Android app on Google Play iPhone app Download from Windows Store

 

Markets & Competition

Both personally and professionally I love markets. As an economist, I marvel at what the market can do. As a consumer, I am grateful for what it brings to life. It is one of the most significant inventions of humanity. Although it is an old idea, it makes the modern world possible. It is the great coordinating mechanism that creates order without orders, or “spontaneous order.” Markets enable cooperation between strangers, each of whom is motivated by self-interest (which is not the same as selfish interest) but is a necessary part of an emergent order that, in the words of Adam Ferguson, “is the result of human action, but not the execution of any human design.” Markets enable cooperation as mentioned before but their power is a consequence of competition among market participants. Let me tell you a few simple stories.

The last time I was on a transcontinental flight, I flew Cathay Pacific. As the flight was preparing to depart Hong Kong for San Francisco, the captain announced, “We are good to go. It will only be a few minutes — we’re waiting for some paper work. Our flight will arrive an hour early. So please make your phone calls to let others know. There are three areas of turbulence reported on our route. We’ll try to avoid them if possible. We don’t like turbulence any more than our passengers. Enjoy your flight.”

That was a thoughtful thing to do. The pilot could have elected to keep the information to himself but cared enough to share it. Another thing I was grateful for was their arrival preparation. In many airlines, the procedure is to wake up the whole cabin nearly two hours before landing. Not on Cathay Pacific. They did not bother people until about 15 minutes before the flight landed. People got to sleep in if they wanted. In-flight service distinguishes airlines. All things being equal, I would choose to fly Cathay Pacific.

The second story relates to some fast food I got for dinner one evening last week. It was one of those big fast food chains. I got a chicken sandwich meal to go. Came home and found the food not quite up to scratch. I called customer service. The representative apologized for the bad experience and said that someone will get back to me with 24 hours. Well, what do you know! I got a call back in 15 minutes. “I am the regional manager and my name is X. I am sorry to know you were not satisfied with our food. I will investigate the matter. In the meanwhile, I’d like to mail you two coupons for complementary meals.” I received the coupons yesterday. In any competitive market, customer service is indispensable.

In the US, retailing is one of the most competitive sectors of the economy besides being one of the largest. Two of the stores that I frequent the most are Costco and Trader Joe’s. Over the years, I have bought thousands of items from Costco. Their guarantee is simple: if you are not happy with your purchase, return it. I have returned scores of items to Costco. Once I had bought a bunch of clothes that were the wrong size. (They were meant for a friend’s wife in India.) After more than a year, I went to return them. I didn’t have receipts. They spent time figuring out how much I had paid for them and refunded the money.

The main point behind all these customer service stories is this. In a competitive marketplace, sellers compete for customers. They are in business to make a profit, which they can only do if they keep their customers satisfied. They compete on prices, quality and finally on customer service, motivated not by benevolence or altruism but because they are motivated by self-love. This competition in the market leads to lower prices, higher quality and superior customer service. It is the competitive market structure that lies at the root of socially beneficial effects. At the other end of the spectrum from the competitive market is monopoly. A monopoly faces no competitors and therefore lacks the discipline of competition. Being the only provider, customers have no choice and therefore have to take what they get.

Indians have had first hand experience of monopolies, almost always the result of government action. At one point, the government had a monopoly on telephone services and on commercial air travel. We all know the effects: high prices, extremely limited supply, poor quality and insufferable customer service. The Indian government continues to have monopolistic control over other segments of the economy — and with the attendant predictable bad outcomes. Why do public sector monopolies perform so poorly relative to competitive private sector firms? Simply stated, it is because the public sector monopoly firms have no incentive to satisfy their customers. Their deal to the customer is “take it or leave it”, knowing that the customer has no alternative but to take it.

Generally, public sector firms don’t perform as well as private sector firms. Part of the reason is that they are protected by the government. They can continue to incur losses and still continue to exist because they don’t face a hard budget constraint. The government just taxes the productive sector of the economy to subsidize the unproductive public sector firms; or worse, just prints more money — which is another way of taxing people without actually raising taxes.

Managers of public sector firms are government employees. Regardless of their performance, they get paid. They don’t have an ownership stake in the health of the firm. If they waste public resources, they don’t pay a penalty. Every time I travel by Indian railways, I find it painful to look out the window, not because of the garbage but because I cannot avoid seeing the waste of material all along the tracks. Piles of concrete sleepers (or crossties) lie deteriorating in the open; tons of unused steel rail litter every kilometer of track. That’s visible waste. Who knows how much of the budget of the railways is wasted on purchasing material that is never used. Why do they buy these if they are not being used? Perhaps kickbacks are involved.

We say that the government is the buyer. But in truth, people do the buying. It is easy to understand that in a system where wastage is not penalized, and where the buyer gets a kickback, you will find evidence of colossal wastage. In the end, the people lose. But in some ultimate sense, the people are to blame. They have willingly let the government rob them by not preventing the government from being in the business of running businesses.

It’s all karma, neh?

Atanu Dey on India's Development

Atanu Dey
Chapters
PJ O’Rourke: Every government is a parliament of whores
The Amazing Power of Technology
Swami Vivekanand: To the 4th of July
No True Islamic State
Herbert Simon — Information consumes attention
Yoga has no Religion
Hayek on “The Mirage of Social Justice”
An Open Letter to PM Shri Modi
Prefer a Functioning Economy
Political Discrimination is Socially Harmful
Markets & Competition
Ministry of Power, Coal, and New and Renewable Energy
John Stuart Mill on the Liberty of Thought and Discussion
Reading Ronald Coase
Universal Literacy
Man versus the State
What Comes Before
An ad from 1947: “The Uphill Task Ahead”
Pohela Boishakh, Vishu, and Puthandu Greetings
Rich People Spend More
Goodbye, Mr Lee Kuan Yew
Friday the 13th, Pi Day the 14th & Beware the Ides of March
Money is the root of all Evil
Warren Buffet’s Letter to the Shareholders
The Man Lee Kuan Yew Admires the Most
An Informed Citizenry is the Bulwark of a Democracy
Problems and Solutions
People I Admire – Part Doh
Nelson Mandela on Education
Criticizing Modern Indian Holy Cows Considered Dangerous
Richard Dawkins on the Monotheistic God
List of Pages on Teresa the Merciless
People I Admire
Lee Kuan Yew is under Intensive Care
On Monkeys, Cats & the Generality Principle
The Great Indian Bamboozle has to Stop
2400 hours of electricity for Delhi — every year?
Make India first to “Make in India”
Republic Day Thoughts on Reading the Constitution
A Day of Shame and National Mourning for India
The most dangerous man to any government
Socialism, Competition and Politicians
Open Thread: Ask me anything
Aakash, the “iPad Killer”, Vaporware has Evaporated
The Dreamer and the Dream
Circular Firing Squad of Flying Attack Monkeys Target Rajiv Malhotra
We need more Anandamide, not Jihadamide
Constitutions Matter in our Daily Lives
The Only Home We’ve Ever Known
Adam Smith on the Division of Labor
The Passing of Former President Mr APJ Abdul Kalam
Socialism Works its Wonders in Venezuela - also in West Bengal
Why the terrorists killed the satirists of Charlie Hebdo
Islam Poses an Existential Threat
The Wisdom of the Crowd
On Knowing Enough to Know that You Don’t Know
NITI — New Initiatives for Transforming India
Will India Recover?
The Unbearable Stupidity of Controlling Prices
Nov 14th as the “Day of Shame and Lamentations for India.”
The Indian Constitution — Part 2
Hayek on Valuing Individuals
Mr Modi goes to Washington