Unless you live under a rock, in a tree, or in some crazy guy’s love dungeon, you’ve probably heard of newly proposed regulations aimed at curbing some of the more abusive practices in the mortgage lending, credit card, cell phone, and internet service industries. And you’ve undoubtedly heard the same industries reply that burdensome regulations will stifle competition, increase prices, and harm consumers.
For those of you that believe in unfettered “competition”, let me provide a reality check. I’ll use the credit card industry as an example, but the principal applies to most industries. There are four credit card companies (you get bonus points if you can name them) so the average Joe has four options. Theoretically, the companies will compete amongst themselves to offer the lowest interest rates, the best incentive programs, and the lowest prices to woo consumers. The reality is that they all charge the same usurious interest rates (anywhere between 15-30% for most consumer cards), they all use the same questionable practices (dual-cycle billing, universal default, etc), and they all charge the same fees for late payments, overcharges, and the like. How, exactly, is this competition?
It’s not. When the four companies that control more than 90% of the market have the same pricing structure, fees, and practices, you have an oligopoly. And history, as well as present day business practices, shows that oligopolies abuse their customers unless prevented by law or regulation (and oftentimes even then).
“Just stop using them and go to a different company” the anti-regulation crowd will say. But like I just said, there are no other options. You get to pick from four companies with the same practices wrapped in different names. “Deregulation increases competition” they say while completely ignoring the fact that study after study after study has shown deregulation nearly always leads to HIGHER prices and LESS competition (just look at the cable industry, the phone industry, the major ISPs, and the electric industry in California) which is always BAD for consumers.
Remember- capitalism is not a panacea. It’s an idea. And like all ideas it is ripe for abuse. Regulations are boundaries for capitalism. They are not the end of capitalism. Boundaries ensure a well defined, level playing field. And that’s good for both producers and consumers.
If you own a hardware store and there are 10 other hardware stores to go to, consumers can make a choice and shop those stores that treat them fairly. When you have only two choices for your cable provider and both offer exactly the same prices and the exact same shoddy service, capitalism has failed. It’s time to stop whining about regulation and instead look at it as a tool to maintain fairness between consumers and businesses and between businesses in the same industry. If we could trust profit-seekers to act ethically and in the interest of both themselves and their customer, regulation would be unnecessary. But again, history and current practice both show this is not the case. History and current practice also show that self regulation is a farce. Until people can act ethically when money is involved or until we develop a system that is abuse-proof, regulation should continue to be an important part of capitalism.
Suck on that Comcast, AT&T, and Countrywide.
6 comments:
Visa, Mastercard, American Express and Discover.
Hooray bonus points!
Janelle, don't you already have open access to bonus points from Brandon? You're stifling the competition by having unfettered access to the source.
Also, doesn't Diner's Club still exist as a credit card company? I know they were one of the earliest but I am not sure if they still exist...nevermind, a quick check show's they are part of Mastercard now.
Also, wouldn't the cable, phone, and ISP example you listed be rather redundant? The big communication companies actually sell all those (AT&T, Comcast, TimeWarner) services.
TV is one of the few things I indulge on with my measly grad student stipend, and yet part of me wants out. There are two reasons: it's goddamned expensive and there's (almost) nothing on this summer. If it weren't for the hassle of having to set it up again in the fall (likely to the tune of increased rates) I would more seriously consider it.
Not to dwell on little things but I think that using cable in your example does not really fit (for the most part). The following is based on my knowledge from being a cable franchise administrator for a municipality.
Most cable companies are under local franchises that provide use of the public's "right of way" land in exchange for a percentage of the fees collected from residents. In California, most franchises (up until January 2, 2008 (phase two of AB 2987) were 5% of the fees with some going one step further to include PEG fees of either a fixed amount or 1% which would increase the total City/County fees to 6%. Granted the PEG (Public, Education, & Government Channels) fees had to be accounted for separetly and used for specific PEG expenses (video casting, video production, AV equipment purchases, etc) but it was still more money available to the government. Although most franchises put restrictions on rate increases, the cable company was still able to increase rates without much check (some of the restrictions state that they must place an ad in the newspaper of sufficient size and add a new line on their bill) and with zero competition from other cable companies. Now the last statement applies to exclusive franchise agreements, which were common, but in some cases non-exclusive franchises allowed for two companies to compete but the areas of service were pretty much defined.
