Tuesday, February 7, 2012

FedEx, UPS, and market information

Great post from Yglesias about what he terms "halfway house" privatization:
Consider the U.S. Postal Service. This is, right now, a government agency. Something we could do with it is privatization. Repeal the law establishing the Universal Service Obligation and also repeal the law giving the USPS a monopoly on delivery of daily mail. Then put the USPS—its facilities, its cars, its real estate, its brand, the whole thing—on the auction block. That's privatization. Where once you had a state-owned firm, you now have privately owned assets.

A very different idea would be to shut the USPS down entirely while remaining committed to the idea that the United States ought to have a monopoly provider of daily mail delivery services who operates under a universal service obligation. With the USPS out of business, the federal government would then accept bids from Federal Express, UPS, and DHL to be the government's daily mail contractor. That's halfway house privatization. And it looks very different. In theory, our three parcel firms compete to offer the best service at the lowest price with all the ingenuity of the private sector applied to the problem.
In short, halfway house privatization retains some of the key features of the public sector--public funding, enforced monopolies, and universal provision of services--while attempting to streamline government "waste" by inserting a competitive element. Of course, it often doesn't work very well, because competition between a handful of megafirms is a very different beast than the efficiency-maximizing competition between theoretically infinite producers envisioned by microeconomic models.

But I want to focus on Yglesias's second point:
In practice, our three parcel firms compete to obtain maximum political clout. They lobby members of Congress and disperse their operations into key congressional districts. They buy ads in Roll Call and in D.C. Metro stations. You basically keep all the problems of politicized service provision that you have with a public agency, but you remove rules about transparency and lobbying and executive compensation that apply in the public sector.
This is true. Frankly, it's a lot cheaper for a firm to claw its way to the top of the political discussion than to claw its way to the top of the market. But it's also worth pointing out that the problem Matt has identified is hardly restricted to his "halfway house" firms. Congresspeople aren't the only people susceptible to informational market failures. It happens in truly private markets too. I mean, think closely: do you actually know which of the major private postal services is the best? Can you personally identify their relative strengths and weaknesses? Next time you have to choose between FedEx and UPS, will you judge them on the quality of their service or the quality of their advertisements? Even in the private sector, it's a lot cheaper and easier to convince people with words than with actions.

1 comment:

  1. Will, a few problems with this post:

    I think you are slightly misunderstanding Yglesias' point. The problem with "half-way house privatization" isn't that because "competition between a handful of megafirms is a very different beast than the efficiency-maximizing competition between theoretically infinite producers envisioned by microeconomic models." The problem is actually that in halfway house privatization the government grants a complete monopoly to a single major company to provide the service it is no longer providing itself. The three companies compete by bidding to offer the government's required service at the lowest possible price. Once the government chooses who gets the contract the other two companies may no longer compete. This places an extraordinary amount of importance for these companies on the government's decision. It could mean billions of dollars of revenue, so it is beneficial for them to lobby extremely hard and donate tons of money towards congressional campaigns and stuff. The fact that it is three companies bidding for the service is irrelevant, it could be an infinite number of companies and the same problem would exist, too much potential revenue turns on a single political decision.

    The lack of competition in the private market that would exist if the government completely privatized regular mail delivery would be a problem as well, but a different type of problem and one that is unrelated to the "halfway house privatization" problem.

    The effects of advertising in the private market are quite different. Advertising makes you aware of a certain good or service and will likely lead you to try it once or twice. In the private market, however, you can switch providers if you werent satisfied. I often hear about new restaurants based on ad campaigns, try the restaurant, dont like it, then never go back. I dont have to make a commitment of 5 years to eating at a restaurant. As a result, restaurants have to have good advertising to get me there, but also must back up their ad with a good product. Congress, on the other hand, will probably have to give the company granted the monopoly at least 5 years.

    Lastly, I don't know whether Fedex or UPS provides better service, but that is probably because i havent had to send an express package to anyone in the last 4 years. I bet if I ran a company that shipped packages very regularly I would probably know a ton about which one is better and could identify the relative strengths and weaknesses.

    Inversely, in areas where I do spend my money regularly I think I am a quite savvy consumer. I could explain the strengths and weaknesses of most bars and restaurants in the uptown area. I know when all the happy hours are. Overall, I spend my money in the bars and restaurants in uptown in a relatively efficient manner. If a new place opens up with a lot of fanfare ill probably try it, but if they don't really understand what proper deli meat is supposed to taste like I probably wont go there very often.