Amartya Sen, when he was at the Delhi School of Economics, used to teach a course in mathematical logic. One of his favourite examples was the fable of Buridin's ass.

Buridin tied his donkey equidistant from two bales of hay and went on a holiday. The donkey died of starvation because it could not decide which bale to eat first.

That donkey's fate seems to be befalling American consumers. They have so much choice that they can't decide and are going off without buying anything.

So some large US firms are withdrawing from several market segments says a report in the Wall Street Journal (http://online.wsj.com/article/SB10001424052748703373404576148363319407354.html?mod=WSJ_LifeStyle_LeadStoryNA).

This is an interesting reversal from the trend of the last half century during which firms had sought to expand consumer choice by entering as many market segments as they could for a product.

Thus, Procter and Gamble once had 68 brands of soap. Our own HUL and ITC have also followed that route.

What gives?

The previous article in this series had noted that when firms with great brands pursue higher revenues by launching lower-end products, their top brand runs the risk of being devalued. On the other hand, if they wish to retain the pristine purity of their high-end brand, they have to be content with being small.

It is a difficult choice.

But while one can explain the behaviour of small firms with great brands, how does one explain the brand behaviour of large firms with not-so-great brands? Why does Colgate want to get into those blue and red gels even though the standard white paste makes top dollars for it? Why does a firm that makes toothpaste or shampoo launch so many brands? Why does it compete with itself?

Or, if you like it in economic jargon, why does it allow the demand curve for its products to flatten out so that it can't influence the price much? Sounds pretty dumb to me.

The obvious answer, of course, is the urge to capture small slices of as many market segments as possible. But does the strategy really work in the sense of being efficient for the shareholders?

There seems to be no conclusive evidence that it does. Indeed, economic theory clearly shows that as more new firms enter segments that are highly profitable, overall profits will decline and there will be less to go around.

So firms may maximise market shares by pursuing a multi-product strategy. But they do let their shareholders down somewhat by not focusing on maximising profits.

This sort of firm-level behaviour was explained in 1956 by the economist Herbert Simon who went on to win a Nobel prize.

Satisficing

The theory has come to be known as ‘Satisficing' — maximising satisfaction. It is based on the notion that given various alternatives, a firm (or an individual, for that matter) can only hope to approximate the best result, never actually achieve it because of various gaps in information, both about the present and the future.

Consider the problem that the firm faces. First, all the alternatives have to be identified; then the consequences of each have to be listed; and finally, they have to be compared. Clearly, this is impossible.

Simon showed that the best strategy is arrived at by assuming a closed system that limits both variables and consequences.

In a nutshell, managements don't maximise profits. They make just enough profits to keep their shareholders just happy enough.

That is, they just meet an acceptable lower limit in the assumption that shareholders will not protest. And for this, they get paid huge sums.

What a ripoff, Sirjee.

(T.C.A. Srinivasa-Raghavan is Senior Associate Editor of Business Line.)

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