Wednesday, December 09, 2009

A place in the sun

Sometimes, a callow client will wax eloquent about the competition in the market that her or his business is engaged, as if it was a good thing for the business. When that happens, Spot shakes his head sadly, and then says, “NO YOU FOOL, YOU DO NOT WANT COMPETITION.” Spot adds, “You want your own place in the sun, free from competitive pressures so that you can maximize your profit. We will, you and I, try to build as many barriers to entry into competition with you as we can.” Patents, trademarks, and making products that are difficult to reverse engineer are just a few things you might try.

A business could also try to limit the availability of labor, capital, or raw materials to the competitor. It could try to sew up exclusive marketing agreement with important distributors. With a formidable adversary, it might be better to just divide up a market and live peace, at least until the business thought it could capture the market at a later time.

The things in the immediately preceding paragraph are, to a greater or lesser extent, illegal under federal and state anti-competition laws. But they are strategies considered for implementation by businesses all the time.

A very powerful trick in building you own place in the sun, if you’re big enough, is called regulatory capture. Think James J. Hill and the Interstate Commerce Commission.

The idea that there is a competitive “private sector” in America is appealing, but generally false. No one hates competition more than the managers of corporations. Competition does not enhance shareholder value, and smart managers know they must forsake whatever personal beliefs they may hold about the redemptive power of creative destruction for the more immediate balm of government intervention. This wisdom is expressed most precisely in an underutilized phrase from economics: regulatory capture.

Regulatory capture is an important feature in the current health care reform debate.

This is why the public option in health care reform is so important. The earnest-looking execs testifying before Congress about the importance of the private marketplace for healthcare are either fools, or much more likely, they think we are. They undoubtedly believe that the people in Congress are.

Because, you see, a viable public option would actually bring the thing the the industry pays lip service to, but hates and fears: competition.

It really is that simple.

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