The Concept of Consumer Market Efficiency: Toward Evaluating the Social Efficiency of Consumer Marketing

John F. Gaski, University of Notre Dame
ABSTRACT - This paper develops a concept of market efficiency from the consumer's perspective, that is, value received from consumption of a product category relative to the cost of consumption. After conceptual specification, an initial suggestion for operationalizing the construct is offered. The purpose of these efforts is to develop an ability to appraise various product markets in terms of how well they are performing the basic task of delivering satisfaction to consumers efficiently.
[ to cite ]:
John F. Gaski (1986) ,"The Concept of Consumer Market Efficiency: Toward Evaluating the Social Efficiency of Consumer Marketing", in NA - Advances in Consumer Research Volume 13, eds. Richard J. Lutz, Provo, UT : Association for Consumer Research, Pages: 88-93.

Advances in Consumer Research Volume 13, 1986      Pages 88-93


John F. Gaski, University of Notre Dame


This paper develops a concept of market efficiency from the consumer's perspective, that is, value received from consumption of a product category relative to the cost of consumption. After conceptual specification, an initial suggestion for operationalizing the construct is offered. The purpose of these efforts is to develop an ability to appraise various product markets in terms of how well they are performing the basic task of delivering satisfaction to consumers efficiently.


Considering the recognized importance of such issues as consumerism, the social responsibility of business, and ethical standards in marketing, development of an objective method for evaluating the net contribution of consumer marketing to human welfare would be useful and significant. There have been occasional exhortations in the marketing literature for analysis of the "social efficiency of marketing," as this concept may be designated, as well as suggestions for possible measures. Some representative illustrations of these views follow.

Expression of the "net" social contribution of marketing implies a comparison of marketing's costs with its benefits, in other words, an input/output-type measure of efficiency. Some initial appraisals have been concerned with the efficient intra-firm performance of marketing functions, with societal benefits implicit upon aggregation (Barger 1955; Beckman 1957; Bucklin 1970; Stewart and Dewhurst 1938), for example, estimates of distribution efficiency. Hollander (1961) observed that labor hours and monetary costs are the "only two measures by which we can evaluate the total inputs into the total marketing system." Regarding outputs, sales or consumer "votes in the market place" were offered as the appropriate index. This is intuitively appealing since purchase prices should approximately reflect value, or at least anticipated value, in perhaps all cases except attainment of extreme bargains ant, possibly, monopoly. (Even in monopoly situations with artificially high prices, consumers have the option of declining purchase. Monopolies are only permitted to exist where society has decided their benefits surpass these additional costs.) However, Hollander also has identified a potential problem in that profits, or the difference between sales and costs, are generally such a small percentage of the total that "input and output will always be roughly equal." This complicates the task of determining efficiency. The same criticism can be applied to suggestions of value-added as a measure of marketing output (Beckman 1957; Hollander 1961).

Profit, itself, is an attractive surrogate for marketing' net social contribution. This assertion is supported by the free-enterprise axiom that the producers which most efficiently provide the goods and services that people desire the most will be the most successful. In the words of Czepiel and Rosenberg, "the cash register and profit-and-loss statement generate powerful feedback for . . . society about the satisfaction resulting from a given product/service" (1976). It is conceivable, of course, that higher profits will not always translate into greater social welfare, e.g., price increases without comparable increases in value. So profit, although attractive, appears an imperfect indicant of marketing efficiency.

A parallel argument has been presented by Balderston (1964), who suggests that "one criterion of the efficiency of marketing organization may be the maximization of total net revenues of all market participants other than final buyers," to which Preston and Collins (1966) protest that this "specifically neglects the welfare of consumer participants." Total revenue appears to be a better approximation of marketing input than output.

The Market Perspective

Perhaps a more analytically promising way to assess the concept of consumer marketing efficiency would be by isolating the performance of individual markets. Since markets can be considered components of the marketing system, and the function of marketing is to actualize potential exchanges in markets for the purpose of satisfying human needs and wants (Kotler 1976, p. 5), this approach would seem to have merit. However, prevailing descriptions of "market efficiency" tend to restrict the scope of the issue to a level far beneath a full consideration of social consequences. Stigler (1961) has adopted the position that since "the basic function a market serves is to bring buyers and sellers together," existence, continuity, and stability are necessary conditions for market efficiency. Re adds: "A market is efficient when cost changes are readily reflected in price changes, demand changes reflected in volume changes, and random instability not associated with fundamental readjustments is at a minimum." Preston and Collins define market efficiency as "the facility and effectiveness with which the potential exchanges are accomplished," while acknowledging their neglect of "the specific character or quality of goods or services subject to exchange" (1966). Finally, the economic concept of pareto-optimality, or the condition by which no market participant can gain without a loss to another (Henderson and Quandt 1971, pp. 255-8), while conceptually impeccable, does not consider the welfare gains of innovation and variety associated with market imperfections (Lundstrom and Lamont 1976).