Now, this system has changed since AB 2987, or as we franchise administrators like to say, the DIVCA (Digital Infrastructure and Video Competition act of 2006). Local governments are not allowed to issue new franchise agreements as only the State can, through the Public Utilities Commission, with a flat 5%. Cities can still collect the 1% PEG. This essentially makes the entire state one big non-exlusive franchise and now AT&T, Verizon, Cox, Time Warner, and Comcast can go anywhere. While this is more competition in theory, because of the regulation of the old and new franchise system, these companies can pass the fees onto the consumer, thus increasing rates and in turns gives more money to the governments, which then are okay with higher rates... the system is in an upward spiral but it is due to the regulation already in place. The only real check is satelite TV, which cities hate because they see zero dollars from, which is, at the moment, offering better "deals" trying to lure customers away from cable and the other sat. company. All in all, the deregulation that AB 2987 provided may allow more competitors to enter the market, it is not yet possible to see if this has resulted in any reduced rates.
Dave- you're right. The phone companies, cable companies, and ISP companies have, for all intents and purposes, become indistinguishable. Therein lies the problem. They all charge the same price, have the same practices, and provide the same poor level of service. There is no competition. Most areas only have two cable options anyway. And the last two areas I've lived in only had one. Essentially, the telcos have become monopolistic and have used their market position abusively.
Ambassador- I'm not familiar with the specifics and I think you did a good job explaining the situation in CA. My problem is that the big cable companies are, even as I type, pushing legislation that will keep the price increases coming while blocking new entrants to the field. If you're interested, I'll pass on the studies I've read, most of which were done on the east coast and in the midwest. What they find is that, once more companies have access, rates increase rather than decrease because the companies have greater pricing control. It's like the airlines- when one compani increase price for whatever reason, the others follow suit rather than using the price difference to attract new customers. I would contend that it's not the regulations that are causing the problem in CA so much as how they are structured. With government getting what are essentially payouts and kickbacks from the cable providers, it's in their interest to ignore situations where above-market prices are being charged and the consumer either has to swallow the bullshit or do without tv (except air-wave is a joke anyway).
I should state I'm not anti-monopoly. There are things known as natural monopolies (electric companies, water companies, and you might argue even cable providers or traditional phone companies) and I'm fine with that. Natural monopolies allows you to take advantage of economies of scale and avoid the need to build expensive, totally redundant infrastructure. But we all know monopolies will eventually abuse their power for personal gain (Intel, Microsoft, OPEC, etc). That's where I'm pro regulation. Without explicit protections, no consumer can possibly be expected to do the thousands of hours of legwork necessary to sort out the honest merchant from the crook. The industries should welcome regulations as a means of increasing the confidence of their customers and shareholders and keeping out people that are dishonest and give the industry a bad name. Instead, they complain about making the market anti-competitive (which is funny since that's exactly what they were doing). What they really mean is that now consumers have an equal footing, a clearer understanding of their business practices and pricing, and thus are more difficult to take advantage of. I would take self-regulation over government imposed regulation any day, but I've not seen a single instance yet where a large, shareholder beholden company would follow its own rules and not take advantage of its market position.
Regulations should be structured and written to protect both the industry and the customer. If the regulations allow prices to increase and everyone profits but the consumer (as The Ambassador's example showed in CA), then it's a bad system. It's not the regulation's fault. It's the fault of the unethical bastards that implemented it.
Dave: Actually I really need the bonus points. Brandon will often walk into the room and announce that I am getting a B- for the day, or something similar. He is kind of mean like that. Worst of all, I don't know what I'm being graded on so clearly stated bonus points are the only way to knowingly bring my grade up.
Yea...I don't have anything actually related to the post to write. :O)
Janelle, I can't help but think of your story from a couple years ago. Brandon gave you an F but later that day you were able to turn the tables on him and say "Who gets an F now, bitch?"
Ambassador, the problem from the consumer's end is that prices continue to rise with or without regulation. There are no (or very few) alternatives for cable service. I realize that prices will rise over time, but in the two years since I've moved in to my current apartment have I really gotten $25 more "service" from the company?
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