Lobbying for restrictions on competition

Lobbying for restrictions on competition is a really simple phenomenon. It is a bit depressing that journalists reporting on various commerce associations' initiatives for "improving" the workings of the market. Currently, parliamentarians are concerned that instant/quick loans are offered at outrageous terms, in particular that the associated costs are very high. See the article in English at Helsingin Sanomat's website here.

The association of instant loan companies is of opposed to the proposed measures. However, they have a most "helpful" suggestion. They suggest that making instant loans should be a business subject to more regulation and licensing. Today, outrageously enough, anyone can start a instant loan company. This requirement of licensing would of course be in the interest of consumer protection, as the licensing would ensure that only "serious" companies engage in this business.

On the surface, this may sound sensible. But even the slightest scratching of the surface unveils a more plausible reason for the lobbying. Introducing licensing requirements increases the barriers to entry to the market. This reduces competition in the market, increasing profits. The currently active companies are likely to be in a good position to get licensed, as they already know the industry. Apparently they are also good at organizing themselves for lobbying for their industry, which might make it easier to ensure favorable regulation.

In defense of telesales

Yesterday's papers reported on a new initiative by the Finnish consumer protection agency, proposing outlawing telesales, unless the individual consumer has given express permission to the salesorganization targeting him. Clearly, many individuals are annoyed at receiving aggressive telesales phone calls, so these people might be happy about this kind of law. However, these kind of benefits typically come with costs attached, costs which aren't often immediately detected by everybody.

The largest daily newspaper Helsingin Sanomat noted yesterday that outlawing/restricting telesales would dent the circulations of papers and magazines, as these rely heavily on telesales. While Sanoma Magazines, who publishes many magazines in Finland may have reason to worry about the proposed law cutting down their circulations, the affect on them would not be all bad.

Worst hit by the law would be potential entrant into the magazine business, or any business for that matter. For while the encumbents, like Sanoma Magazines may find attracting new customers more difficult, they will still have their current customer base. New, potential entrants on the other hand will not have the option of using the, presumably highly cost effective telesales device for attracting customers. This will likely lead to some potential entrants finding entry to the market too costly, with them as a result deciding not to enter.

Outlawing, or severely restricting a cost effective way of reaching potential new customers essentially amounts to increasing the barriers of entry into a market. Increasing the barriers to entry means that the encumbents, those currently in the market will face less competition. This will make serving the market will be more profitable for the encumbents. Here it is of course necessary for the encumbents to be able to keep their hold of their current customer base. Nevertheless, maintaining a customer relationship is always easier than creating a new. 

So who will at the end of the day suffer from this proposed restriction? Encumbents in any market where telesales is a cost effective way of signing up new customers will face the cost imposed by more expensive signing up of new customers. On the other hand, they will face less competition. Potential entrants only face the cost. Consumers, those who are supposedly protected by the law will have to deal with firms facing less competition. This in general leads to higher prices, less variety and potentially worse quality.

So what would the policy recommendation of this post be: Just don't do it. Those individuals who are annoyed at receiving telesales phone calls can sign up to the Don't call registry. Anecdotal evidence suggests it is highly effective. Then let those who are not as annoyed continue receiving offers for magazine subscriptions, boxers, mobile phones, etc. over the phone, at the same time ensuring a decent level of competition in these markets.

Economics of customer poaching

Some more reflections on my previous post on changing operators. As someone who’s worked with sales and marketing, it first struck me as a bit odd that my old operator would be lame enough only to send me a SMS when trying to keep from switching to their competitor. Then I remembered that the operators had met at the Ministry of Transports and Communications to deal with problems related to “too aggressive” telemarketing in selling mobile phone subscriptions. They managed to get the minister to start the process of changing the law so as to outlaw telemarketing of  mobile phone subscription (see the press release in Finnish here).

And so if the operators agreed not to actively sell subscriptions by calling customers, then a handy way of sidelining this is to send a SMS to the customer, and encourage him to call you.

The economics of this issue are related to customer poaching and how it can increase the competitive pressures in the market, ie. lead to lower profits for the operators.

