June 1st, 2012

Thinking About Thinking, the Other Puzzler

You've Been Warned.

I've been thinking a lot about thinking. I suspect that at least for me, this is a migraine inducer. Maybe.

Anyway. The other Puzzler that's been on my mind lately is trying to understand what people _think_ our regulation on markets should have as a goal and what would be a reasonable set of rules that might help attain that goal. I'm trying to figure this out, because people keep writing things about the three lawsuits involving 5 of the Big 6 and Apple and the Agency Model and the things they are writing often don't make a lot of sense to me.

There are two obvious goals that we might collectively have when we regulate the US market in support of competition (so I'm ignoring all the safety and don't lie rules -- I'm _only_ talking about policy that is in support of a competitive marketplace). One goal might be to have many participants at every level of the market. That is: lots of producers for every good, lots of distributors for every good, lots of retailers for every good, type of thing. This kind of thinking tends to drive merger/takeover/purchase limitations and used to drive some of the rules about same-terms-for-all-customers. In theory, lots of participants would support lots of competition (and full employment! Yay!), altho it would presumably limit economies of scale/productivity gains associated with automation that only makes sense for larger producers. You could argue about all of that, of course. Another goal might be to have the lowest possible price to the end consumer that is still compatible with a diverse enough array of goods to satisfy consumers. In theory, the lowest possible price would indicate that people were behaving very, very competitively, altho in practice, it might result in a single participant (other than the consumer), fully vertically integrated (viz. a monopoly).

Those goals are both pretty desirable, but not particularly compatible, and the result currently seems to be a hybrid that is philosophically confusing and possibly perverse in outcome (but not necessarily undesirable -- it might still be the best possible current outcome). We let firms compete vigorously up until there are a half dozen, give or take, left (think publishers, or record labels or airlines or telcos or railroads or ...) and then we basically don't allow any further mergers (because it would result in too few players). Up until reaching this point, the participants were forced to vigorously compete and/or innovate and/or invest capital in automation so they've attained a lot of productivity gains or other economies of scale -- things are cheap to the end consumer. However, it's now really fucking hard for a new entrant, because you have to invest all that money in order to get to where they have all been for a while (not, strictly speaking, a barrier to entry, in a technical sense, because everyone else had to pay it, too) and once you are there your efforts to get into the marketplace will just force everyone's price down even further and your margins will be small so why bother? Meanwhile, the existing players are no longer compensated for further innovation/investment and the small number of participants (and increasing amount of regulation and the trade organizations, lobbyists, consultants etc. who help you deal with it) supports informal if not actual cartel-like behavior.

It is _really_ not obvious how to improve the situation. Let everyone finish merging? It might lead to a last round of innovation to take over the market, but it might just as easily turn on who can secure the least principled financiers. Particularly if the half dozen firms have been run by the kinds of executives who are attracted to this kind of "mature" business, the resulting monopoly will not be run by someone exceptionally competent and is likely to be run by someone exceptionally full of himself AND likely to make Very Bad Decisions. Plus, then you'll really need to regulate them.

Force the half dozen firms to dismantle themselves into smaller enterprises? Well, if they got big to take advantage of economies of scale, this will only serve to make things more expensive to the consumer. That'll make you _real_ popular as a regulator. Your administration and party will _definitely_ be re-elected forever and ever. Ha.

So we kick the can down the road, and occasionally, a cartel really screws up and takes their nice, stable low-margin business in a spectacularly stupid direction and drives itself into the ground (see also: American automakers with SUVs, American airlines with frequent flier promotions, American finance sector with securitization). Occasionally, there's a big enough technology change to replace a cartel or at least change the mix significantly (WinTel didn't really manage the transition to the web and/or mobile all that well). _Very_ occasionally, someone with deep pockets, hubris and a sense of disgust at the incompetency of the sector will start something new (Southwest Airlines, JetBlue, etc.). Thus we learn that at least part of the time, the market can, more or less, correct itself.

All the pieces are currently in play the book industry. A new entrant -- Amazon -- with deep pockets, hubris and a sense of disgust at the incompetency of the sector (and let's be fair here: Bezos went _looking_ for an incompetent sector, altho he called it low market concentration or something like that) showed up, deployed some new-to-the-sector technology and grew like kudzu. Like kudzu, a whole lot of people originally regarded the new arrival with equanimity, if not something even more positive. Understandably, as the pre-existing, p-book sector of a half dozen firms which knew they probably couldn't grow, couldn't merge and it wouldn't pay to invest in the business was populated by a bunch of executives that were not precisely prepared to cope with a highly innovative, highly competitive, er, competitor.

The pbook sector took a look at what the music industry did when it got hit by related technology/competition: hook up with Apple (who would take a sizable cut). And the pbook sector figured, okay, that's what we'll do, too. But when the music industry did what they did, they did it after having _actually behaved as a real cartel_ for quite a while (that did, after all, eventually have to pay up for the CD pricing thing). They had practice, and they didn't overreach by trying to stop discounting at other sources. When the book industry did what they did, they did it after having behaved only _sort of_ as a cartel -- they were more about gentlemen's agreements and following each other's lead. Also, music industry people are, sort of by nature, kind of about music, whereas book industry people are, sort of by nature, very much about the words. Book industry people talked and they got quoted, which resulted in some coverage that made all of us popcorn eaters in the peanut gallery go, how is this not blatant price fixing? And why would they admit to it in public? Hello?

That, all that, I can understand.

Where the fuck were their lawyers through all this? That's what I don't understand. Do they not _have_ lawyers? I found a list of who is representing them in at least one of the trials (the DOJ action, IIRC), but I have no way of knowing if those law firms are Excellent or Risible -- or if those law firms got brought in after the suit was filed or were giving advice throughout the Agency Model planning process.

And all these people who think that it makes sense to let a cartel fix prices on ebooks so as to prevent Amazon from completely dominating ebooks? I don't get that at all. If the concern is truly about predatory pricing, then you can safely wait until Amazon _raises_ their prices above the competitive level and then file a class action suit as consumers. Which will happen on the 31st day of February in some unspecified year in the future. If the concern is that you just don't want to buy from fucking Amazon, well, I hear you. I wouldn't buy from fucking Microsoft, either, and the result of that was that I didn't own a computer for about 10 years during which time I might otherwise have bought one every three or four years (I mooched off of work computers, my then husband's computer, a boyfriend's computer, etc.).

I'm at a bit of a loss to understand why Amazon infuriates people in the way that Microsoft has always infuriated me. And that particular puzzler may never be answered to my satisfaction.