The Idea:
Oligopolies, insane intellectual property laws, unreasonable
shareholder expectations, government corporate welfare, massive
subsides, corporate amorality and other aberrations keep the current
economy light-years from being a true market economy, but at a micro
level, customers are starting to flex their muscles and their
creativity and working their way around market-distorting behaviours of
obstinate and dysfunctional corporatists. This article explains how it
all works.
 The
other day I was challenged to explain some of the economic phenomena
I've written about on this blog, like the Wal-Mart Dilemma, file
sharing and the end of affordable personal service, in terms of
classical economic models. I was a little rusty, but here is how I
replied:
In the ideal, 'perfect' marketplace (if we should ever find one), the
amount of a product that is sold, and the price at which it is sold is
determined by the intersection between the supply and demand curves, as
illustrated in Fig. 1 at right. The black dot, which corresponds to the
point at which y units of the product are sold at price x apiece, is
that intersection: If a vendor charged more than x, the drop in demand
would more than offset their improved margin, and some competitor would
eventually step in at price x.
What Wal-Mart has done is shown in Fig. 2. They bully their suppliers
to lower their wholesale prices to the point that Wal-Mart can sell for
less (and less each year). Customers accordingly buy a lot more of each
product, often more than they need, either to stock up or because they
can get more of the product from Wal-Mart than from other vendor for
less money, so even if they throw the extra away they're still ahead.
Much has been written about this practice, which is analogous to what,
in international markets, is called 'dumping' -- clearing out a product
at a loss to force smaller competitors out of business. Much has been
written, also, about the devastation this has wrought in the name of
'productivity': Vlasic pickles chased the Wal-Mart business to the
point they produced almost half the US's total pickle volume, but at
margins so small they were unsustainable, and they became insolvent.
The only way Levi Strauss could meet the price-cutting demands of
Wal-Mart, upon whose business they quickly became dependent, was to
close all of the company's once-proud Made in America facilities,
outsource everything to Asian sweatshops, and lay off all American
production staff. The competitors of Vlasic and Levi Strauss (and many
more companies like them), in the meantime, lost so much market share
to the discounters that some of them, particularly small local vendors,
disappeared as well, taking small local retailers with them. The
Wal-Mart Dilemma has arisen as a result: The laid-off US workers can
now only afford to buy from the same deep-discount retailer who put
their employers in receivership or forced them to offshore their
domestic operations. It's a grim irony and socially devastating to
millions, but to the shareholders of Wal-Mart it makes perfect sense.
And, what's worse, in most cases, the foreign crap that Wal-Mart sold
was so inferior in quality that buyers found the 'low prices' weren't
even a bargain -- their products had to be replaced much sooner and the
absolute cost to the consumer (and to the society in energy waste and
landfill garbage) was actually higher. Only when customers wake up and
realize that they're actually getting less value for money (and/or when
Asian currencies are revaluated) will this aberration in the healthy
supply/demand curve some to an end.
In industries where oligopolies use their size and domination of the
market to crush or buy out small competitors, and hence jack up prices
and margins to exorbitant levels, you get a picture like Fig. 3. In
this case, the high prices drive customer demand to near zero, to the
point where there is essentially no intersection of the supply and
demand curves. We've seen this in the CD market, where the oligopoly
dramatically reduced the number of titles it produced, jacked up
margins to sky-high levels, and saw unit sales plummet for a decade as
a result. While the oligopoly blames the sales drop on P2P suppliers
(file-sharing), the P2P phenomenon is actually a result,
not a cause, of exorbitant pricing and falling product diversity. The
'market' worked around both the excessive pricing of the oligopoly, and
the lack of variety and quality of their product -- consumers simply
traded music with each other (as they in fact have always done, but on
a much smaller scale), and welcomed independent online artists who
offered the quality and variety they wanted at a reasonable price. Here
the irony is working in the opposite direction than it does in the
Wal-Mart case: The music oligopoly cannot afford to lower its prices,
broaden supply or improve quality to recapture lost market share
because their shareholders will not let them -- this would at least
temporarily hurt profits and share prices. So instead the oligopoly is
simultaneously suing file-sharers and squeezing artists to try to find
a way to sustain profits without capitulating to the market that its
own greed has created -- a losing game.