If you in effect can manage to get the state to outlaw aggressive poaching practices, then you can increase profitability. Given that you are more or less happy with the amount of customers you have, then by agreeing with your competitors not to pursue their customers too aggressively, while getting them to reciprocate, you can increase your profits. The problem in a normal competitive situation is of course that after entering into an agreement like this you will have an incentive to deviate – Get your competitors to play nice with you, while you plan not so nice with them will be a winning strategy.

With everybody knowing this we have a prisoner’s dilemma, ie. the operators know it’s in their private interest not to honor the agreement, even though everybody would be better of with everybody honoring the agreement as, compared to nobody honoring the agreement. One way of avoiding this unpleasant outcome is to get some additional credibility to your promise not to be aggressive – ask the state to draft an appropriate law banning the aggressive behavior. For the incumbent operators this has the additional benefit of making entry by new actors harder. Homerun!

On poaching customers, avoiding repoaching

 I'm changing mobile phone operator, and I received my new phone, complete with new SIM-card and confirmation of the changeover in the post last Friday. With all the papers came a note asking in big bold type whether I'd want to have my new mobile phone subscription with my new carrier opened as soon as possible. If so, I'd just need to call their customer service and ask them to speed up the process. The catch? By doing so I agree not to be covered by my statutory 14 day right to return the phone and SIM card and cancel my subscription. I didn't see any problems with this, so I called up my new operator and asked them to speed up the process.

Today, on Monday I get a SMS from my old operator, where they note that I’m about to change operator, but they urge me to call their customer service and get a better offer.

So what’s going on here? If I hadn’t surrendered my 14 day right of return (and whether I actually have done it in a legally binding way is a bit doubtful I guess, as this is a statutory right, granted by the consumer protection law, whose rights in general aren’t  surrenderable), my old operator, receiving notice of my plans to change from my new operator, could contact me and make me a counteroffer, so as to avoid having me poached by the new operator. However, my new operator, by ensuring that they do not initiate the process of transferring me from my old operator before I’m on the hook with them (with a two year agreement), can avoid having my old operator “repoaching” me.

Further, I’ve experienced more or less exactly this kind of repoaching about eight years before. I had already signed up online with a new operator, who initiated the transfer process, after which my old operator called me and offered a better deal than the potential new operator, with the benefit of not having to change SIM-cards, etc. So I didn’t change operators that time. So I see the operator have become smarter at this game since that episode.

Letting them die and the importance of competition

Both the original blog post by Karls Smith, as well as The Economist's Free Exchange comment have much to commend. They are very insightful, and these insights have quite serious and broad implications, beyond that which is explicitly stated.

For one thing it supports Steve Yegge's long rant about Google and the importance of platformization - Don't think you can do everything yourself, but rather let other developer's try to add value to your product by opening up to them.

Also, it speeks volumes about the public sector, with the clear implication that outsourcing service production to multiple service providers will be much better than relying on a single monolotihic organization to come up with all the ideas. Further, it does cause a bit of concern when thinking about the planned changes in the municipal structure here in Finland. While I do see the potential for improvement, fewer municipalities will without a doubt lead to fewer organizations producing services, given the hesitation to outsource.

The law of unintended consequences, or how to follow the letter of the law, but not the spirit

First a few stipulations:

I'm no friend of surcharges that cannot be avoided, like the fuel surcharge that some shipping lines charge. There really is no point in having a separate surcharge unless you want to steer behavior with it, so that people either avoid actions imposing costs covered by the surcharge, or only take those actions when they are ready to pay the surcharge. The fuel surcharge might as well be included in the ticket price, as you as a passenger can not book your ticket and tell the shipping company "transporting me will not increase your fuel consumption, so please don't add the fuel surcharge."

On the other hand, I am a big friend of surcharges on costly add on services, say parking, or the use of expensive payment cards (Do note that some payment cards are less costly than cash to the retailers), as these can make the customer take into account all the costs of their actions.

