Monday, February 18, 2013

Model, Market, and Monopoly

Markets are rarely, if ever free. Truly free markets are a theoretical concepts like zero or infinity. We can imagine them, but they may not actually exist. Monopolies form. Government interferes. Supply can be cut off. New technologies can violently disrupt society. Imbalances in other markets can interrupt distribution.

Markets occur whenever we sell a product or a service. 

Markets are many and diverse. Markets can be found in the parking lot swap meet or a professional trading floor.

Free markets are thought to find the optimal price and best distribution of goods and services.

Free markets are uncontrolled by government.

Free markets have no monopolies. 

Mark the monopolist wanna-be
Managing Markets

I once was manager of products and services in markets. My job was to find out what people's wants and needs were, find a solution, then deliver it to them. For several years I specialized in the real estate industry providing technology and processes. The real estate markets spanned multiple countries and cultures.

I worked for corporations. Corporations are a legal tool owned by people. I was labor. I worked for other people. Someone else owned the capital and resources. If I did well at my job, owners made millions in profits. If I failed, owners lost millions. A salary was my compensation for pieces of my life's time.

We built databases of properties for sale. We had databases of transactions. We created and maintained records of government property tax roles. Marketing materials to help sellers find buyers. Catalogs to help buyers find sellers. Accounting software to optimize costs. Estimating software to predict individual transactions, local markets and national trends. Tools and training to automate business processes. Information about the market and where the best deals where. Software to help local governments predict revenue.

Modeling market data
Finding out what peoples wants and needs are is the hard part. What people say they need and what they actually need often don't match up. Of course I would listen to what people said and ask many questions. I also followed people, watching them. Observing their behavior and taking notes often revealed unexpressed needs. Watching closely provided deeper insight to the nature of their activity. I studied their suppliers and customers. I followed the paths of their resources from creation to destruction.  I came to understand the structure and flows of each market I competed in.

Designing solutions is more my suit. Doing studies and creating graphs. Designing structure and process .  Long arguments in front of white boards building models of market behavior.  Taking those models “out into the field” for testing to see if they worked. Revising and editing the models until the product or service became as profitable as they could be.

Controlling local supply  of resources
Building Monopolies

Designing a product is by definition an anti-free-market activity. One must engage in thinking like a socialist dictator in order to control a market. Every day I tried to figure out how we could monopolize markets. Corporations want high, steady income. Getting a monopoly on a market is the best way to ensure that.

Finding a resource to control helped build a monopoly. If you can control a fundamental resource in one market, you can monopolize many markets. Being the entry point for the supply of a resource is a common method. Data about the market is one of the best resources to conquer.

Dreams of monopoly
We spent a lot of effort making the best data entry systems possible. The easier it was to put data in our system, the more the market did it. The more data they gave us, the greater the control we had in the market. At one point, well over half of the U.S. property market came into systems we controlled.

My labor was not in a free market. I had signed away my right to compete with the owners. They wanted my labor as a steady, high resource. The corporation had a monopoly on my labor. Luckily the market for my labor was made free. I could wait a year and the contractual provision would expire. Signing a new contract with a competitor was a good move for my income. It still cost me a year of my life to buy that market freedom.

Monopolies typically maximize their profit. A corporation with a monopoly wants to produce fewer goods and selling them at higher prices. Monopolies destroy free markets.

In a free labor market
children are a resource
The Real "Monopoly"

Real estate brokers have taken control the market data since I left the industry. Real estate brokers are “middle-men” standing between the buyer and the seller. They have an effective monopoly on the information about the supply of goods in that industry. Claiming they provide a better service, they have built up barrier to entry requiring you to belong to their trust (monopoly). You must sign away your free market rights to be able to participate in the property market.

It is possible to use For Sale By Owner (FSBO) methods to sell or buy houses. This is a small niche of the market however. Individual experience may vary, but it is generally more difficult to sell your house. Real estate brokers will typically not work with FSBO. Real estate brokers work hard at keeping FSBO to a minimum through laws and the control of information.

A home is the single largest purchase most people make in their life times. Most middle class citizens buy two or three homes in their lifetimes. Typically we buy a home when our children are born or we retire.  Most real estate market transactions go through the broker's monopoly. One group or another has monopolized the real estate data market for so long, we accept the monopoly as normal and are unaware of how much it costs us.

Cheating unbalances markets
Free Market Myth

The idea that we can just “free” our markets and they will we will all prosper runs against my experienced in business. Free markets are often more myth than reality. Many of our markets are operated by or as monopolies.

Disruptive technologies like the printing or the internet have broken information monopolies. A wise owner looks for such technologies and tries to monopolize them before they disrupt the market. With the financial power coming from the monopoly, this happens frequently and the monopoly continues on.

Trade associations are often used for groups of owners to control markets. The National Association of Realtors is a very powerful organization that does this for real estate. They have been actively involved in keeping control of the data about real estate for over a century now.

Government is One Answer

We can use our government to break up monopolies. The power of government is used to force those who would control a market to let go of it.  Government is often the proper tool to keep markets free from monopoly.  

Teddy is still rock solid
Teddy Roosevelt was a progressive Republican who had his face put on Mount Rushmore because he broke up monopolies. Teddy was known as the “trust buster”. He offered a “Square Deal” that regulated the business practices of monopolies to guide markets toward more freedom. He facilitated negotiations between labor and owners to break up monopolies on labor.

There are those among us today who think “markets should be free”. They operate under the idea that perfect competition can exist. My experience of reality indicates this is not so. The people who want this may well just be trying to monopolize markets. I can not prove that all business people want to have a monopoly. I have met enough of them to believe many do.

No comments:

Post a Comment