Fig. 4 shows yet another market anomaly: The unaffordability of decent
customer service. The industrial model of the West is based on high
margins (from oligopoly practices and automation) and high volume of
identical products to sustain the absurdly high ROIs that shareholders
demand of public companies. This leverage is much harder to achieve in
services than it is in products. Vendors want customers whose products
are obsolete or broken to throw them out and buy new ones -- as often
as possible. A market for durable used products would disrupt that
consumer pattern, and the fact that companies like Amazon and eBay are
meeting the exploding demand for quality second-hand products is
alarming and threatening to all the companies that depend on the
Western industrial model. It's like the file-sharing nightmare, except
now people are trading everything
used, not just music, videos and software. Likewise a huge gap has
opened up between the supply of and demand for quality customer service
-- another area where ROIs are constrained by lack of leverage: Service
is hard to automate, usually dreadful when it's offshored, and offers
lousy margins compared to products to boot. Every
segment of the customer population, from corporations and the rich to
the poorest individuals, is dissatisfied with the quality and
value-for-money (and sometimes the absolute unavailability) of quality
customer service. Providing good service is expensive, and large
corporations are trying everything they can to force customers to a
'self-service' (i.e. no service) model. Those in industries where they
can't just tell the consumer "Throw it out and buy a new one" are in
especially deep trouble. Examples: the news media, professional
services (legal, medical, financial etc.) are all under fire for their
skyrocketing prices for less and less service time and value.
The curves in Fig. 4 are not sustainable. Customer demand is not going
to yield -- the need for quality service will never just go away, most
people will never adapt to 'self-serve' models (the digital divide just
keeps widening), and thanks to the Wal-Marts of the world customers'
ability to pay for quality service is going to decrease,
not increase (especially when the stock market and housing market
bubbles burst). This will widen the gulf in Fig. 4 even further. There
are three possible scenarios, and we're likely to see a mixture of all
of them:
- New low-price, high-quality service suppliers will enter
the market. If this happens (and it's already started), expect a bloody
battle from the incumbents who will do everything they can to prevent
it -- getting governments to ban 'unlicensed' (by the incumbents)
service providers, rendering warranties invalid if service is done by
'unauthorized' personnel, and, of course, suing the new entrants.
Credit unions, Internet banks and insurance companies, independent
Sarbanes-Oxley 'compliance consultants', alternative media,
paraprofessionals, alternative medicine practitioners, healthcare
offshorers, self-publishers, investment clubs, alternative disputes
settlement forums, and other 'peer assist' offerings are just some of
the examples of alternative offerings eating into the 'customer
service' establishment in many industries, and trying to close the gap
in Fig. 4.
- The price 'bubble' for services will collapse, just as it
has for products and just as it will for stocks and real estate. This
will also be bloody. Public corporations in service industries will be
crucified by shareholders as those incumbent service providers who
break ranks drive service industry ROIs down to more reasonable levels.
Large-firm 'professionals' who would faint at the unheard-of idea of
salary cuts will see cuts in double-digits, which, on top of the
incredible hours they already work, will probably lead to massive
strikes by people you would never expect to see striking. Companies
which make shoddy products and which try to shove off all service to
outsourcers or offshorers, like the big computer hardware and software
makers, construction companies and lawn tractor makers (according to
Consumers' Union, these industries' products have the highest failure,
repair and complaint rates, and none provides quality service) will
face a consumer revolt, and demands for government regulation to
improve or offer free replacement for defective products and work --
which these industries will fiercely lobby against.
- Peer-to-peer service models will emerge. This could be
fascinating, because there's a precedent for it in just about every
country that has ever suffered through an economic collapse. The next
generation may start by working their way through university fixing
computers inexpensively for the big, sloppy computer manufacturers. But
why would they stop there? Once they become expert at repairing your
piece-of-shit Dell computer, why wouldn't they start building their
own, and offering much more customization, better upgrade capability,
lots of free, Open Source software bundled in, and friendly, reliable,
knowledgeable local service? At a fraction of the price. Yes, at first
some of them may be pretty crappy themselves, but the market will work
that out, just as it did with the Japanese manufacturers when they
first entered the Western market (remember when Made in Japan was
synonymous with poor quality?) And if you buy your next computer from
your neighbour's son's upstart enterprise, why not do your banking
through your niece's new community bank, part of a huge peer-to-peer
network of community banks all helping each other out? And why not a
new industry comprised of young legal students (or retired lawyers)
offering alternative dispute resolution services for $20/hour instead
of the $200 the lawyer charges? Lots more examples spring to mind.
It's hard to say where this could end: Whether customers will be
content with a rectification of corporatists' market-distorting abuses,
by simply 'working around' the dysfunctional giants; or whether this
trend could usher in, especially with the pending retirement of half a
billion baby-boomers in the next decade, an early evolution of a new
and entrepreneurial Gift Economy. If it should turn out to be the latter, we'll need to
find a replacement for the classic supply/demand curves that I've
used in this article. When x=0, all the time, y by definition becomes
infinitely large, and a world of scarcity becomes a world of incredible
abundance. I'm not sure the Gloomy Profession is ready for that.
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4:11:07 PM 
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