
“[This leads to ] an oppression of the weak by the incompetent and an exploitation of the poor by the lazy,” (p.59)
Hirschman, Albert O, 1970, Exit, Voice, and Loyalty
Examples
Examples
Albert O. Hirschman
1915-2012
“The United States Post Office can serve as another example of the lazy monopolist who thrives on the limited exit possibilities existing for most of its fastidious and well-to-do customers. The availability of fast and reliable communications via telegraph and telephone makes the shortcomings of the Post Office to tyrannize the better over those of its customers who find exit to other communication modes impractical or too expensive,” (pp.59-60).
Hirschman, Albert O, 1970, Exit, Voice, and Loyalty
Other Differences from Profit-Maximizing Monopoly
Albert O. Hirschman
1915-2012
“Those who hold power in the lazy monopoly may actually have an interest in creating some limited opportunities for exit on the part of those whose voice might be uncomfortable,” (p.60).
“Here is a good illustration of the contrast between the profit-maximizing and the lazy monopolist: the former would engage, if he could, in discriminatory pricing so as to extract maximum revenue from its most avid customers, while the lazy monopolist would much rather price these customers out of the market entirely so as to be able to give up the strenuous and tiresome quest for excellence. For the most avid customers are not only willing to pay the highest prices, but are also likely to be the most demanding and querulous, in case of any lowering standards,” (p.60)
Exit, Voice, Loyalty, and the State
Clark, William R, Matt Golder, and Sona N Golder, 2012, "Power and Politics: Insights from an Exit, Voice, and Loyalty Game," Working Paper
A Game Theoretic Model
A game between State and Citizen
State begins the game by deciding to Predate 1 unit from Citizen
Citizen must respond with with either:
Model parameterizations from Clark et. al 2012
A Game Theoretic Model
Exit
- State: 1 (keeps)
- Citizen: E (exit payoff)
Loyalty
- State: 1+L
- : benefit of citizen's loyalty)
- Citizen: 0
Voice
- State: will have to respond
- Citizen: might get 1 back
A Game Theoretic Model
If Citizen exercised Voice, State must then respond (S.2):
Respond:
- State: L
- gives back 1, but gets benefit of loyalty
- Citizen: 1-c
- gets 1 back, pays cost of exercising voice
Ignore:
- We'll give the Citizen a response...
A Game Theoretic Model
If Citizen exercised Voice and State Ignores, Citizen must then respond (C.2):
Exit:
- State: 1
- Citizen: E-c
- gets exit payoff , but also paid voice cost
Loyalty:
- State: 1+L
- Citizen: -c
In principle, could add another round of Voice and Ignore or Respond but gets repetitive...
A Game Theoretic Model: Scenario 1
Scenario 1: Citizen has no credible exit threat
Subgame perfect Nash equilibrium:
(Predate, Ignore), (Loyalty, Loyalty) †
- Outcome: State predates and citizen remains loyal:
- State: 1+L
- Citizen: 0
† Strategies for State chosen at (S.1, S.2) and Citizen at (C.1, C.2)
A Game Theoretic Model: Scenario 2
Scenario 2: Citizen has a credible exit threat, but State doesn't depend on citizens
Subgame perfect Nash equilibrium:
(Predate, Ignore), (Exit, Exit)
- Outcome: State predates and citizen exits:
- State: 1
- Citizen: E
A Game Theoretic Model: Scenario 3
Scenario 3: State depends on citizens, but exit is better than cost of voice to citizen
Subgame perfect Nash equilibrium:
(Predate, Respond), (Exit, Exit)
- Outcome: State predates and citizen exits:
- State: 1
- Citizen: E
A Game Theoretic Model: Scenario 4
Scenario 4: State depends on citizens, voice is cheap to citizen
Subgame perfect Nash equilibrium:
(Predate, Respond), (Voice, Exit)
- Outcome: State predates, citizen voices, State responds:
- State: L
- Citizen: 1-c
A Game Theoretic Model: Deterring Predation
Full Model: give State the choice to Respect instead of Predate
What would it require for State to Respect?
- Suppose it costs State to respond to voice
A Game Theoretic Model: Deterring Predation
- Subgame perfect Nash equilibrium:
(Respect, Respond), (Voice, Exit, Loyalty) †
- Outcome: State respects, citizen is loyal:
- State: L
- Citizen: 1
† Strategies for State chosen at (S.1, S.2) and Citizen at (C.1, C.2, C.3)
A Game Theoretic Model: Deterring Predation