Thursday, October 19, 2006

Dysfunctional Capitalism

Notwithstanding what I said in my previous post regarding Adams invisible hand, a couple more thoughts. Competition within certain industries can sometimes lead to undesirable consequences such as a loss of quality. By way of example, the repeated electricity blackouts in the north east of the united states which happened in the early 90's ('93 I think) and then again in the early 2000's ('04 I think). The point is that they happened and after 10 years, the underlying situation had not been corrected and it happened again. My contention is that this is an illustration of competition taken to its extreme where the scramble for customers has driven prices down to such a degree that the business itself is not really sustainable. In order for the companies to provide the cheapest rate they have had to, over time, optimise their businesses to such an extent that if there are unexpected loads there is no 'fat' (excess capacity) available and hence the power outages. Now the question is, why was there not sufficient excess capacity? Did the engineers just miscalculate the demand curve over time? Were there more than one unusual event and the engineers had only calculated the demand from a single unusual event? Was there not enough capital expenditure due to the requirement to make profits or if there were no profits, to merely stay in business?
I think that it is possible for competition to drive prices so low that the quality of the service is undermined and that this is detrimental to the customer, perhaps more so than if the customer had to pay slightly more but have a better quality service. Of course there is the risk that the 'slightly more' just goes to the bottom line and there is no improvement in the quality of service.
Surely, in the same way that competition tends to drive prices down to a point, there should be an opposing principle which prevents the quality of a service from deteriorating past a point. This should be the customer choosing a more expensive quality service over a cheaper option with less quality but what tends to happen is that customers choose the cheapest option and then berate the supplier for not having the quality of the supplier which they rejected.
I think that what I am saying is that there are certain industries, fundamental ones, like electricity and telecoms, where the quality of the service is of such importance that there has to be excess capacity to cater for the unknown and that in these industries, perhaps competition is not the smartest idea.

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