With that out of the way, I was a bit amused having read this article on Ryanair's latest invention when it comes to card use surcharges in the UK. Ryanair imposes various surcharges for bookings paid by card. British laws stipulate quite sensibly that there has to be some payment method which consumers can choose that avoids the surcharge. In other words, the costs of the cheapest payment method should be embedded in the costs of the products, and surcharges should then be imposed on more expensive payment methods, enabling consumers to make an informed choice as to whether they for example think that paying with their American Express rather than a debit card is worth the surcharge.

Now Ryanair started of in 2009 offering no surcharge purchasing to anybody using a prepaid MasterCard. The idea behind this was of course that most people wouldn't have a prepaid MasterCard and would thus pay Ryanair's inflated surcharges of £6 per person per direction (of course this makes no sense from a cost perspective, as the costs for processing card payments is not contingent on number of persons or number of flights). But this still made it possible to avoid paying the surcharges to Ryanair, and thus a potential source of profit was not fully exhausted. So now Ryanair launches it's own prepaid card and, yes you guessed it, only by using this card you'll be able to avoid the surcharges. And of course, obtaining the card, using it and even not using it will carry costs, which you pay to... ...Ryanair.

So there you go, the sensible law to protect consumers is honored in letter, but not in spirit.

On allocating costs

A debate about who should bear the cost of building parking spaces has flared up in Helsinki. When new houses are built, they are required to build a certain amount of parking spaces. This amount is some quota based on the number of apartments built. In downtown Helsinki and the inner-city suburbs this means in practice building underground garages under the houses. This is not a cheap exercise, studies put the average cost per parking space at 40 000 euro. This cost is typically borne by all the apartments in the house, irrespective of whether the inhabitants have a car or not. 

Lately this has lead to some discussion as to whether this is a good system. Today's Helsingin Sanomat interviewed the chairman of the Helsinki City board on the issue. He claims that it would be unreasonable to demand that only those who use the parking spaces would pay for them. Why? "A civil servant or teacher couple cannot afford to pay 40 000 euro, buyt they may still need a car." So therefore the cost of the parking space should be split among all the inhabitants. 

This is a very interesting argument, especially coming from a representative of the main right of center Coalition party. Personally I'd be tempted to extend his argument. 

Consider a house with apartments of two sizes. The larger apartments might be too expensive for the civil servant or teacher couple described by the chairman. The obvious solution is for the owner of the smaller apartment to subsidize the cost of the larger apartment, so that the teacher and civil servant can afford to live there.

Another solution would of course be for those who want a parking space to pay the actual costs of it, and if they cannot afford it, either move to somewhere cheaper, or get rid of their car, if they don't consider it to be worth the cost.

The failure of corporate IT

I just got a invitation to a event organized by a medium sized organization. The invitation asked for signups to a gmail.com address created for the event. Evidence of the failure of corporate IT to cater to users' needs. But also evidence of users' increasing ability to bypass rigid corporate IT with the help of easy to use consumer technology.

Something wrong with the labor market

Today's Helsingin Sanomat writes about plans to reduce the incentives for sabbatical leaves. The federation of employer's director of legal affairs notes that the system with sabbaticals is a great way of testing potential new recruits.

Essentially what he's saying is that the need for temporary employees created by people on sabbaticals is a good thing, as it enables employing people on temporary, rather than non-temporary contracts.

There's something wrong with the labor market if the only decent way of testing potential recruits is having somebody leave so that you can employ people in a sensible way.

Debasing your trademark with Groupon

What are they thinking? Two Michelin star restaurant Chez Dominique is offering  a 50% discount through Finnish Groupon subsidiary Citydeal on a dinner for two. Puts you in the same league as pizza chain Kotipizza. Great way of debasing your trademark.

New bad suggestions for Greek collateral

Another twist in the saga of the Greek bailout and Greek collateral. The cash deposit idea was stupid. Now it is suggested that Greece nationalize some banks and post shares in those banks as collateral. Source: Handelsblatt

Seems like a good idea? But wait a minute. Those Greek banks hold a fair bit of Greek government debt. And the collateral is meant to guard other debt holders against Greek default on that same debt. So what happens if Greek defaults? The banks fail, and those shares that are supposed to act as collateral become worthless/lose alarge  part of their value. Fail.