Economic segmentation

Jerry W. Thomas wrote,

What is market segmentation? At its most basic level, the term “market segmentation” refers to subdividing a market along some commonality, similarity, or kinship. That is, the members of a market segment share something in common.

I have argued before that the economy is illegible. By that I mean that aggregate measures of labor input, capital input, “the” price level, and output are useless when the economy is dominated by services and the value of labor and capital is dominated by intangible elements. Aggregate measures of “the” standard of living are useless when housing expense, which is a large component of living costs, is so divergent across locations.

Instead, I believe we need to think in terms of multiple economic realities. Perhaps one way to address this would be to start with market segmentation analysis. In the marketing world, demographic analysts have sorted U.S. zip codes into clusters of similar consumer tastes. Suppose that we were to find occupational clusters, consisting of people with similar industry groups and similar skill types.

Next, imagine a matrix, with occupational clusters down the side and consumer market segments across the top. Might we see interesting patterns?

We might think about the occupational clusters in terms of the traditional theory of international trade. What do they produce? What do they tend to consume? Which clusters supply savings to other clusters, and which receive savings? How much of each cluster’s economy is internal trade and how much is external trade? What are the terms of trade (exchange rate) between a cluster’s imports and its exports, and how have the terms of trade changed over time?

I am thinking that perhaps this is the next big theme I will be working on. That is, the illegibility of the economy as measured using traditional statistics and the possibility of getting more useful information by thinking in terms of multiple economic realities.

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4 Responses to Economic segmentation

  1. Corey says:

    In my field (plasma physics) some of the most interesting work recently has come out of the study of plasmas that have two (or more) temperatures. In brief, a driven plasma can be in a steady state where two different population of electron or ion species are thermalized at two different temperatures and only weakly interacting with each other. There are other phenomena that reveal that some species are chaotic, not thermalized, and thus do not have a temperature.

    I mention this because temperature (in physics) is generally fitted to a distribution (Maxwellian, or Gaussian). I assume that type of statistical fitting happens a lot in economics too.

    You might be onto something pretty interesting here. I’ll certainly be following along to see what you learn.

  2. John Hall says:

    This post reminds me of multi-level models in statistics (also called hierarchical models and a bajillion other names). Occupations can be grouped by industry and sector in a hierarchy, but one can also group by location (by region, by country, by state, by city, in a hierarchy) or by experience (years is continuous, probably should not bin). There is also the interaction of these effects.

  3. Matthew Young says:

    The multiverse theory of economics.

  4. MG says:

    Your analysis would be on the right track. Your “favorite blogger” most recent post adds to all of this

    http://conversableeconomist.blogspot.com/2017/11/regional-price-parities-comparing-cost.html

    The data already being compiled by the BEA suggests that there is demand for be looking at the economy in a more granular basis. It could be said that current approaches (from what I could tell from their BEA’s website) continue to aggregate in traditional ways (for example, geographic clusters ), and that even these more granular approaches will eventually fail to paint the “real” segmented picture you suggest exists when we look at the “real” underlying clusters of producers and consumers.

    I think the “answer” may lie in a hybrid approach that gives geography more weigh when the production/consumption must take place “locally” and less when it does not. But geography will matter for quite some time.

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