Product Differentiation and Form Change under Protestantism

Because markets exist for the exchange of products, the nature of a product is central to market analysis. Compared to traditional economic theory, contemporary economics offers a sophisticated view of product in which the essence of any good is defined by the bundle of utility-creating characteristics that customers want and are willing to pay for.1 Hence, a loaf of bread purchased at a convenience store must be seen not merely as bread, but as bread plus convenience. In other words, the customer is willing to pay a price that reflects his or her utility from consuming the bread, and a premium that reflects the utility of time saved at a convenience store as opposed to a supermarket.

Bread is not a complicated product, yet economists readily acknowledge that it involves other dimensions (time, location, etc.) that are capable of conveying utility. Many products are more complicated, thus dramatizing the basic point. An automobile is a complicated consumer product that combines characteristics that appeal to a person's demand for transportation, fashion, prestige, status, and so forth. Even within the same product group (e.g., automobiles), different characteristics are combined in different ways to attract consumers' interests and, ultimately, to clinch a sale. From an economic perspective, religion is a complicated product, entailing as it does characteristics of morality, security, acceptance, status, society, and so forth. We earlier characterized this product, in the language of Gary Becker, as a Z-good.

The history of religion from the sixteenth century to the present is a history of ever-changing faiths, each seeking out a peculiar niche in a vast religious market. In a few instances this was accomplished by mon-archs, such as, for example, in England and Scandinavia. More often it was accomplished by religious entrepreneurs—Luther, Zwingli, Calvin, Knox, and so forth. As entrepreneurs they assigned different characteristics to the product (e.g., articles of faith or organization) in an attempt to satisfy potential demanders; they did this at some risk to themselves, since no one can foresee perfectly the extent of demand for a new product. From an economic perspective, this development is entirely predictable—it illustrates perfectly the unfolding of the competitive market process, a chief element of which is the theory of product differentiation. We may therefore think of Christianity as a product that evolved from its monolithic state before the Reformation to a differentiated product within a product group after. Within this product group, different denominations—or forms of religion—emerged over time to satisfy the various consumer groups who demanded different bundles of (religious) characteristics. In this way, economics predicts that once market entry was successfully achieved, Protestantism would eventually produce different denominations that appealed to different groups of consumers.

The fact that religion is a complex product (combining elements of public good, private good, credence good, club good, etc.) does not change the basic contours of the analysis we suggest. Protestantism began as an effort to reform a monopoly religion. The economic consequences of this action established a system of beliefs and membership services that was comparable to the monopoly product of the Catholic Church but entailed a lower price. The demand price was lower because consumers no longer had to bear the onus of confession, penance, good works, high taxes, and (for some) price discrimination. The supply price was lower because the new churches and the new rituals were less elaborate, requiring less initial capital and less ongoing maintenance. Both products promised salvation, but whereas the Catholic Church had so complicated its doctrinal product through rent seeking and other opportunistic behavior as to make it expensive, if not unbelievable, Protestantism presented a simplified doctrinal product that was considerably cheaper to sell and to buy.

The cost savings to buyers and sellers can be found in the theological and organizational changes that defined the new churches, as we will soon see. Some people, for example, may derive comfort from a doctrine that justifies faith by grace alone, whereas others may get utility from voting, and would therefore, other things equal, be attracted to a particular organizational form of church that allowed its members greater participation in decision making. Competition between churches can be expected to move along these margins (theological and organizational), as well as along many other margins too numerous to mention here.

In religious markets as we know them, it is inevitable that theology and organization become intertwined. All Christian religions, Catholic as well as Protestant, seek to find a scriptural basis for both their doctrines and their organization. In economics, organization is an important consideration in assessing the efficiency of outcomes, but when speaking of Christianity, it is necessary to recognize that form often follows doctrine. Roman Catholics have used the scriptural text in which Christ entrusts to Peter the "keys of the kingdom'' to establish the primacy of the pope. But this was not always the case. Before the end of the first millennium, the early Catholic Church adhered to a congregational form, which eventually and gradually gave way first to an episcopal (consistory) form, and only later to the most authoritarian/hierarchical form known to any religious institution. Protestants interpret Christ's adjuration differently; they see it as the assignment of a mission to solicit and gather up a community of believers. The Protestant structure for realizing this goal can, and does, take on different organizational forms.

In chapter 5 we described a process whereby doctrinal manipulations by the medieval church steadily raised the price of membership, creating an opportunity for new entry based on a more attractive, lower-priced product. In chapter 6 we argued that the dominant-firm reaction— represented by doctrinal changes legislated by the Council of Trent (i.e., the Counter-Reformation)—had the effect of reducing the full price of some church services; but in the main, the Catholic Church continued to alienate its customers by persisting in various kinds of rent seeking. All of this took place within an organizational form that remained highly centralized and authoritative after the papacy consolidated its power around AD 1100. Because Luther bucked the authority of the old Catholic Church, it is tempting to conclude that organization was the toehold allowing Protestants entry into the religious market—but this is belied by the fact that emergent Protestant churches embraced different forms of organization, almost from the very start. It is therefore clear that the doctrinal imperative of justification by faith alone—the core unifying principle of Protestantism—can be realized under alternative forms of church governance. Hence it makes sense to treat organizational form as merely another competitive margin to be exploited in the quest for customers.

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