Recently there was a consumerist war. The Blu-Ray dvd player, manufactured by Sony, fought the HD DVD player, manufactured by Toshiba. Consumers stood in a circle around the fight and watched. They had learned their lesson from previous fights (Betamax vs VHS) and weren’t going to part with any money until they knew who was going to win.
This is capitalism as it is supposed to be: firms fighting it out to give us more choice at a reasonable price. Except in this instance there should have been more fighters in the ring. Two fighters is looking a tad suspicious for a capitalist contest.
Anyway, Sony came out victorious. People knew where to put their money and the units started flying out the door. The best product must have won, right?
Wrong.
It was well known at the time that Sony was making a huge loss with every PlayStation 3 it sold (the machine had a Blu-Ray player built in). Sony’s strategy was clear: undercut the competition until they run out of money, then the market will be wide open for the monopolistic dominance of one company. It’s a well known gambit. Regional newspapers used to do it all the time to upstart magazines appearing in their territory which were given away for free. These magazines would eat into the newspaper’s advertising revenue by offering a cheaper alternative. The newspaper’s response would be to slash its own rates until the upstart starves of income. Once dead, the newspaper would safely put its own rates back up to immodest levels.
What we have instead of competition then, is simply, the survival of the richest. In a market of few players, the player with the deepest pockets wins. And we can see this happening today. Look at practically any market in the Western world and a few giant players dominate. How many supermarkets can you name? Presumably then, the logical endpoint of capitalism is a monopoly. Game over.
Should firms be allowed to sell their products at below cost? Surely, some would argue, that option is part of the freedom of capitalism? But corporations are required by law to maximise their profits for their shareholders so is this strategy unlawful?
This is why an independent referee with meaningful powers is required in any market.
Great article, thanks for posting!
The strategy would never be seen as unlawful, as the maximisation of profit is often dependent on a loss leader. Customers and share holders alike could easily be persuaded by Tesco for example, that beans are essential to the commerical success of other products within the supermarket. Thus, they are willing to take a hit on the beans to sell other things. It’s all too easy to justify.
The betamax/vhs debate is an interesting one. There are many who profess that betamax was a better product. Others think this an urban myth. Personally, ive never found a problem with VHS,always ben happy with what it did/does. But how many players do we need there, to make the viability of a market ‘ok’? How would you marshall it?
I completely understand where you are coming from, but what do you mean by an independent referee? Someone who tells us what the best product is? When we buy a perfume, a sausage, a telly or a car – we are buying brand and percieved quality. Not just our own, but those who view us with our brand new toy (or sausage!)
Once a new player, with little money makes it big – they’re party to the same rules. I guess what i’m saying is, give me a viable alternative.
Sorry if i sound like a straight opposition to everything you’ve said, tis not my intention. I actually agree in principle, but like many others are hyprocritical in the way i consume, buy or view products of any kind.
Thanks for visiting, Will. I realised as I was writing the post that I was leaving myself open to a firestorm of valid objections. What I was trying to point out in the post is how everyone tries to game the system; whatever the rules, some people will find a way round them.
Suggesting an alternative system is the hard part but what I have discovered is that an either/or approach is usually the wrong one and a compromise solution is the least of all evils. Too much power with any one person or group of people is always a dangerous set up.
The referee in the post would be the equivalent of the Monopolies and Mergers Commission, I suppose but with more formidable powers. And it wouldn’t consider the products themselves but the way in which the players market their products.
The HD-DVD vs BluRay is a useful analogy, not in characterising capitalism, but in illustrating its limits.
Yes, BluRay won that fight, but consumers weren’t waiting for a winner, they’d already chosen LoveFilm, Netflix, iTunes, BitTorrent and Pay TV as their preferred modes of watching movies.
Sure, Sony trojanned a BD player into millions of homes as a PS3, but sales of BD discs are flat at best. I have a PS3 and own just two BD titles, but I have dozens of downloaded HD movies from many other sources
So perhaps the lesson here is that companies and conglomerates can no longer shape marketplaces at will, but that thanks to a networked culture, we’re able to assess utility and assert choice whilst remaining somewhat aware of flagrant commercial coercion.
Monolithic institutions that aren’t adept at embracing networked culture (News Corp, Sony, political parties, USGov, Arab dictators, Microsoft etc) will generally be undone by scale-free, ad-hoc ecospheres (social media, open source, Wikileaks, Google)
Great post. I think the example of regional newspapers is good, and happened in the big smoke recently with the Evening Standard, Metro and London Lite (?) which started fighting it out, gloves off. Another is bus companies, often Private Eye’s long time enemy Stagecoach, which put on extra busses so that their competition’s busses were flanked by theirs, and fares were less than 10p, making it uneconomical to run a bus in the area; once the competitor left the area or went bust, the prices went up by 1000s%.
Re Beetamax and VHS, Beetamax was supposed to be the superior but lost out and, I believe, one major reason was that Beetamax would not allow pornography on its system and VHS would, so people opted for VHS.
Re maximising profit for shareholders, if the system works in the long run, it can be argued that losses in the short term make for gains in the long term, hence newspapers selling at 10p or being given away for free with other purchases, or 3 for 2 deals in shops or X% off first order. When it comes to banking, weren’t we all complaining that they were looking for short term gain and not in it or the long haul?
You’re right, Imran, people only care about the end product and not the delivery system. This works fine when alternative delivery systems are available but what about the supermarkets? Apart from trying to grow some of your own food, I can’t think of any other alternative. What about oil or money? These are even too big to fail (which is diametrically opposed to the capitalist system, weak players are supposed to die).
John, the long term argument can indeed be ‘gamed’ but show me a capitalist fishing fleet that is arguing for the restriction of the fishing of certain species. Show me a mining company that factors in an environmental clean up in its long term business plan. How long is, ‘long term’?