Thursday, October 22, 2009

Book Club - God is Back #3

In chapters 5-7 of their book God is Back, the authors explore why and in what ways religion is thriving in America. One argument they make is that religion provides something that is without close substitutes and that is demanded just as much in today's modern world as in the past. Another claim is that Evangelicals, which form one of largest categories of highly engaged religious persons, have ramped up their intellectual credibility. But it is another claim that I want to explore here:
The American religious marketplace is almost a study in perfect competition: there are no real barriers to entry, the domestic market is big enough to support a mind-boggling variety of religious producers, and new religious entrepreneurs are always rising up to challenge incumbents. (P. 174)
I agree with their conclusion, yet their discussion misses a glaring issue. How is it that the religious marketplace is so competitive when there are such strong network effects that work in favor of religious monopoly?

Network effects, also called network externalities, arise when one person's consumption of a good influences another's consumption of that good. For example, my benefits from using Facebook are more enjoyable if all of my friends also use Facebook. A similar effect arises with religion: if all of my friends belong to religion X, then I would enjoy religion X more than if they were not in religion X.

Economists have long recognized that network effects often result in natural monopolies, which arise when a single-supplier is the most efficient industry structure. That religion exhibits network effects but has not led to a natural monopoly in the U.S. may be due to the other characteristics of religion that are not found with other natural monopoly settings, such as low barriers to entry.

What other reasons help explain why religion in the U.S. is quite competitive despite the network effects that work in favor of natural monopoly?

11 comments:

  1. Religion in America is almost a perfect match for Monopolistic Competition because there are no barriers to entry but the products do not have perfect substitutes. Instead there are close substitutes that are differentiated from one another. In perfect competition perfect substitutes exist, such as bottled water; Evian, Arrowhead, etc are all water, hence perfect substitutes. In the case of religion, the products are not perfect substitutes, Catholicism is not the same as Islam or Judaism, instead it is said that they are differentiated products.

    This degree of differentiation between religions allows them to have some form of market power and hence demand more of their followers due to the amount of investment in the form of social capital such as friendships and such. In order for the religion to survive it must differentiate and increase the degree of investment of its followers. However, in monopolistic competition cross-price elasticity is large, meaning that if a religion significantly increases the cost of membership, the quantity demanded for a close substitute will increase by more as in the case of the Moonies. This is demonstrated by the Catholic Church’s move to reduce the cost of switching from being an evangelical to Catholicism. Although they are not perfect substitutes they are close substitutes and if the cost of membership of one increases by a large margin then there always is the alternate of switching.

    As far as Religion being a Natural Monopoly, I think that it does not really apply. In a natural Monopoly barriers to entry exist, most notably in the form of start up costs and to some extent government regulations. In the argument for natural monopolies the economies of scale decreases the costs to consumers, but in religion the barriers are very little to none, as a simple living room could suffice to start a congregation. If government were to provide religion as a public good, then the government might make an argument to allow a natural monopoly to lower its costs, (arena churches vs. small churches) rather than the cost of many smaller religions.

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  2. Ramiro, Nice thoughts. I am not sure how economies of scale fit in here. Religious goods that are produced collectively are often produced within congregations, and having a congregation that is too big makes it more difficult to provide some goods. So it seems that some of the network effects work in favor of natural monopoly while others work against it.

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  3. I think the fierce competition in American religions is not taken over by a monopoly due to network effects because new religions and churches are providing more benefits that out way the cost of leaving behind other friends. Religion, in the American sense, is a very social activitty and the network effect cannot take hold because each is able to provide the same or close the the same amount of social engagment and enjoyment.

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  4. In the book it discusses megachurchs move to expand by broadcasting it's sermons on TV and on the web, however one of the traditional characteristics of religion is the intimate and private relationship with god and ones priest/clergy. This I believe keeps religion competitive, as once the size of the church is too large the ability of a worshiper to interact and have a close relation with the clergy diminishes. It thus makes churches more like gas stations rather than Basketball games, as people will not travel large distances to attend and the market is very localized.

    An interesting thing that I read was on Asset Integration, it stated that a prospect is acceptable if its utility from integrating the prospect with ones current assets exceeds the utility from the assets alone, and that final states matter, not so much the gains and losses. I like this because it makes sense of the network effects that friendships and relationships have on joining a religious group. The religious capital from integrating ones religious activities with their friendships exceeds the religious capital that results from just attending the religious activities.

