Tuesday, August 10, 2010

Water, Food, and Dirty Laundry

Hearing some bits and pieces about the on-going "net neutrality" debate, I thought I would offer a few thoughts. At it's end, the concern seems to be over various telecommunications companies gaining some kind of monopolistic stranglehold on the internet through tiered subscription arrangements and the manual blocking of certain kinds of websites or data. If that is their intention, then I believe their focus is misplaced. If proponents are really concerned about such a stranglehold arising, a focus on barriers to entry in the telecommunications market is a more apt solution; not government control and burdensome regulation on providers. Consider how the three following analogous situations present themselves in the marketplace, and consider the reaction of the common person:

WATER - Although a municipal venture, the public is not charged a flat rate for water. Like electricity, the provision for and distribution of water is scarce. Because of this, you pay per unit consumed. Data transmission is fundamentally no different. It costs money to transmit data. Bandwidth is limited. We can fundamentally understand why the price structure for most scarce goods reflects a (somewhat) linear relationship between price and quantity, yet when it comes to the transmission of data, people become enraged at the thought of paying more for consuming more.

FOOD - Product discrimination is more than apparent in the food industry. More often than not, when you go to a restaurant you will be limited to certain types of drinks, and therein certain brands. Some restaurants procure contracts with large franchises like Pepsi or Coca-Cola, and agree to offer only their products, and to exclude the competitor's products. Likewise, super-markets give visual shelving preference to their own brands and specific name brands. Yet, people do not generally demand that the government force such businesses to provide access to all brands of a given product in equity simply because they provide a product. Why? How does the market facilitate demand for a wider selection of products?

DIRTY LAUNDRY - Let's say I want to open a laundromat down the street. I set up my business in an identical fashion to many other laundromats with one distinct difference; I charge half price per load washed when my customers use Tide detergent (I've made a lucrative contract with Tide to do such). Should this be illegal? Why or why not? If the general populace does not like this arrangement, what are they likely to do?

These are all serious points and questions I have for the proponents of net neutrality. I would argue, strongly, that the extent to which markets can't resolve such issues is the exact extent to which that given industry enjoys some kind of privilege bequeathed to them by government directly or otherwise. If the government had its hands in the telecommunications industry to as little degree as it does in the industry of dirty linens, I think there would be little to nothing at all to worry about - which is why my primary concern is barriers to entry; particularly the barriers fostered or imposed by government. Unfortunately the telecommunications industry, as a largely municipal venture, is a far cry from separation when it comes to government influence and privilege.

What seems to be leading the charge on this issue is a general misunderstanding of arbitrage in a free market, peppered with a healthy dose of class warfare. Call me unimpressed. The general indictment includes sudden bouts of greed and selfishness, with no apparent tie to the reality of things. As with the financial crisis, we're led to believe that SUDDENLY certain market actors are overcome by greed and a general yearning for profit. The tragedy is that they are so right they don't even understand the implications of their conjecture.

The horrible (read sarcastically) truth is that almost all market actors are motivated by greed. To act like you're surprising someone by alerting them to that fact is to presume that someone is far dumber than they probably are - and maybe that presumption is too common. Telecommunications companies, just like banks, are out to make the largest profits they can. If they could charge you ten times what they are currently charging and make more money (after the loss of market share) they would. Don't delude yourself into thinking that there's some bulwark vestige of altruism in the boardroom that's keeping them from getting another penny out of you - there's not.

The dirty truth is that, without a true natural monopoly, businesses have a hard time keeping their prices above the average subjective evaluation of that good or service. The discrepancies between cost, price, and subjective evaluation creates arbitrage opportunities. Oil companies don't sell oil for $50 a gallon. It's not because they wouldn't like to. It's because they can't - economically, not legally. As long as that given company doesn't hold a natural monopoly on oil, another company can make a killing by offering oil to their customers for $49 a gallon...and so on and so on.

Some economic explanations are simple and some are not. Yet there are some basic truths that aren't hard to wrap your head around when you learn the basics. The reason you can buy a shirt for $5 isn't that the producer is altruistic. The reason that 98% of Americans live on wages exceeding that of minimal federal and state requirements isn't because those requirements exist. Likewise, the reason you can find an enormous variation in soft drinks when you visit your local supermarket is not because of some government mandate imposed by the disenfranchised denizens of fast food joints that give preference to certain brands or products. Granted, some of these conclusions aren't obvious. In fact, some of them are down-right counter-intuitive. But maybe we should give some of these issues more thought before we start publically calling out the hangman.

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