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How the Market Fixes Mistakes

Yoga downward facing dogPeople aren’t perfect. And because companies are collections of people, they aren’t perfect either. Companies accomplish great feats—just take note of some of the technologies you’ll use today—but they also occasionally let us down. Products that fail to deliver on promises are disappointing and sometimes even harmful. But do these mistakes mean that the government should step in and “protect” us?

No, they don’t. The market has a variety of mechanisms that respond to errors far more effectively than the government ever could, and still allow for companies to craft their own solutions.

A Transparently Bad Product: Lululemon Yoga Pants

Lululemon, which produces yoga and other athletic apparel, provoked outrage from its devoted customer base when it released a flawed product earlier this year: see-through yoga pants. Founded in 1998, the company had built trust and loyalty among its yoga-loving clientele for delivering quality products: In just 15 years, Lululemon had grown to over $1.3 billion in annual revenue. So, it’s no surprise that Lululemon’s fans were upset and disappointed at the failure.

But Lululemon’s response to its mistake demonstrates why government intervention in the marketplace is unnecessary and, often, inferior to that of the free market. To address all the complaints the company received from consumers and stores, Lululemon recalled the pants on March 18, offered refunds, and apologized.

Despite the gesture, the market punished Lululemon for its error: Its stock price plummeted the next day, decreasing the company’s value by $250 million. Several weeks later, the chief product officer resigned. The repercussions for Lululemon’s mistake affect the short term as well as the long term: The damage to consumer confidence will take time to rebuild and revenues will reflect the damage.

The incentives for the company to address this mistake couldn’t be any higher. They will be far more powerful in encouraging better customer service than having the government inspect all clothes manufactured.

Mystery Meatballs: Ikea’s Food Faux Pas

Earlier this year, a scandal broke out across Europe. IKEA, a global home furnishings chain, was serving meatballs advertised as beef and pork, but found to contain horse meat. While this isn’t a food safety concern, it is disconcerting that food across the continent was mislabeled.

“ A mistake made by the government often has little accountability—as recent scandals have shown. ”

The discovery sparked intense outcry from IKEA customers. The threat of losing those customers was enough to spur the company to take swift action: IKEA has implemented new measures, including a check of its supply chain “from farm to fork,” to ensure products are tested more rigorously.

Hot Tunes: Apple Has Been on FireLiterally

iPod Nanos hit store shelves in 2005, and sold millions. But it turns out that as the product aged, the batteries degraded and, in rare cases, even caught fire.

This defect didn’t become well-known until five years after the first generation of iPod Nanos were manufactured. But Apple still decided to provide free replacements for anyone who had the original product. In truth, this wasn’t just a “replacement”—the new iPods were substantially more advanced, coming as they did with a touchscreen, FM radio, and pedometer.

Because Apple wanted to maintain a good reputation, and to prevent its old product from harming consumers, the company decided to voluntarily give away its newest products.

Reputation Is Everything

The above examples show how the market is more effective at policing itself than the government could ever be. Businesses succeed based on their reputations, and they know that making a mistake—even if corrected quickly—can result in lasting damage. Scarred reputations can lead to falling stock prices, lower sales, unhappy customers, and ultimately less profits.

Business aren’t perfect, and they will make mistakes. A mistake made by a business can be “punished” through various market mechanisms, reducing the likelihood that a similar problem will reoccur. A mistake made by the government often has little accountability—as recent scandals have shown. We should leave individuals and businesses to make as many decisions themselves as possible, and let the market hold them accountable.