Major industrial markets are moving toward a model of consolidation where three or four players dominate each market, and control pricing. All of our largest industries exemplify this trend: oil and gas, pharmaceuticals, media and entertainment, automobiles, airlines, telecommunications, and others. Other major markets such as financial services and health care delivery are moving to the same model in their key sub-markets. And we see evidence of the link between market consolidation and corporate pricing power reflected every day in consistent, lockstep price increases at the gas pump, in airfares, at the ATM, and at the drugstore, while we watch Exxon marry Mobil, BofA acquire Fleet, Pfizer absorb Pharmacia, GM swallow Saab, Disney add ABC, and on and on across the board.
We used to have a public economic policy which resisted such consolidation, based on the basic capitalist theory that robust competition spurred the kind of “necessity is the mother of invention”-fueled innovations and efficiencies that were good for consumers, kept prices fair (reflecting true value), rewarded strong providers, and weeded out weaker ones. This strategy was enforced by anti-trust regulation, which came into being as an inevitable reaction to the evils of monopoly experienced at the turn of the 20th century. At that time, our choices were anti-trust enforcement or communism, and by and large, the western world chose an anti-trust reform of capitalism in an attempt to maintain its vitality, rather than throw out the baby with the bathwater.
More recently, however, regulators have allowed the kind of consolidation to occur that was formerly forbidden, on the grounds that, after all, three players are much more than one, and are sufficient to ensure competitive behavior and its concomitant benefits. Unfortunately, these grounds are invalid, as we now see in reflected in the spiraling cost of goods and services in each market cited above, and many more.
Why is this approach invalid? Basic game theory to the rescue:
Suppose that, as a major player in a market with only a few players, I employ the following strategy. We start with equal prices all around, among the major players. I raise prices. My competitors now have a choice whether to match my price increase, stand pat, or lower prices in reaction. Whatever they do, I follow them – so if they match me, we all now charge higher prices. If they stick with the lower price, or go even lower, I match them, with the result that we will all be charging lower prices. In any scenario, my strategy, which is well known to my competitors, will result in my price being equal to or lower than my competitors – so no price advantage will accrue to any competitor.
If our good or service is one that consumers will generally purchase in stable quantities – out of necessity, high levels of desire, or value – then it is in the best interest of each of the players in this market to simply match my price increases. We all make more money. Any other strategy by any of my competitors will result in all of us (including the competitor) making less money, as long as I am willing to back off my price increase and match competitor pricing whenever they do not follow me up. And of course, this is the actual pattern of pricing behavior we see in all of the markets cited.
The only way that this will not happen is if the market is “messy”. If it has lots of competitors who cannot all be counted on to follow predictable behaviors, who change the rules, who frequently change the paradigms of products and services and pricing, who out-innovate to differentiate, who are hungry. When we have stable, predictable markets, dominated by fat cat providers whose interest is stability and pricing power, and who do not want to kill the golden goose by competing too hard, we get the predictable outcome outlined above.
It is important to understand that I am in no way impugning the integrity of the individual corporate leaders, or arguing that this is a well-planned plot. It is a natural consequence of a competitive situation. It is quite rational and un-corrupt for companies to try to eliminate competitors by acquiring them, thus accruing both greater market power and the useful intellectual and productive capital of the specific competitor. And it is quite natural for companies to take advantage of whatever pricing leverage they have – if they can get away with raising prices, they should and they do, without any evil intent or overt corruption. I am merely pointing out that it is clearly in the best interests of the overall society for markets to be messy and crowded enough that companies cannot execute this simple price-fixing strategy, but that our regulatory policy is no longer enforcing what is in our best interests.
Our regulators and politicians know this. So why do they continue to relax anti-trust regulation and oversight, following this “three is enough” theory, arguing publicly that opposition to this view is tantamount to anti-capitalism, to socialism, when of course precisely the opposite is true?
There are only a few explanations that seem reasonable.
1) They believe what they are saying, because they are too stupid to see what’s in front of their noses, believing in the simplistic “invisible hand” models of ideal capitalist markets that they recall from Econ 101. The right response – throw the idiots out.
2) They believe what they are saying, because they believe that globalization and rapid technology-fueled change require our corporations to have greater heft to compete effectively, that size and stability are required to support our continued competitiveness. This is a more subtle view, albeit still wrong – based on the idea that what we see in front of our noses is deceptive, and that if one “gets” the pace of change and the frightful prospect of bigger, stronger, foreign government-supported global competitors (perhaps Airbus, or the Japanese auto companies, are the classic citations of this view), then one will recognize the anti-intuitive need to make our fat cats strong enough to survive. Better the homegrown devil that keeps the jobs at home while screwing us over than the foreign devil that takes both our jobs and our money.
The first response here is that we’ve gone way too far. Even counting the viable players around the world, many of the markets cited are down to a very small number of major global players.
The second response is that offshoring has undercut the value of getting behind the supposed home team. If there’s no benefit to propping up our fat cats, why should we? Why should we not at least get the benefit of lower prices, as we scramble for the jobs that remain at home?
And the third response is that, in this context (unlike the “ideal capitalism” of robust, messy, truly competitive markets), the Marxist critique of capitalism as the mechanism for the bosses to screw the workers is valid. When a few strong players run the show in unspoken conspiracy, prices are kept artificially high, while at the same time, workers lose significant leverage in forcing employers to compete for their services. The bosses are less dependent on outstanding workers to drive pricing power, and are free to behave in the same oligarchic way to set wage levels that they do to set prices – following each others’ lead in keeping the workers down.
3) They are corrupt. We all know that the revolving door and socially connected sphere of big business and big government is far, far too cozy and corrupt for the good of the general population. As Bill O’Reilly says: “who’s looking out for you?” No one, clearly. So as Lenin asked famously a century ago, and as we must ask now if we are to avoid a catastrophe like communism or social collapse: “what is to be done?”
The spectre of communism hardly raises any serious alarms these days, and few make the connection between relaxation of anti-trust enforcement and the social ills of our time – the world war between democracy and fundamentalism, for example, or the threat of outsourcing, are much more obvious sources of danger. But I would argue that a longer view of history is in order, and that sometimes what is hardest to see is what is right in front of one’s nose, but not focused upon.
The cozy connection between big business – wanting to get bigger – and big government – sometimes complicit with big money, sometimes our only bulwark against its power – has always been the fulcrum of social health and social dysfunction. It lurks now beneath every other issue: the Mideast, the environment, tax policy, the twin crises of healthcare cost and delivery, human rights policy, tort reform, global alliances and frictions, etc. And as the hell-bent corporate consolidation Ponzi scheme spirals on, anyone who doubts that a major collapse could occur need only look back a year or two at the dotcom collapse and the stock market and boardroom scandals – not as a phase that we’ve gone through, but as a preview, on a limited scale, of the really big bust that could spin out of control at any time, as the bubble of price increases in engineered markets strains the already strained system. Those too complacent to think that surprisingly bad things can happen forget the Depression, forget 9/11, forget the World Wars. They make the universal mistake of thinking that we’re past all that, that we’re now in a more mature era of advanced safeguards and well-managed continuity – until some seen-but-not-noticed fault line suddenly shivers. If the fundamentals say that we have an underlying problem, then the earthquake is inevitable, no matter how much we avoid stepping on the lines.
