When I lived in Bolivia a few years ago I noticed some market behavior that I’d never seen before. In the central market, all the vendors got together and set their prices, which they posted for the public to see. There were two bus companies in Sucre, and they charged the same amount and drove the same routes. Much of the local economy seemed to be based on price-fixing.
When I thought about it, it made sense. If you have thirty people all selling the same products—vegetables, say, or potatoes, or cow snouts (yes, there’s a whole row of cow-snout vendors in the central market)—does it make sense to have each one compete with the rest by lowering prices? Wouldn’t that cause every vendor to starve? Vendors in the Sucre market competed with each other to see how nice they could be to their customers, often offering a yapa—a little something extra—with each purchase. They hawked wares based on quality, appearance, and taste. Price was not—could not be—a basis for competition, because it would be ruinous.
This was an eye-opening revelation. Price-fixing is illegal in practically all of North America and Europe. Yet it was common practice in Bolivia. And it seemed to work.
So it occurred to me that, contrary to our conventional understanding that the most natural mode of economic behavior is the kind of ultra-competitive “free” market where price-fixing is not allowed, perhaps an economy that includes price-fixing is more natural.
Indeed, Adam Smith, the founder of modern economics, recognized this. In The Wealth of Nations, he wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in . . . some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which could be executed, or would be consistent with liberty and justice.”
In other words, Smith did not foresee a world in which price-fixing was illegal. Such legislation seemed impossible to him—not to mention contrary to “liberty and justice.” The maximization of profit and price-fixing go hand in hand.
But now it is almost equally impossible to imagine a world in which price-fixing is legal. Except if you’ve spent time in Bolivia.
So let’s imagine it: the entire Western world does away with its laws against price fixing, perhaps with certain exceptions (for example, for price-rigging in government contracts, or price-fixing that effectively creates an industry monopoly). What would happen?
Well, there has been plenty of tacit price-fixing in the Western world, and it seems to have worked quite well.
For thirty years I worked for publishers, and I am 100% certain that we never met with other publishers to discuss the pricing of our books. Yet there currently is an implicit understanding that a hardcover under three hundred pages will almost always be priced at $26.99, and twenty years ago a paperback of a certain length would always be priced at $14.99. When pricing a book, we didn’t try to undercut the price of other publishers—we always tried to price it the same as everyone else did. There was no price-fixing per se, but the result was exactly the same. Competition in the book industry is almost completely unrelated to price, and is based almost solely on quality and appeal.
The airline industry used to operate in a similar manner. A flight from Los Angeles to Atlanta might be offered by four different airlines, and the price was the same. Instead of competing on price, the airlines competed by advertising the quality, comfort, promptness, and friendliness of their flights.
In a competitive market, the legalization of price-fixing would encourage innovation, quality, and diversity.
But there’s something else going on in the developed world, the world where price-fixing is illegal. And it’s actually more insidious than price-fixing itself.
In Bolivia, when all the vendors in the market fix prices, or when the competing bus companies decide to serve the same customers and charge the same price, they get together and form a syndicate (also known as a cartel).
In the United States and Europe, by contrast, that kind of activity is highly illegal. The technical term for it is a “horizontal price-fixing conspiracy.”
But there’s actually a very easy way around it. Here in the developed world, all the vendors in the market can also agree to fix prices. They simply get together and form a . . . firm.
Now I’m not talking about monopolies here. If you didn’t like the prices in the mercado central in Sucre, you could always go to the mercado campesino, which was a lot cheaper, though also a lot more chaotic. In the US, horizontal price-fixing agreements are illegal even if they don’t work, even if other competitors are going to be around. Similarly, if vendors get together and form a firm, there very well may be other firms that will compete with it.
So what are the essential differences between a price-fixing syndicate and a firm?
In a syndicate, each vendor owns her own operation. In a firm, each vendor is either a part owner or an employee. She can no longer make a little extra money by giving away yapas or having her goods be of better quality than those of the other vendors. A firm’s products rarely compete with each other, while those of a syndicate are perfectly free to. A firm aims to be efficient; a syndicate has no such need. A firm has a strong interest in standardizing all the goods it produces, while a syndicate has a strong interest in individualizing them. When firms innovate, they replace their old products with new ones; when syndicate members innovate, their new products are sold right alongside the old ones.
