Suppose there are two bakeries which make wedding cakes and other baked items. The pastries from one bakery are pretty much the same as those from another so the baked goods market is quite competitive and margins and profits are thin.
The legislature passes a law allowing businesses to select which customers they will serve and which they will not.
One bakery, bakery A, decides to be selective and the other, bakery B, decides to be non-selective. The fact that bakery A has become selective becomes public knowledge either because the bakery advertises this fact or through word-of-mouth.
Does economic competition eliminate discrimination? This is the question.
Customers who abhor bakery A’s selection criterion boycott bakery A even if in other respects it would be convenient to just get a doughnut from bakery A. So, bakery B, gets additional business it did not get before.
Surely bakery A is suffering and hence should drop its ill-advised selection policy? Not so fast.
Some customers favor bakery A’s policy and they actively seek out bakery A’s products (the “Chick-fil-A” effect). So bakery A loses some customers but gains others. Moreover, the customers it gains are more loyal than the customers who enjoyed its products before it adopted its policy. Similarly, the customers bakery B gains are more loyal too.
Hence, product differentiation has increased because of bakery A’s active adoption of its policy and from bakery B’s decision not to adopt the same policy. The logic of competition now implies both bakeries will make more profits than they did before.
So, discrimination is not driven out by competition between firms. If anything it is reinforced by competition. This stands in contrast to Becker’s model where competition decreases discrimination in employment. (There is some way to make these models consistent by having workers have preferences over co-workers. Maybe someone already did this model?)
Without political or legal intervention, competition will not drive out discrimination.
Cheap Talk 
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March 31, 2015 at 12:07 pm
Joe Carter
***Without political or legal intervention, competition will not drive out discrimination.***
There’s only one problem with your conclusion: it fails the reality test.
In much of the country, discrimination based on sexual orientation is perfectly legal. Actual discrimination by businesses based on sexual orientation is either extremely rare or non-existent.
According to your theory, we should see businesses discriminating against LGBT customers and actually increasing their business because of that. But that’s not happening. Why? Because the Becker model applies not only in hiring but in other areas of business. Rather than rewarding them with more loyal customers, competition would drive out those who discriminate.
March 31, 2015 at 5:06 pm
K Johnsen
People don’t go to Chick-Fil-A because of their policies. They got to Chick-Fil-A because it great food, great value and to stick it to libs.
It is the silent minority noisily munching in reaction to the ever present government regulation.
March 31, 2015 at 7:15 pm
Jonas feit
What’s more, these same sorting “benefits” could be achieved if the bigot-owned firms were just courageous enough to state their policies without the endorsement of the state.
Joe carter: you’ve confused theory with reality. Becker theorized that the magic of competition would drive out discrimination. Merely restating that does not make it any les orthogonal to reality.
K Johnsen: you’ve pretty well confirmed the assumptions built into the post.
March 31, 2015 at 8:10 pm
I. Cheong
This seems more like a case of product (or business model) differentiation than that of (price) discrimination. Theory says firms may choose niche market to avoid competition. (for example, competition does not push players toward the center in Hotelling’s location model). More generally, how can we compromise that with Becker’s non-discrimination argument? Becker’s story is about labor employment, an input choice. Firms care only about workers’ productivity, while restaurants face customers of diverse preferences.
April 1, 2015 at 7:32 am
Mark
Translation: Overt discrimination can turn a market from being perfectly competitive to being monopolistically competitive.
April 1, 2015 at 8:07 am
Greg
What about economies of scale/ fixed cost coverage? I would think the ratio of type A vs type B people would matter (and maybe type C who are indifferent). Your conclusion of higher profits depends on being able to translate higher loyalty into pricing power; I would think that in some distributions of customers that wouldn’t be enough to overcome the loss in volume, sending one of the bakeries out of business… Either a victory for tolerance or a cementing of discrimination.
April 1, 2015 at 1:09 pm
NoniMausa
In a sufficiently intensely bigoted community, business discrimination might succeed because of discrimination outside of the actual A or B bakeries. This doesn’t require that the whole community is overtly bigoted, only that a sufficient percentage of the public is sufficiently ready to be really nasty.
Looking at A versus B, the purchase of cakes at non-discriminating bakery B, or even going into bakery B, can set up Bs customers to attack by bigoted community members. Generally these people are not legitimized outright, but they aren’t punished or ostracized enough to prevent their attacks. They are the disposable shock troops of bigotry. How many people would keep buying from bakery B if some b******rd sets fire to their garage or poisons their dog when they see a discarded Bakery B box in their trash can?
