Mike Munger just lately wrote about an elementary misunderstanding of financial competitors many legislators and regulators appear to harbor – the concept enhancing competitors means guaranteeing there are extra corporations reasonably than much less. This misunderstanding springs from what Munger calls a confusion between the textbook definition of “good competitors” (which Munger calls an “idiotic idea”) and actual competitors, because it happens on the planet exterior of the classroom blackboard. Munger cites this instance:
Senator Elizabeth Warren just lately argued that the Biden administration, by the FTC, ought to block the acquisition of Uncover by Capital One. Her logic has been “good competitors,” two small corporations are higher than one medium-sized agency. But one want solely check out the bigger trade, the place Visa, Mastercard, and American Specific management totally 98 p.c of credit-clearing transactions, to understand the folly of that method. If the Capital One-Uncover marriage will be consummated, there shall be extra competitors within the trade, not much less. The newly shaped entity would have the monetary energy, and the dimensions of transactions, to drive the bank card trade out of its anachronistic methods.
That obtained me eager about different circumstances the place “extra corporations = extra competitors = higher” fails to carry true. Two massive examples struck my thoughts – banking, and cellular working programs.
Let’s begin with the primary. Previous to the Nice Despair, Canada had a largely unregulated banking system. From that system, what emerged was a comparatively small variety of very giant banks that operated throughout the nation. In america, there was a extremely regulated banking system that (amongst different issues) closely skewed in the direction of a “unit banking” system reasonably than a department banking system. That’s, banks have been geographically restricted in how far they might develop (working throughout state traces was typically a no-go) and have been thus restricted in measurement. From this method, what emerged was a system of tens of hundreds of pretty small banks throughout the nation.
From a “extra corporations = extra competitors = higher” perspective, it would appear to be america, with its huge variety of banks, could be in a greater state of affairs than Canada, which was “dominated” by just some very giant banks. However in observe, the other was true. As a result of banks have been so quite a few and small, it additionally meant every particular person financial institution was extremely undiversified within the belongings it held and was all however chained to native financial circumstances. Massive, extremely diversified banks can higher take in financial shocks than small, undiversified banks. That is a part of the rationale why within the Nice Despair the extremely regulated United States banking system had over 10,000 financial institution failures and the evenly regulated Canadian banking system had none in any respect.
The second instance that got here to thoughts was cellular working programs. Proper now, it’s by no means unusual to see a certain quantity of handwringing over the truth that cellular working programs is successfully a duopoly between Android and iOS. Wouldn’t it’s higher if there have been extra cellular working programs in the marketplace, due to elevated competitors? Properly, no, not essentially. Should you’re questioning why, then as Munger himself would say, the reply is transaction prices.
Let’s think about a reasonably excessive instance. Think about a genie snapped its fingers and tomorrow there was 10,000 completely different cellular working programs in the marketplace. Why wouldn’t that be good for competitors? Properly, one of many annoying options of the true world that’s unnoticed of the introductory blackboard fashions is transaction prices. If you wish to produce and promote an app that simulates a coin flip to assist enhance the lives of indecisive individuals, there’s merely no manner you’re going program and format that app for 10,000 completely different OS’s. The transaction prices are just too excessive. The identical is true for each programmer and app developer on the market. The extra working programs are on the market in the marketplace, the extra sophisticated and costly it’s to make your utility or program obtainable to everybody in the marketplace. Over the past couple of a long time, there have been a greater variety of working programs. Symbian was one. BlackBerry had their very own, referred to as (reasonably unimaginatively) BlackBerryOS. WebOS was one other. Home windows Cellular had a great run, too. These have all fallen away, leaving Android and iOS locked in opposition to one another. Would it not be higher if all these defunct cellular working programs have been nonetheless on the market, offering extra and higher competitors? Possibly so within the imaginary world of good competitors. However in the true world, a world the place transaction prices exist, it’s by no means clear that this could be the case. Extra working programs means rising transaction prices related to producing every little thing we use these working programs for – which might very effectively make the cellular OS market much less reasonably than extra productive.
What’s the “optimum” variety of working programs? I don’t know. Neither do you. The reply can’t be derived from the blackboard, the armchair, or from tea leaves. However the perfect probability now we have to find the reply is when markets are free sufficient for actors to have interaction in actual world market competitors.