From the preceding discussion it can be posited that there is an implicit, qualitative aspect to marketing output that is far more difficult to specify than the inputs to the marketing system which may be subject to monetary measurement. It is advocated here that the proper specification of this elusive construct is utility, in the strict economic usage, or the term's marketing-language translation: satisfaction. Justification for applying this interpretation to the question of social efficiency comes from marketing's ultimate purpose of consumer satisfaction (Czepiel and Rosenberg 1976; Kotler 1976). Obviously, a sizable measurement problem has just been created.

Some Measurement Background

There have been relatively few efforts to empirically measure customer or consumer satisfaction in this general context. Among representative examples, Cardozo (1965), in attempting to isolate the influence of effort and expectation on customer satisfaction, operationalized the construct as a product rating on a scale of zero to 100, representing "very inferior" to "vastly superior" in comparison to other products. Swan and Combs (1976), designating consumer satisfaction as a function of the expectation-product performance relationship, merely asked respondents to state instances of satisfaction and dissatisfaction, and "what happened to make you satisfied (dissatisfied) with this item?"

Some have found it convenient to focus entirely on consumer dissatisfaction, defined by Anderson as "the degree of disparity between expectations and perceived product performance" (1973). In his study of the effects of disconfirmed expectancy, Anderson developed a quasimonetary measure of satisfaction by having subjects estimate the cost (worth) of ballpoint pens they had been given. Lundstrom and Lamont, on the other hand, took a more global view in their 82-item, six-point Likert-type "Consumer Discontent Scale," designed to measure the general state of consumer attitudes toward business (1976). Sample statements from the scale include "Business profits are too high"; "All business really wants to do is to make the most money it can"; and "The consumer is usually the least important consideration to most companies." Of course, there is an entire literature on the subject of consumer satisfaction/dissatisfaction, but not on the subject precisely as interpreted here.

Some preliminary ponderings on how to measure marketing's contribution to the "quality of life" are found in Reynolds and Barksdale (1978): Andreasen (1978) discusses shortcomings of indices such as sales, repeat purchasing, and expressions of consumer satisfaction as measures of health care quality, and recommends actual reports of problems as a preferable indicator. Bechtel (1978) explicates a life-quality satisfaction scale ("never" to "always satisfied") with respect to a number of product categories and marketing functions.

While the measurement attempts described above are intriguing and productive, there does appear to be considerable potential for improvement in quantifying the output side of consumer marketing efficiency. Product quality evaluations do not necessarily capture satisfaction experienced, and overall sentiment toward business, or even marketing, may be subject to invidious social biases. Surely a concept such as satisfaction, or utility, can be assigned a more precise valuation. This premise provides the basis for the following discussion.


The case for a measure of marketing's social efficiency rests on these tenets, which have been stated or implied:

(l) Measurement of marketing efficiency constitutes an input-output. or cost-benefit, analysis.

(2) Marketing input is comparatively quantifiable. Total sales or revenues are acceptable measures for this (from the consumer perspective), reflecting all costs of the marketing system including return to the entrepreneur, i.e., profit.

(3) Since the objective of marketing is customer satisfaction, this specifies the system's output. Quantification of this dimension, when compared with the input, would yield an objective efficiency ratio highly consistent with the concept of social benefits in relation to costs. (The advantage of such an input-output comparison over traditional satisfaction measures, therefore, is that it considers consumer satisfaction in relation to an objective standard, rather than in isolation.)

(4) Given the ambitiousness of such a measurement project, the most realistic procedure may be to examine the efficiency of the components of marketing, or individual markets.

The present discussion, therefore, will be limited to the efficiency of markets, specifically consumer product markets. At this time, to establish a reference analog, it may be instructive to consider a measure of market efficiency already developed and widely accepted in another context.

In the field of finance, the concept of market efficiency is applied to capital markets and manifested in the Efficient Market Hypothesis (E&I). According to the EMH, a capital market is efficient only if prices fully reflect available information; that is, there exists no trading system based on available information by which a return could be earned in excess of the equilibrium expected return of the market portfolio or an individual security (Fama and Miller 1972). Furthermore, it has been suggested, tested, and supported that, with few exceptions, the actual capital markets in existence are efficient (Fama 1970).