April 2, 2015 at 11:00 am
ndnd9
Hello Cheap Talk: I enjoyed your blog. Following is a piece that supports religious protection from a different view. If someone aids a bank robber they can be put in jail as an accomplice. The government should not be in the business of trying to force people to aid those they believe are doing something immoral. LGBTs like to compare themselves with black Americans. But there is nothing immoral about skin color. And who should ever care what someone’s skin color is anyway. (Remember God protected Moses’ second wife, an Ethiopian, from his sister Miriam’s criticism by making Miriam a leper when she criticized the woman’s skin color. But God gives laws against homosexuality.) Genome studies have shown that “science is inadequate at determining sexual orientation.” This means that there is no genetic basis for homosexuality. There is a greater incidence of sexual identity confusion in developed countries today because of the practice of some parents reassigning their baby’s sex at birth. Because of the excess hormone estrogen that lodges in a woman’s body when she uses birth control chemicals, she may give birth to a male child with deformed genitalia. Rather than leave him male, the parents may opt for surgery to make him appear female. However, they cannot change the baby’s chromosomes. Gender is determined by chromosomes, and males think and feel differently than females. So, when the child grows up it has gender confusion — thinking and feeling male but being in a female body. In coming years it will be possible for these children to reverse back to their chromosomal gender. Studies have been done and the government knows birth control chemicals cause this effect, but they consider it a form of population control and let it go on without warning women of the side effects. In any event, if men took more responsibility for birth control instead of putting the whole burden on women, it would be easier for couples to avoid this event. From a reincarnation point of view, those being born in this condition at this time may be those who in centuries past had their sons castrated so the sons would be hired by the rich and send money back to their parents. This is the eternal validity of the Golden Rule — as you treat others you WILL BE treated in this life or another. In any event, that does not change the moral issue at stake here. Another reason for people choosing homosexuality is that older siblings (or others) consistently frightened them as infants. Those children grow up not understanding why they are attracted to same gender others, or to no others, because they don’t consciously remember what was done to them when they were infants that caused them to not trust and to fear rather than love. God’s law is clear and firm against homosexuality. Everyone on earth has a cross of some sort to bear. Those who have been pressured into sexual confusion should seek God’s guidance to not succumb, but should work to endure their particular challenge as others work to endure their own unique challenges. No one should scorn the homosexual, but it is appropriate for society by its laws to remind them that their choice is against the will of the Creator of the universe and, by those who respect God’s presence and will, against what society will endorse. More information about this issue is in my e-book (on Kindle) If You Ask Me…. Peace, ND (Nancy Dobson at blog nomagicwandchristianity).
April 6, 2015 at 2:26 pm
Blissex
Becker’s argument is not the same as yours and it is laughable for a different reason: Becker’s argument is based on the assumption that employer’s won’t discriminate against certain types of employees because there is a shortage of “good” employees, and those who discriminate will deprive themselves of a sufficient supply of “good” employees.
If conversely there is an oversupply of “good” employees there is likely little or no impact on the employers that discriminate, as they can still get all the “good” employees they want from the pool of people they don’t discriminate against.
Suppose for example that there are two employers, each wanting to hire 10 “good” employees, and one of them wants to hire only those of asian origin because they think that european ancestry arer lazy and ignorant.
Then if there are 80 applicants shortlisted for the 20 jobs, and of the 80 applicants 30 are asian and 50 european, and there are 15 “good” asian employees and 20 “good” european ones, the company that discriminates against europeans will be able to hire 10 “good” asian ones and no europeans, and the company that does not discriminate will hire 4 “asian” and 6 european “good” employees.
June 27, 2015 at 3:58 pm
cardiffkook
Blissex,
Your model oversimplifies reality into black and white gradations of quality. In reality, there is a best estimated employee at a lowest going wage. Any time this potential employee is skipped due to discrimination, then the discriminating firm is handicapping itself. I do agree with Ned’s comment though on an exception.
April 7, 2015 at 7:16 pm
EqualTime
I’m not ready to call the respectful preference not to provide personal services to an event one would rather not participate in “discrimination”. This is not a religious issue to me, being a atheist, but rather one of personal liberty. Must a wedding band play at a same-sex wedding, or a photographer take photos at the wedding, under threat of fines and damages when alternatives, such as the non-selective bakery? In Denver, a gay baker was able to not prepare a cake with an anti-gay message. I agree with this too – but tolerance is a two way street. Acceptance of LGBT rights should not necessary lead to a requirement to participate in LGBT events.
April 8, 2015 at 9:29 am
Ned Smith
Hi Sandeep from your colleague down in the MORS group! This is well timed for me personally as I’m currently working on a model extending Becker’s, albeit in different ways. To your ending question though, Becker himself acknowledged in chapter 5 in “The Economics of Discrimination” that his attractive equilibrium–i.e., the elimination of discrimination in competitive markets–breaks down when consumers themselves are discriminators, or, in his words, have a “taste for discrimination.” You’re smart to treat this as a strategy question about differentiation, but his logic is simpler. If consumers are willing to pay the cost of discrimination, then discrimination can persist, even in highly competitive markets. Discriminators have a cost disadvantage relative to non-discriminators. That’s the core of Becker’s thesis. But if they can pass that additional cost on to consumers then they need not be forced out of business.
April 12, 2015 at 4:48 am
Blissex
«Discriminators have a cost disadvantage relative to non-discriminators. That’s the core of Becker’s thesis.»
As I wrote above that cost disadvantage only exists if there is a huge undersupply of “good” employees, so that the discriminators cannot hire as many “good” employees as they want from the categories they don’t discriminate against. That means a really tight labour market, which is not happening anytime soon.
That’s a pretty obvious point, but somehow both Becker and you seem to disregard it.