Greed and Loathing in the United States

Verizon
Mobil
Shell
BP
Alaska

Anyway, you get the idea. I can understand the need to make a buck. I can understand the need to satisfy shareholders. I even understand the arguments that "social welfare" isn't exactly compatible with corporate objectives and isn't necessary from a "free market" point of view. The unfortunate problem is that we don't live in a perfect free market. For example, utilities, such as oil, phones, internet service, water, electric, etc. are not "free markets." You and I cannot just start up an electric plant and start competing with ComEd. You and I cannot just start up a telephony company and start competing with AT&T (or SBC or Cingular, or whoever the hell AT&T is these days). You and I cannot just throw down an oil rig and start competing with Mobil, BP and Shell. There are significant barriers to entry to each of the utility markets. Some are practical: high costs of capital, high costs for fixed assets, labor intensive, technical knowledge, etc. Some are regulatory: licensing for operation, licensing for drilling, licensing to dig to lay down fiber, licensing from entities that already have lines down to use their lines, etc.

Unlike Microsoft's "monopoly" which is more the failure of the market to create a competitive product than the doings of any over-arching conspiracy, the utility "oligolopy" creates a bigger threat. The current players spend millions of dollars a year lobbying congress for two things: deregulation and rigorous licensing standards. The reason is obvious, though maybe not intuitive.

Before deregulation of most of the utilities in the 1980s, the government set hard caps on the prices utilities could charge, the markets they were allowed to enter, and the number of them that exist. The companies argued that with de-regulation there would be greater competition and lower prices. (why would the government listen to the companies?? Did they really think that industry was interested in more competition and lower prices?!?) With deregulation, these barriers were removed, they could charge whatever the market would bear. They could buy up whatever markets they wanted. And they could consolidate into a very few large national companies. These companies have no incentive to "compete" against each other. Rather, they have a large incentive to compete with each other. One agrees to lay down the infrastructure, the others agree to lease it from them. The leases ensure that prices have a floor - at a minimum, no company is going to charge less than what they have to pay to lease the line. High physical barriers to entry ensure that start-ups cannot compete. If a start-up manages to get its foot in the door, deregulation ensures that one of the few can buy out the company before any significant threat is realized.

Going hand in hand with that is difficult and laborious licensing procedures. The companies that already exist already have the licenses. Getting one more isn't going to present a problem. On the other hand, a start-up faces the daunting task of getting all them before they even begin. The minutia involved and the local political grumblings practically ensure that no one other than the big players can lay lines without the permission of the entity that's already there.

What all of this means for the consumer is prices that bear no resemblences to "free market" competition. The companies don't compete against for lowest price to attract customers. For the most part the utilities are necessities of daily life - the consumer cannot boycott the high prices. So, the companies have no incentive to keep prices low; it's not like they are going to lose customers. They only have to ensure that they stay within a reasonable distance of their competitors. And it's a leap-frog up the chain instead of down. Company A charges X, Company B charges X.01; while everyone might go to Company A to start, Company B still makes some money (for instance, BP routinely is .01 above its surrounding competition because of its advertising and 'status' as a 'premium' supplier, it's why they spend so much money to keep clean stores and good lighting). Having no incentive to keep prices low, Company A gets greedy, they realize that they can charge X.02. They can do this because Company B has no incentive to keep their price at X.01 - their shareholders demand increasing profits, so they have every incentive to keep up by charging their "loyal customers" (you know, the ones with the Company B "discount" card) X.03. And so on and so forth. And in the meantime, customers have no recourse because they can't not buy the resource.

Oil prices are at an all-time high. Yet the oil companies are making record profits. Cable and Electric prices are all-time highs, yet they are bending truths to wring more money out. And meantime, we, the customers are bending over and taking it because we have no choice.