This framework can be adapted to consumer marketing. While capital market efficiency is expressed as a comparison of investment returns to an absolute standard, consumer market efficiency would involve a relative comparison of consumption spending returns in various markets. Consumption spending return can be defined as the benefit/ cost ratio in each particular market and will necessarily be relative because of the apparent absence of a limiting value to satisfaction, which would serve as the numerator. The measure of return in consumer markets, therefore, appears:



or       Output


or        Satisfaction (Utility)         

           Expenditure (Total Sales)

or        "Return"    


Taking the view of marketing's social purpose, consumer satisfaction/expenditure seems a valid expression of the concept, and is analogous to the financial measure of discounted net present value of cash flows/initial investment (Van Horne 1971, p. 60), i.e., the "profitability index." With the marketing measure, satisfaction and expenditure flows would simply be expected to occur in the same period. [Products of long purchase-cycle, such as consumer durables, would pose only a slight conceptual problem here. Either a "discounted net present value of future satisfaction" would have to be determined to define the numerator, or the "period" would have to conform to the purchase- or product life-cycle. The denominator would then include all life-cycle costs, a la Hutton and Wilkie (1980), rather than just initial expenditure.] More precisely,

Benefits - Costs     or     Satisfaction - Expenditure

       Costs                                Expenditure

would be the proper measure of return in consumer markets, as can be illustrated by the following discussion of the consumer exchange process.

Typically, a consumer purchase involves an amount of money exchanged for a product (good or service). For the exchange to occur, the consumer must value the product more than the money. That is, unless a greater value is attached to the object of purchase than is represented by its price, or the amount of money that must be given up for it, there is no incentive for the consumer to make the exchange. Symbolically,

V(P) > V($)

with V(P) = value of the product

and V($) = value of the money.

For the purpose of defining a market efficiency measure, the amount of difference between V(P) and V($) is of importance. The algebraic difference V(P) - V($) represents value, or benefit, provided by the product in excess of its cost. (This is a micro-representation of the concept known in economics as "consumer surplus.") Identification of what this value is for any given exchange may be accomplished with the assistance of the consumer involved. Theoretically, a consumer would be willing to pay an amount approaching V(P) - V($) for the privilege of obtaining V(P) worth of value for only V($). For example, if a consumer buys a product for $10, he or she must value this product more than s/he values having the $10. Say the subjective valuation of the object of purchase is $15. Therefore, s/he should be willing to pay an amount very near $5 to be able to exchange $10 for $15 in value. Provided consumers can make accurate estimates of such maximum acceptable transaction "fees," the ratio

V(P) - V($)


would represent excess benefit, or excess satisfaction, in relation to expenditure (analogous to return on investment), and V(P)/V($) would reflect total satisfaction per unit of expenditure, or an efficiency ratio of output/input. Aggregated across all transactions within a product class, an overall measure of market efficiency for that product would be derived. The relative efficiencies of different product markets could then be compared. All that remains now is to generate an accurate monetary measure of consumer satisfaction in specific product markets to be compared with expenditure. This, of course, will be no small task.


As indicated, the fundamental purpose of this discussion is to develop a procedure for comparing the social efficiency of various product markets on the basis of the inputs and outputs described in the previous section. This will involve estimating consumer satisfaction and expenditure associated with different products. As this is done, a means will be provided for the testing of the following hypothesis.

H: There are significant differences between different consumer product markets in terms of social efficiency provided (expressed as the monetized value of satisfaction relative to expenditure).

Confirmation of this hypothesis would actually be trivial. However, the rank ordering of different product markets on the basis of efficiency ratings could be highly revealing. Failure to confirm the hypothesis might be the most meaningful finding of all, suggestive of a kind of unanticipated equilibrium level of satisfaction per dollar across all product categories.

The principal problem to overcome in any such research effort remains the development of a means of establishing quantified or monetized values corresponding to consumer satisfaction. One imperfect suggestion for accomplishing this is summarized in the remainder of this section.

First, a representative sample of consumers must be selected. Perhaps the ideal approach would be to interest one of the national polling organizations in the project and utilize their resources to obtain an adequate sampling of the consumer population. Given the importance and relevance of the issue, this hope may not be too unrealistic. Failing that, another possibility would be to purchase commercial market research. The samples employed by the MRCA consumer panel, National Family Opinion, and Market Facts, Inc. would be highly suited to the purpose. In the event that such assistance cannot be obtained, then a less ambitious sampling plan could be designed, such as telephone sampling or use of commercial mailing lists.

