I realized recently that there’s an inherent paradox in the free market system: left to its own devices, the free market will create as little freedom as it possibly can.
The most obvious examples are the big famous monopolies like Standard Oil and AT&T, but this happens in much more subtle ways all the time. Here are just a few examples:
- Cell phone companies. Why is it that all carriers require two year contracts? Why doesn’t one company gain a competitive advantage over another by offering a one-year contract, or a six-month contract, or no contract at all? The answer is collusion. Maybe not the kind where men in expensive suits sit around smoking cigars and plotting, but there is clearly some kind of an "understanding" in the industry (which seems to have come about in response to number portability). As choices become more limited (exclusive handset deals, consolidation), I wouldn’t be surprised to see three-year contracts become the standard like in Canada. Carriers get away with this because the costs of anyone new getting into the industry are prohibitively high. No single mobile phone service provider can act as a monopoly, but acting in collusion, they can very easily limit consumers’ options, and apparently get away with it.
- Television providers. Not only do you have very little control over who provides your television/internet/phone service, but at least where I live, they are all starting to require contracts just like mobile phone carriers. As in the case of phone contracts, customers are expected to sign agreements with penalties before it’s even possible to know how good the hardware and services are, and how they compare with the (limited) competition. Often the only recourse consumers have is switching to another product or service which these contracts are explicitly designed to prohibit.
- Alarm companies. Same story. Every one of them in my area requires a three year contract. If you want wireless equipment (which is all anyone wants to install anymore), they also want to charge extra per month rather than a higher up-front cost. If you call them on the length of their contracts, they simply respond with something like "it’s the industry standard." In this case, "industry standard" is synonymous with collusion.
- The software industry. There are just too many examples to name in the world of software. Customer lock-in is standard operating procedure. Think about how difficult it is just switching to a new computer with the same operating system, and now imagine switching to a different operating system, or migrating years of data from one software package to another, or converting an entire company from one internal workflow to another. These challenges often aren’t accidental. In most cases, it’s easier and cheaper to put up with what you have than to switch to something better.
- The medical industry. Regardless of where you stand on the healthcare debate, unless you’re a highly paid specialist or an insurance executive, it’s hard to argue that the system isn’t out of control. Doctors and hospitals charge way too much because they know that individuals usually aren’t paying their own bills, and insurance companies therefore charge as much as they can for coverage and pay for as little treatment as they can get away with. The victims are the insured and uninsured alike who are locked into a system that doesn’t work and which doesn’t provide any better options.
The reality is that it’s cheaper and easier to lock customers in, stifle competition, and apply "leverage" than it is to truly innovate and compete on a level playing field. Even if it’s not good for the industry or for consumers in the long run, it’s better for next quarter’s earnings which, as we all know, is what leads to higher stock prices (aka executive compensation) and better bonuses.
All of this takes place in a free market system, and all of it is either perfectly legal, or at least legal enough that nothing is being done about it. All of these limitations and constraints and miserable experiences that we are all stuck with are actually rewarded by the free market which, in many cases, isn’t free at all. The only way to create a truly free market is to constantly regulate it — sort of like the government itself.
So what can be done about it? First and foremost, multi-year agreements should be illegal, plain and simple. If a company can’t provide a service which is valuable enough to keep you from switching to another service, you should be allowed to switch without penalty. Second, in any instance where the huge majority of dominant companies in an industry begin to adopt the same sets of practices, the government needs to investigate. I don’t like the idea of the government getting involved in private industry any more than anyone else, but the reality is that private industry has proven over and over again that it will not regulate itself, so the only entity with the power to do it for them is the federal government. And finally, wherever competition is lacking in a particular industry (or a particular industry which is strategic to the country is failing to prosper), the government should offer incentives to private industry through low interest loans, tax breaks, etc. This does not mean giving failing car companies who have a long history of mismanagement more money to mismanage; rather, it means giving entrepreneurs the opportunity to compete against the status quo.
It’s easy to argue that these kinds of solutions are unfair, but if businesses are offering quality products and controlling costs (i.e. executive compensation), nobody should have anything to worry about.
Update: Judging from the comments, I feel I should clarify some points in this post. By no means am I unconditionally in favor of more government and regulation, nor am I in favor of nationalizing private industry in any way. I believe we need the right amount of government which means less in some areas and more in others. And, of course, we need government that works. Often the assumption is that everything the government attempts to do will inevitably fail miserably. Obviously that’s not acceptable. Just as we should be able to drop our mobile phone carrier if their service is not what it should be, we need to vote out politicians who can’t ensure that government programs are run effectively.
