"Turbulence in the Transition from Regulation to Competitor"
University of Missouri
25th Annual Rate Symposium
April 26, 1999
You have seen the headlines. Government rules gone beserk, people harmed. Corruption alleged. People clamored on for deregulation. It's gone on too long. The headlines of course are from 1763-1776.
Regulation of commerce is all too often more about favoring one individual or company over another rather than about efficiency. More than 200 years ago, American colonists learned this vital lesson. A distant British government attempted in America to favor one group over another, to place taxes on some and not on others, to restrict commerce to certain favored companies and not to others. In short, the British attempted to regulate commerce.
The British however attempted to enforce their regulations with troops. Some they could enforce better than others, some of the key areas of commerce, transatlantic trade, were easily enforced.
The American colonists ultimately rebelled. The Declaration of Independence speaks of:
We hold these truths to be self-evident
(1) that all men are created equal
(2) that they are endowed by their creator with certain unalienable rights
(3) that among these are life, liberty, and the pursuit of happiness.
The colonists were tired of corruption, of one group favored over another, of people denied basic liberties. It was, in short, an indictment of corrupt commercial regulation as they knew it.
How have things changed in the past two centuries? We have amazing new technologies. But we also have commercial regulation - regulation that ultimately favors some parties over others - regulation that ultimately has corrupting influences and harms consumers.
Now some say the bad old days are over. At the FCC regulators have great sound bites. Everyone says "Competition is good!"
It is part of the regulatory catechism. Powerful words are spoken, but few understand even these simple words, often not the speakers themselves. I will make my comments on those two words.
So what does this powerful word, "competition," actually mean, and why do so few people in Washington understand it? Let me focus first on what the term means. The economics profession, and many people more naturally endowed with common sense, have thought a lot about the concept of competition over the past two centuries. I will try to keep my comments simple enough to even be understood in Washington.
"Competition" is a description of one way in which a particular goods or service may be provided. Importantly, it is not a description of how people or businesses choose or select the goals or services, rather merely how it is provided. Competition is not a disease that infects everything around it. Some goods may be competitively provided and others not. Competition for a good or a service may prevail with or without government interference; but, as we shall see, it does much better without it.
I will summarize competition with seven characteristics. Others may have been chosen, and some of these deleted. My main emphasis here is not an exhaustive and comprehensive definition, but rather a definition that helps illustrate what, if anything, a government regulatory agency has to contribute.
A. Unrestricted entry
The first characteristic is unrestricted entry to sell the good or service. If you want to sell electricity or telephone service in St. Louis, those markets are competitive only if no one prohibits such selling.
Many people confuse "unrestricted" entry with "free" or "costly" entry. Entry may be costly, but as long as everyone faces roughly the same costs of entry, including those already in the market; and these costs are not in some sense "unnatural," this condition is met.
For the economists in the audience, I don't want to get in a protracted debate now about sunk costs. Let me focus instead on the "unnatural" costs of entry. Just a few years ago, it was unlawful to offer competitive phone service in St. Louis under any circumstances, and that may still be the case for some selected other services. The cost of entry was what I might call unnaturally high. Entry might lead to government confiscation of assets, perhaps even jail time. Hardly what I would call a competitive market.
In a market heavily influenced by organized crime, entry might also be discouraged or allowed only with certain payments to a local mobster. Hardly competition.
Unrestricted entry must also be voluntary entry. If I want to offer telephone service in St. Louis, but a government official who has the power to stop me insists that I have permission to serve St. Louis only if I agree to serve Kansas City as well, I have no unrestricted entry into either city. In a truly competitive market, someone else will enter if I don't, and the proper role of government is not to restrict entry or even condition it.
Ultimately, only government officials and mobsters can impose what I would characterize as "unnatural" barriers to entering a market. Some people confuse the two. But when government restricts entry, or force entry, or conditions, it - willingly or not - is engaged in a corrupt practice of picking winners and losers in a market, the net effect of which may be indistinguishable from that of the gangster.
B. Unrestricted Exit
The second characteristic of a competition is unrestricted exit. Michael Jordan may be the greatest, most competitive basketball player ever. When he chose to retire, no government law, regulation or underworld gangsters stood in the way and forced him to continue to play. Every year, millions of Americans choose to retire, most in occupation for less glamorous than professional basketball. No one stands in the way.
Suppose, however, I wanted once I had begun, to stop offering telecommunications services in St. Louis. If I were a new entrant, no one would stand in the way. But if I were SBC, now that is a different matter.
In a perfectly competitive market, entry and exit are fluid, and those who exits are replaced by others in the market or by new entrants.
The proper role of government is not to interfere with this process either by limiting, conditioning, or prohibiting exit from markets. To do so is, once again, no different from picking winners and losers in a market, a corrupt form of practice little different from a mobster not wanting one of his paying customers to go out of business.
C. Market determination of available goods and services
In a competitive environment, markets, not government laws or officials, determine which goods and services are available. In a competitive market, if the people of St. Louis want a call-forwarding feature on their phones, and it is technological feasible, it will magically be available. In a market governed by excessive regulation not competition, the magic may take years of regulatory review to allow the service.
The American public was forced to wait decades for wireless telephone service and cable video services entirely as the result of regulatory delays. Under competition, these delays could never have occurred.
When government officials, not markets force pick the goods and services that will be available in a market, consumers always lose. Some goods and serving will be delayed or not offered at all. Others, with insufficient market demand to warrant being offered, can be sustained in a market only by taxing consumers, directly or indirectly. Picking goods and services in a market corrupts the regulatory process into a game of winners and losers. Competitive markets cannot sustain such intervention.
D. Market determination of quality
In a competitive market, the quality and characteristics of goods and services are determined by the power of supply and demand. In an overregulated market, these decisions are made by government administrators after protracted deliberations. Consumers wind up paying more than they wish for some services whose service quality is set too high, and do little for other goods and services whose quality is set too low.
E. Market-determined prices
Prices are the central form of information in a competitive market. When bid up, prices help encourage entry. When bid down, prices encourage exit. But, when prices are set by REGULATION, entry and exit conditions are confused and corrupted. Prices set too high encourage over investment and entry. Prices set too low discourage investment and entry.
F. Market Determined Quantities
Under competition, markets determine how much is supplied for each good and services in each market. Under excessive government regulation, government officials do. Prices and quality of service adjust to make up the difference.
Much of economics is a recognition that transactions in competitive markets can be summarized with three elements: Prices, quantities, and quality characteristics. An old theorem is economics holds that if, you try to restrict any one of these elements, the other two will respond accordingly in a manner that the net result is harmful to both businesses and consumers.
Restrictions on two of the three elements lead to substantially reaction in the third element, and have potentially more serious economic consequences.
According to the economic theorems, it is impossible to restrict all three elements at once. The Economists who propound the last part of this theory have obviously never visited the FCC.
G. Protection of Information Insurance, Intellectual Property and Related markets.
Competitive markets are usually based on free and competitive operation of supporting activities such as information, insurance, and intellectual property. Local mobsters have a stake in some of these markets and do not want competition there. When government officials intervene in these activities they threaten all related markets.
H. Competitive markets defined by supply and demand.
To summarize the discussion of competition, all of the salient characteristics of competitive transactions are determined by the unfettered actions of supply and demand.