I am a little late on this, but Ilya Somin has a nice post on Joel Waldfogel's book on capitalism and serving niche markets.
University of Pennsylvania business Professor Joel Waldfogel argues that markets give us too few choices because
they often fail to provide products that satisfy minority preferences.
This is the opposite of Barry Schwartz's argument that markets are bad
because they give people too many choices, which I criticized here.
In one sense, Waldfogel's point is irrefutable: due to high startup
costs or fixed costs and just to the general scarcity of resources in
the world, there are some minority preferences that the market won't
satisfy. The market is undoubtedly inferior to a hypothetical world in
which all preferences, no matter how unusual, could be satisfied at
zero cost. Not even the most hard-core of libertarian thinkers denies
this. That, however, says little about the question of whether
government could satisfy such minority preferences better, or whether
it is even a good thing to provide products whose costs are greater
than their benefits.
He makes a number of good points, including the one that first comes to my mind -- that in most cases, it is the government that tends to limit choice.
the relative lack of diversity of programming on radio stations - one
of Waldfogel's principle examples of the inability of the market to
satisfy minority interests - is actually a failure of government
regulation. As Jesse Walker documents in this book,
the FCC has for decades colluded with big broadcasters in suppressing
alternative and "microradio" broadcasters, thereby greatly reducing the
number of stations and making it very difficult to run a station that
caters primarily to the interests of a small minority. Even a
completely free broadcasting market would not satisfy all potential
listeners. But it would have a great deal more diversity than is
currently permitted by the FCC.
I called for the end of broadcast licensing here. By the way, the author also ignores Sirius and XM, which have some incredibly niche offerings, and which happen to be in the least regulated part of broadcasting. Why Sirius would have more niche choices than Clear Channel is explained here.
I could add many other examples onto this. The FCC's regulation of the cell phone market creates the stupid environment we have today, arguing about locked iPhones. In a previous post, I demonstrated how new government "a la carte pricing' regulation will lead to more homogenization and less focus on niche viewing audiences in the cable TV industry:
I can add a million examples. Hair braiders are stepped on by the government in collusion with licensed beauticians. Taxi companies get the government to quash low-cost or innovative shuttle transportation. Discount casket companies are banned by government in collusion with undertakers. Take dentistry. Why do I need to go to an expensive dentist when 99% of my dental needs could be served by a hygienist alone? Because the government colludes with dentists to make it so. And don't even get me started on medicine. My guess is a huge percentage of the conditions people come into emergency rooms with are treatable by someone without a 4 year medical degree and 6 years of internship. Does one really need a full medical education to stitch up a kids cut knee? Well, yes, you do today, because doctors collude with the government to make it so. Why can't people specialize, with less than 10 years of education, on just, say, setting bones and closing cuts? Why can't someone specialize in simple wills or divorces without a full law degree?
Every business where the government has licensing is an industry where the government is limiting consumer choice. It is limiting the number of competitors, and it is specifying a narrow subset of ways in which a company can compete, eliminating service or product innovation. In Colorado, my employees needs a license to take our customers fishing on a lake. In Phoenix, you need a license to paint street numbers on a curb. In Scottsdale you need a license to work out of your own home, a license to valet park cars, and a license to give massages. And, of course, there are our tremendously dated liquor licensing laws.
The justification offered is always the same: to protect the consumer. However, the reason
is demonstrated by observing who lobbies at the state legislature for
the imposition or strengthening of licensure. The lobbyists are
invariably representatives of the occupation in question rather than of
the customers. True enough, plumbers presumably know better than anyone
else what their customers need to be protected against. However, it is
hard to regard altruistic concern for their customers as the primary
motive behind their determined efforts to get legal power to decide who
may be a plumber.
Update: Just for fun, I sat here and came up with 10 business ideas that would provide better service for customers, would reduce costs in notoriously high cost industries (e.g. medicine, dentistry, law) and which would make me a pile of money. which are all illegal due to licensing requirements that are set in collusion with current industry incumbents.