Regardless of which sampling procedure were to be used, the intention is to assign a value to the amount of satisfaction derived from a given market for a specified period. This value might be estimated by consumer subjects' responses to a hypothetical situation statement similar to the one that follows, presented to them in personal interview context:

I want you to think about an imaginary situation. Suppose I am the all-powerful ruler of the United States, or some supreme world authority, and that I have the power to do anything I want. Suppose I am a very capricious ruler and that, for no reason at all, I decide to prevent you from buying (product) for an entire month. Not only do I prevent you from buying _____, but I also prevent you from having your family or friends get it for you--in other words, I prevent you from obtaining ______ in any way for a period of one month. I won't even let you use the _____ you already have. Remember, since I am all-powerful, I can do this.

But imagine that, even though I rule the world, I a: still very font of money. In fact, if you pay me enough money, I will agree not to deprive you of _____ for the one-month period. That is, I will let you purchase the right to continue buying _____.

Now think about what it would be like to do without _____ for a whole month, and think about whether it would be unpleasant or difficult, or not so bad. What I want to know is: How much would you pay me not to keep you from having any _____ for a whole month?

Accurate answers to this question, if attainable, should represent a true valuation of the excess utility or satisfaction which consumers derive from the specified product market for the stated period, in this case, one month. In other words, consumers would be expected to pay the "supreme authority" an amount up to, but not exceeding, their valuation of anticipated surplus benefit from participating in the market. (It would be emphasized to the subjects that the answer given should be the maximum amount, rather than an initial bargaining position.) As long as the question is understood and the responses genuine, a monetary expression of excess consumer satisfaction for a product market should result, which can then be compared with expenditure. This latter figure could be obtained simply by asking subjects how much they spend per month on the given product (which would be done subsequent to the satisfaction measurement to avoid any possibility of influencing that rather delicate response). This procedure would be repeated for other products in order to generate values for several product markets. Relative market efficiency can be determined (for each consumer) by comparing measures of return:

V(P)x - V($)x > V(P)y - V($)y

        V($)x      <        V($)y

with subscripts indicating markets.

Since utility is not comparable across individuals (Henderson and Quandt 1971, p. 255), intra-subject rankings would have to be averaged for each product market to compute an aggregate measure of relative market efficiency. That is, differences between markets are to be determined by comparing median ranking (across consumers) for each product market.

Although the hypothetical scenario measure may appear unrealistic and operationally intractable at first (and possibly thereafter), a similar approach was demonstrated by Marquardt, et al. (1972) who, essentially, asked consumers the question, "How much would you be willing to sell your camper for?" Marquardt, et al. simply attempted to identify the value necessary to receive before deprivation of a product would be accepted, instead of the price willing to be paid to avoid deprivation. Naturally, the measure suggested in this paper (which is only intended as a conceptual starting point) could be recast in similar fashion. Consumers could be asked, in effect, "How much would I have to pay you to do without (product) for one month?"

The same idea, i.e., excess value received from consumption, is also illustrated by the quasi-experiment reported in the Exhibit.


The kind of market efficiency/consumer return measure which has been suggested may be meaningful or it may be totally specious, but this cannot be known until its validity is assessed. To accomplish this, a more conventional psychological scale should be constructed to measure consumer attitudes toward the applicable markets. A fivepoint Likert scale, incorporating items such as those shown in the Table, could be developed to capture the conceptual domain designated as "value received in relation to cost."



It appears these consumers attach a high monetary value to the "excess satisfaction" obtained from television viewing. This must be a highly socially-efficient consumer product market.

Assuming measures are taken for multiple product classes across multiple consumer subjects, convergent validity can :hen be determined by at least two methods: (l) The 'efficiency" of the various product markets can be ranked according to each of the two measures, and the within subject rank correlations computed. (2) After intra-subject ranks for each product are determined by the two methods, simple correlations between the ranks yielded by each method can be calculated for each product across subjects.

Potential Difficulties

At this point, some unanswered questions should be addressed. First of all, is total consumer monetary expenditure the appropriate measure of marketing input? It can be argued that the consumer's time and effort should also be included in the investment base (Hollander 961). So, might the market efficiency ratio be inflated by not including non-monetary expenditure in the denominator?

In response to this, it will be acknowledged that there is, indeed, a non-monetary aspect to marketing input. However, this time and effort expenditure can be regarded either favorably or unfavorably by consumers, i.e., as either a benefit or a cost, because, for instance, some people like to shop (Hollander 1961). Therefore, it is suggested that, depending on whether this aspect is valuated positively or negatively, it will be manifested n the proposed efficiency measure as an implicit addition to or deduction from the satisfaction value.



