Dictating Standards

August 14, 2007 at 11:30 am | Posted in Economics, Legal | 2 Comments

Mark Goldberg wrote a blog entry on Picking Winners that was replied to by Alec Saunders in an entry today called Driving on the right-hand side in a left-hand wireless world. The entry is about imposing standards by wresting control of the technology from a monopoly and handing it to aspiring entrants :

Consumers are best served when commodities are delivered in standard ways. And because monopolies tend to act in the best interests of shareholders rather than consumers I would argue, in disagreement with my friend Mark, that when the market reaches a point where competition is not being served, standards should be dictated.

I feel Alec’s reply raises more difficult questions than answers, however:

  • Which markets does this apply to?  There’s a big difference between applying this to wireless carriers, pharmaceutical research, and software.  If it applies to only certain types of markets (e.g., huge entry barriers) it may be difficult to define which to apply it to.
  • Who says when something is a “commodity”? The potential competitors? I don’t think anyone invests a lot of R&D into something and thinks they have invented a great new commodity.
  • Why is it a given that defending the best interests of consumers automatically trumps the best interests of shareholders? I’m sure when Zimbabwe outlawed inflation and froze prices that must have seemed in the best interests of consumers – until all the shelves went bare and businesspeople left the market. This is an extreme example, but one that shows why automatic favoring of consumer over producer (or vice versa) causes problems – it’s a delicate balance.
  • Who determines when competition is not being served? Again, it seems the competitors tend to happily take on this role.
  • What does “dictated” mean? Do you get fined or arrested for selling something non-standard? I’m not against compliance tests and labels if they are voluntary.
  • How does innovation occur once a standard has been dictated? There are ways to address this, but they are often slow and tedious.
  • How do you avoid a free rider problem when market consensus on what a standard needs to contain is only obtained by expensive, iterative exploration by innovative companies? The market may reach a point where “competition is not being served”, but how does the government then compensate those that competed versus those that come along after the whistle has blown? I do not believe the lead garnered by brand reputation and awareness is enough on its own to compensate for the competitive costs.
  • As a corollary of the free rider problem, for complex technical issues how does the government assure “survival of the fittest” over “survival of the first”? Standards often emerge only after an evolutionary process encourages variations that live to evolve or die based on their usefulness (although sometimes market realities like poor management or insufficient bootstrapping funds can distort the process).
  • How could one be sure that a law meant to ensnare monopolies would not slowly expand to catch weaker and weaker monopolies until it’s simply being applied to any market? While framed as an attack on monopolies that have rendered competition impossible, many of the examples he gives (e.g., VHS vs Beta, camera lenses as a personal monopoly of his rather than an exit barrier) are not monopolies, which demonstrates the slippery slope that a regulation like this would face.

I must agree with Mark Goldberg (and all my Economics professors) that “markets are better at picking winners than governments.”



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  1. Good questions. For clarities sake, let me begin by saying that I am a free marketer, not some kind of raving loony 😉

    I was speaking specifically about telecommunications monopolies, which are granted by governments. They are artificially created monopolies rather than the result of a clever business strategy, superior product, and/or great market acceptance.

    The statement I made clearly has holes in the general case.

    Returning to the telcos, we would have true competition, even amongst the artificial monopolies of the telco world, if open markets were established. However, each telco is a walled garden that attempts to lock customers in via service contracts.

    It’s reasonable for cellular providers to demand a service contract when providing a subsidized handset. The practice has now extended (at least in Canada) to any kind of agreement. For instance, a few days ago on Rogers network I activated a handset which I provided and paid for in full with a SIM that I also provided and paid for. Rogers’ subsidy expense was $0. They still demanded I sign up for a one year contract. Rogers knows that my GSM phone only works on their network, and that the only choice I have is their terms of service. The rep even laughed at me on the telephone when I suggested I might take my business elsewhere.

    IF that phone was portable to the other two carriers in this country — Telus and Bell, neither of which are GSM — Rogers would be forced to offer more customer friendly terms.

  2. Thanks for the clarification. I know you’re not a loony and, according to other posts of yours, strongly lean towards the free market side.

    The walled gardens have been a significant problem and there’s no doubt in my mind the consumer isn’t well served by them.

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