Tuesday, August 18, 2009

Will competition eliminate discrimination?

Gary Becker (1971) famously argued that competition eliminates discrimination because firms that discriminate will have higher costs, and this will eventually put them out of business. However, he also noted that this mechanism will not work if firms accommodate their customers' racial or gender preferences.

For example, Holzer and Ihlanfeldt (1998) found that the racial composition of customers a ffects the race of new hires, which is consistent with Becker's (1971) prediction that consumer preferences may give rise to racial discrimination.

A new article finds evidence of same-race preferences of viewers of American Idol:
Our point estimates tell that a 10 percentage point increase in the proportion of black contestants increases viewership ratings for black households by about 1.3 percentage points.

Interestingly, no such preferences were identified for non-African American viewers.

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