Although I know this post could come across as sounding like I want a market that is less free, the irony is that I want just the opposite. That’s the paradox. I only want to see regulations placed on private industry where that industry is trying to limit freedom, choice, and innovation. I want freer markets. Maybe government regulation isn’t the best way to get there, but as I said above, these markets don’t appear to be willing to regulate themselves, so who else is going to do it?
Living Digitally 
Proponents of the free market model argue that it’s the responsibility of consumers to regulate industry by choosing what’s best. But as you’ve described, which I agree with, consumers are increasingly forced to choose between one evil or another while real innovation and competition are too often squashed by buyouts or plain theft of ideas.
One area of light I think is the construction industry. Almost everything is compatible by size and function. You buy your tools based on quality (or price), not because you already have the set of proprietary attachments and it’d be too expensive to “change systems.” Every screw, bolt, bit, blade, and cord works with whatever you’ve got.
I wonder if a governing document, like a constitution, would work to regulate the practices of businesses across the board. Of course something like that would meet endless corporate opposition/influence/corruption in the Government. But that’s another post I think.
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In that list, software development might be a relatively free market, but all the rest have been heavily regulated, under centralized control… and incumbents have much incentive to try to lobby that centralized power.
Forbidding multi-year agreements falls prey to the same weakness. Ideally, we’d want to lower the barriers to entry, reduce the political risk of a business commitment, so that more providers can reach a greater diversity of agreements with more potential customers.
Related: Wikipedia has a few entries on economic freedom worldwide, and this link summarizes a few indices:
http://en.wikipedia.org/wiki/Economic_Freedom_of_the_World#Economic_Freedom_of_the_World
jd
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We need less government control not more. Your bullet points prove that whenever government is involved things go bad. The US is not a completely free-market because we have government controlled monopolies.
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To blame all this problems on the free-market one would have to assume that we are in a free-market. But we are not in a free-market system and have not been for quit some time. As for you telephone and cable companies they are controlled by the FCC,so those are obviously not free-markets. The medical industry is controlled by the FDA, this is also not a free-market. And as for the Software Industry, that is controlled by the FCC and well as many stifling requlations and anti-trust laws. Maybe the only true free-market is eBay.
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Just an FYI, the two year contract was in response to the fact that American’s don’t save money and if they had to fork over the money for the actual cell phones…we’d still have payphones on every corner. They don’t give you a free or greatly reduced phone in most other markets.
FWIW, the real lack of choice is where the government is in charge…USPS and public schools…great results there!
Mark Fuqua
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Robert:
I realize our economy isn’t based on an entirely open and free market just as Americans are not entirely free individuals. Of course there are boundaries. But the market is free enough to allow anti-competitive behavior which tends to make it less free. Hence the paradox.
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Michael:
What do you think the economy and the market would look like if it was entirely unregulated? Do you claim the result would be better? Could be, but I see a lot of companies abusing the level of freedom they currently have. That’s to be expected, of course — all I ask is that consumers have the ability to vote with their wallets.
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Mark:
I realize that part of the multi-year contract required by carriers is to pay for a subsidized phone, however I also think that position is being abused. I believe that the penalty for canceling my AT&T account is $200. The price of a subsidized 3Gs phone is $300. The price of an unsubsidized 3Gs is $700. If you do the math (penalty + subsidized price), there’s $200 left on the table — or rather in AT&T’s pocket. Of course AT&T has a right to make a profit. They have a right to make all the profit they can, in fact. But I do have a problem with companies making profits at the expense of consumer choice. Choice is ultimately the only thing that empowers consumers, and it should never be taken away.
I also find it interesting that whenever I talk about government regulation (which, I should mention, I am not uniformly in favor of), people mention things like the post office and public schools. I typically send and receive several packages a month related to my business, and the only problem I’ve ever encountered is a box of books that arrived wet during a hurricane (which the post office reimbursed me for). Are there really hundreds of thousands of people out there having miserable experiences with the post office, or is picking on the post office sort of like picking on Canada’s healthcare system (which all the Canadians I know seem to like)?