In a syndicate, the vendors all earn more or less the same amount. A firm, on the other hand, is run by executives, who earn huge sums of money, while the employees who actually make and sell the products earn relative pittances.
It has been commonly believed for a very long time that regulations against price-fixing are essential to a free market. But in fact, the result is a less free market. By outlawing syndicates and promoting the formation of firms in their place, the government is effectively shutting down small businesses and encouraging the proliferation of corporate monsters.
If you don’t believe me, try reading a recent paper by Sanjukta Paul called “Antitrust as an Allocator of Coordination Rights.” The abstract reads, “It is conventionally understood that the purpose of antitrust law is to promote competition. . . . [But] our current antitrust framework authorizes large, powerful firms as the primary mechanisms of economic and market coordination. . . . The pro-competition norm has served to undermine other coordination mechanisms—such as workers’ organizations, ‘cartels,’ and the public coordination of markets.” (I’m grateful to Matt Levine of Bloomberg, who alerted me to this paper in a recent very smart column.)
Paul basically argues that the right of business entities to coordinate with one another is allocated by current antitrust law to the firm and to the firm only. This is not a natural or foretold outcome but rather a product of the influence of the Chicago School and especially the famous judge Robert Bork (author of the vastly influential book The Antitrust Paradox), which redefined competition to exclude collaboration and coordination, both natural features of competitive markets worldwide. Antitrust legislation originally didn’t make exemptions for firms—“trusts,” which were the original focus of antitrust legislation, were firms, since they were business entities under common ownership and control, and lawmakers treated trusts and corporations interchangeably. The language of the Sherman Antitrust act made no distinction between inter-firm and intra-firm coordination, but that distinction is central to antitrust actions today.
Basically, Western governments favor firms over business consortia, unions, so-called cartels, syndicates, and other forms of business associations, all of which are suspect, and all of which are enjoined from setting prices. In doing so, these governments are acting not in support of competition, but against it.
Paul gives a couple of terrific examples.
Let’s say there are five trucking companies, with twenty drivers each. Each trucking company sets the prices its drivers charge. This is not considered price-fixing, and is perfectly legal. Now let’s say one of those companies goes belly-up and the twenty drivers employed by it decide to form a bargaining unit for the purpose of negotiating their contracts with customers, agreeing on rates. The situation, for all intents and purposes, is the same as when there were five trucking companies, rather than four, but the independent drivers are now engaged in a “price-fixing conspiracy,” simply because they own their own labor rather than being employed by a firm.
Let’s say a number of organists who play for special events get together to fix prices. This actually happened, and the organists were prosecuted by the Federal Trade Commission. Now let’s say a bunch of investors create a corporation that contracts with those same organists and charges a set price for organists who play at special events, skimming a bit off the top. This is perfectly legal under current US practice. The net effect is almost the same. The organists get a little less money; the investors get a little more. But more perniciously, an organizer of a special event now has less control over which organist to hire—that’s largely up to the corporation; and the organists themselves will get much less advantage out of giving superb performances.
And then there’s Uber. What exactly is Uber but a price-fixing syndicate made up of independent drivers? Well, it’s a firm, and a very big one too, so it’s perfectly legal. But if all of Uber’s drivers suddenly quit and decided to drive independently but agreed to use a price algorithm similar to the one that Uber developed, the FTC would hound them, stop them, and levy huge fines on them. Why should this be the case?
In the United States and Europe, large businesses have numerous advantages over small ones, many of them due to government regulations. Large businesses require tremendous government support in order to survive. And one of those supports is the current interpretation of antitrust laws.
An unfettered free market can present terrible problems. But in the case of price-fixing, I think a little more freedom and less regulation might prove a valuable corrective to the over-corporatization of the American economy.
My top ten stocks right now: ARC, PCMI, GSB, KMDA, PCOM, CTEK, PERI, SCX, CLCT, PFSW.
CAGR since 1/1/16: 40.5%
Comments