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  5. These network effects don't cause a monopolistic foundation in religion. My neighbors going to Temple won't cause me to go to Temple, even if I lived in a Jewish area. Religion itself cannot be a monopoly. It is as if the author is disregarding religion as an umbrella for many many more different subsets of various religions. A Jewish man will most likely not think that he is obligated in attending one type of religious denomination just because his friends are Christian or such. It is not fair to say that there are no substitutes for religion because there are many. It is like saying Beer is a monopolistic good, well I don't think it is because of all the different kinds of beers there are. What are the network effects of drinking beer? Sure I am not an alcoholic and will be pressured to drink beer at a party if my friends are drinking (21+) but that is not to say that beer is the only liquid I can drink. Same with religion, there is not just one 'religion' that people have no other choice but to worship.

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  6. Jana, Ramiro, and Alex, Thanks for the comments. I think you all are making a similar point which is that you all think that the networks effects are not strong enough to overcome the variety of religious preferences.

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  7. After reading everyone's post on the Monopolistic propensity of religion and the competitive religion in the US, despite network effects "favoring" a natural monopoly, I would like to juxtapose that perhaps network effects, despite economists always linking network effects to natural monopolies, in the case of the US, work slightly against the formation of a natural monopoly.

    There are two stipulations that Professor McBride notes, first, that network effects often result in natural monopolies. The first is only true if -secondly, a single supplier uses the most efficient industry structure. In terms of Religion, there are tastes and preferences like in any other market and as Ramiro mentioned, all the religions are somewhat substitutes for one another, however they vary drastically and thus can successfully satisfy needs and wants of all types of people.

    What sets apart religion is that religion has an underlying theme ( some sort of divinity) and the interpretation and rituals within each religion is what sets it apart from another. As mentioned in the book, "combination of relentless innovation and high immigration means that the market is as varied as it is competitive," (174). The immigrants, foreigners and natives alike all tend to congregate together, thus the network effects are successful in creating several "main" religions. For each group of people, there tends to be one or two "monopolizing" religions.

    Since religion can be applied to anything from a school to miniature golf, despite network effects, families will bring their children where they believe their children will get the most benefit, regardless of the denomination or religious affiliation.

    As the book mentions, there is a thriving market for religious products and a strong application of business techniques, thus the people managing the churches are not unintelligent people. The people in charge of managing churches are flourishing businessmen and women, so despite network externalities, business techniques are used to keep each religion in "business".

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  8. Courtney, I agree with most of what you said, but let me clarify something. Network effects and natural monopoly are closely connected in that having strong network effects often implies that a single supplier is the most efficient form of production. Sounds like you agree with much of the other commenters that the pluralism demanded by the market is enough to break out of the tendency towards natural monopoly.

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  9. Although strong network effects (social ties) build religious capital and favor religious monopoly, I think religion in the U.S. is competitive because of screening, the theory of religious capital, and innovations.

    Religions try to exclude non-contributors through screening. Some religions are more exclusive and stricter than others. As a result, the network effect would not be enough to lead to a religious monopoly because some people will be excluded or not be willing to be affiliated with a religion.

    Furthermore, our theory of religious capital helps explain how people make their religious choices. A religious monopoly is not likely to form because maintaining religious affiliation will occur more often than religious switching. Because much of religious capital is very specific to a religious group, individuals will value membership in the church to which they are affiliated with more than membership to another church. For this reason, the network effect is not enough for people to switch to a different religion (which would have led to religious monopoly) because they already have religious capital for a specific religion.

    Another reason that explains why religion is competitive is that religious groups are constantly trying to find innovative ways to build religious capital and attract potential recruits. If a successful method is used then other religious groups copy the idea and use it too. As a result, religions are always competing with each other.

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  10. Kendra, I think you're onto something in your exclusion comment, but I think the logic needs to be fleshed out somewhat. If the network effects are sufficiently strong, then is the exclusion necessary?

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  11. Michael Chan (14741172)November 21, 2009 at 11:03 AM

    In the free religious market that the US has, there are a wide variety of substitutes to consider when a person is thinking about joining a particular religious organization. However, at the same time, established groups have such a strong member base that they can be perceived as a natural monopoly.

    Religion requires a member to have strong devotion to their group, therefore resulting in strong network effects. That same person could easily have joined another group if he/she felt more strongly about that other group's values. In most of the highly-regulated countries in Europe, people are not given the option of safely exploring alternatives, and they end up feeling detached from the state church. In this case, the state church does have a monopoly on religion, but low dedication from its members.

    By having a free religious market almost guarantees strong religious commitment, because if a member is dissatisfied with their current group, then they can easily find a better suited substitute and switch over, strengthening the new group's network effect.

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