And the public school I send both my children to is exceptional. In fact, I’m constantly amazed at the level of education my children are getting. That said, I know from firsthand experience that there is an unacceptable number of subpar (to put it mildly) public schools in this country. In fact, when I lived in San Francisco, I had to send both my kids to private schools. But clearly there are hundreds of examples of excellent public schools across the country which prove that public services can be done well — just as there are hundreds of examples of private services done poorly.
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Micheal:
The problem with a completely free market is A; businesses are not required to reveal their budgets and spending practices, and B; they are governed by profits instead of an obligation to the greater good.
Maybe I’m overly cynical, but I find it hard to assume an organization that only answers to the bottom line will look out for its customers in any meaningful way. At least not in any way that would endanger the margins.
And if you’d like a taste of where my distrust comes from, check out Part A of the BBC program “The Century of The Self.” (58 min on Google Video) You’ll see how the market used to be driven by rational decisions of product quality and cost. But in the 20s a man named Edward Bernays employed Freud’s psychological theories to advertising and Public Relations (new name for propaganda) to convince the masses to buy what they FELT they wanted. Thus turning us into a nation of consumers, verses rational people who would typically govern the market by rational decisions.
http://en.wikipedia.org/wiki/Edward_Bernays
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“I see a lot of companies abusing the level of freedom they currently have.”
True, and a better remedy than having corruptible politicians attempt to micro-manage them is to let more players compete, to remove artificial barriers to their entry in the market.
“Capitalism” is when an individual can save their capital, then bet on what they think will work better for more people. It’s kinder and more effective than letting only “the best and the brightest” place the bets.
re “voting with their wallets”: agreed. But many of the problems you cite are directly due to prior regulation artificially restricting public choices. For instance, San Francisco City Hall skims off some political power (“public access channels” for certain types of speech, eg) in return for granting local transmission monopolies:
http://www.bing.com/search?q=site%3Areason.com+cable+%22san+francisco%22
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the free market will create as little freedom as it possibly can.
It is well understood that monopolies and oligopolies are bad for the economy in the long run. That’s why most developed countries have anti-trust laws in place. These Laws and the execution of it might be not perfect but I do not really see a big issue here. In the case of mobile carriers you mention, I think customers understand the long contracts in order to get a understand the lenghty plans in order to pay less for a handset. At least in Europe there prepaid plans are very commonly used for people who do not want the newest handsets and want the freedom to cancel at once.
Just to broaden the context here: To my opinion what really demands attention is the 2 fundamental problems of markets which are:
– A generation problem: future generations have no voice.
– There’s no price on public goods: e.g. air, water, ..
The first problem leads to a short sighted view in the actions of the participants – up to the perversity of acting just on quarterly result targets and bonuses derived from that. A good example of how this leads us to most dangerous developments is the consumption of non-renewable resources.
The second problem leads to destruction of our resources that do not officially belong to someone, are free by definition. In Microeconomics you learn that the scarcity determines the price of a good. Markets cannot do that for public goods because they are (yet) abundant, and they do not forsee their scarcity because of the generation problem.
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(*warning, tangent*)
Ben brought up a really good point. I find it extremely interesting that very intelligent people will make blatantly short-sighted decisions when it comes to quarterly targets and bonuses.
Companies that produce products for sale, and who intend to continue to products for sale, shouldn’t spend as much time worrying about 90 days out, and instead, focus part of their capital on the next iteration of the product they expect will result in sales.
I’m all for making sure your quarterly goals and spending are in check, and there is nothing wrong with trying to maximize sales and existing revenue channels — however, if you don’t plan on what you are going to sell next, your days are automatically numbered.
Furthermore, if you don’t innovate, and your competitors do, your currently “captive”, “solid” and “dependable” customers will prove to be the opposite.
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I pledge my loyalty to those who makes the best product, do not demand a contract, do not impose restrictive conditions upon access & usage, and don’t limit the thrill of innovation developers enjoy.
It is a paradox that the free market fears openness, transparency, & freedom. I vote with my wallet, and am far more principled than years past. I spend that extra $ for an unlocked device. I avoid buying Apple products, despite the appreciation I have for their simplistic UI & responsive touch. It’s just not worth it to me in the long-run to support locked-down systems, contracts, and too much control.
I pledge my loyalty to those who makes the best product, do not demand a contract, do not impose restrictive conditions upon access & usage, and don’t limit the thrill of innovation developers enjoy.
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