Another potential objection concerns the impact of effort n expectancy and, in turn, satisfaction. For example, increased effort, financial or otherwise, may raise expectations and, therefore, influence product evaluation satisfaction) upward or downward upon disconfirmation, depending on the operative psychological model: assimilation, contrast, generalized negativity, etc. (Anderson 1973; Cardozo 1965). Will such a condition confound the relationship between the components of the market efficiency ratio? Possibly, but it should be recognized that the relationship of interest is between actual marketing costs and actual benefits. The measure assumes that expenditure level affects satisfaction. (For example, an extremely high or exorbitant monthly expenditure level would certainly decrease the amount a consumer would be willing to pay for the privilege of continuing to spend that money. In other words, excessively high prices impact upon satisfaction. This does allow a two-fold, or magnified, effect on the market efficiency ratio, which simply makes the measure volatile with respect to price changes.) If these costs also influence satisfaction through the intermediation of expectancy, this is simply another manner in which marketing input impinges upon consumer well-being, accounted for by the measure, but unnecessary to control.

More fundamentally, it is acknowledged that a restrictive interpretation of "social efficiency" has been employed here. Efficiency has been defined only from the perspective of the customers in a particular market, ignoring the clear possibility of externalities, positive or negative, impacting on the larger society. (For instance, producers of goods which satisfy their customers very efficiently might also be discharging pollution into the environment.) Since the nature of externalities may be so difficult to assess, the approach in this paper is offered as a substantial enough starting point. But a reasonable working assumption may be that the democratic process, manifested primarily in government regulation, will attend adequately to the externality problem, eve controlling externalities at a tolerable, and roughly equal, base-line level relative to market benefits across industries.

Regarding the hypothetical scenario statement, the classes of products selected for subject consideration may also be significant. A comparison between vital necessities, or products which are required for basic physiological survival, with discretionary products, for example, may not be valid. It could be argued that urgently needed products would be deserving of the enormous satisfaction values they would be expected to receive because of the priceless needs they fulfill at finite costs, but for purposes of realistic comparison it appears prudent to consider only non-essential, although valued, products. Consumer convenience goods would seem to be potential candidates.

Related to this, it is conceivable that a consumer's income level could artificially limit the stated V(P) V($) amount, removing it from a true expression of excess utility. Restricting the chosen product categories to discretionary and/or low-priced items may be useful for circumventing this potential problem also. In such a situation it seems unlikely that V(P) - V($) would be significant enough relative to consumer income to abort the validity of the analysis.

The one-month time frame may also be a problem. Anticipation of a relatively imminent lifting of the "authority's" prohibition might cause understatement of the satisfaction-valuation assessment. Perhaps an open-ended scenario, requiring payment of a monthly or annual stipend, would provide for greater accuracy. [This would also be pertinent to the concern expressed in footnote l about products with a long purchase-cycle. Approximation of "discounted net present value of future satisfaction" might be achieved by asking how much would be paid to avoid the hypothetical prohibition over the consumer's entire life-cycle.]

Concerning the question of comprehensibility, it would appear that there is nothing contained in the presentation to violate this requirement. Although the imaginary situation is highly unrealistic, the essential proposition is quite simple and straightforward. Final resolution of these issues will only be determined by empirical test, of course, and this is to be the subject of a forthcoming paper.


The preceding has

- described how the issue of the social contribution of marketing activity can be reduced (at least at a product/ market level) to one of value delivered to consumers relative to product cost;

- developed a symbolic specification of this construct;

- suggested two approaches, one primary and one validation, to initial operationalization of the construct;

- advocated the potential significance of determining the comparative social "efficiencies" of different product markets: and

- addressed some potential difficulties associated with the procedure.

Considering the significance of the issue to many audiences--marketing researchers and practitioners, consumer researchers and advocates, consumers themselves, and public policy makers--and the relative scarcity of attention it has received, the modest aim of this paper, itself a precursor of an empirical study, has been to regenerate conceptual and empirical interest in this vital matter. A foreseeable outcome of this type of project might be the more accurate targeting of public policy and consumer lobby efforts, that is, the focusing of attention on less efficient markets. Actually, it maj not be at all extreme to suggest that identifying the social performance of marketing, in the sense of individual product markets (i.e., industries) delivering value to consumers efficiently, may be one of the highest aims of marketing and consumer research.


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