The Queensland government is set to remove the maximum commission that residential real estate agents can charge from the Property Agents and Motor Dealers Regulation 2001. Currently the regulation prescribes in Schedule 1A that
The maximum commission payable on the purchase or sale of residential property is—
(a) if the purchase or sale price is not more than $18000—5% of the price; or
(b) if the purchase or sale price is more than $18000—
(i) $900; and
(ii) 2.5% of
The common practice since the introduction of the regulation has been for all agents to charge this maximum.
The Deputy Premir Paul Lucas is spinning that dergulation will somehow benefit home sellers. Yeah. Right.
Admittedly, NSW, Vic and the ACT don’t have regulated commissions for real estate agents, and the common practice in these states is to charge 2.5% for homes in urban areas, and between 2.5% and 4% for homes in outer and remote areas. It appears from this comparison that Queensland’s regulation mostly benefits those in outer areas and rural and remote areas - those with the lowest value homes.
The question you must ask, is whether the regulation is disrupting functioning markets such that there is an efficieny gain from removing it? I have yet to hear of a real estate agent refusing a listing because the commission is too low. There are always other agents willing to try their luck.
In fact, recent competition suggests that more agents are negotiating below this maximum. I wrote earlier how lower commissions could be a massive competitive advantage for new agencies.
Indeed, when the regulation came in home prices across Queensland were less than half of their current levels. So for every sale, an agent now makes double from charging the same commission. If this regulation was a problem we should have felt it years ago, not now.
Poor REIQ Chairman Pamela Bennet reckons “the regulation of commission rates for residential property transactions has not kept pace with the changing market resulting in consumers not receiving the benefits originally intended” What now?
For the maximum to have kept pace with the changing market it should have been reduced over time so that the inflation adjusted average commission was constant – theoretically providing the same benefits as originally intended.
The only logic I can see is that the government thinka this change will stimulate sales and hand them back some stamp duty revenue? Sorry. That's not going to happen.
Wednesday, June 15, 2011
Population and housing all muddled up (and now corrected)
RBA governor Glenn Stevens needed to say something about house prices in his recent speech. What he said was a little muddled, but if it is meaningful, does not bode well for home prices. The analysis however got quite a bit of support from one property commentator.
First to the governor’s housing commentary –
It surely is no coincidence that the two state capitals that have had the clearest evidence of declining house prices over the past couple of years – Brisbane and Perth – are the two that previously had the highest rate of population growth and that have since had the biggest decline in population growth. Moreover, it is hard to avoid the conclusion that changes in relative housing costs between states, while certainly not the only factor at work, have played an important role. Relative costs are affected by interstate population flows, but those costs then in turn have a feed-back effect on population flows. This is particularly so for Queensland.
Historically, Queensland has had faster population growth than the southern states, as it has seen a slightly higher natural increase, a rate of net international migration on par with other states and a very substantial net positive flow of interstate migrants. Net interstate migration to Queensland peaked around 2003 – not long after Sydney dwelling prices had reached a new high relative to other cities. Interstate migration at that time was contributing a full percentage point a year to Queensland's population growth. By 2008 this flow had slowed a bit, but international migration had picked up and Queensland's population growth increased, peaking at nearly 3 per cent. Western Australia's population growth was even higher, peaking at almost 3½ per cent.
Meanwhile, at least up to 2007, people were confident and finance was readily available. Brisbane housing prices, which had been a bit over half of the average level of Sydney and Melbourne prices in 2002, had risen to be almost the same by 2008, which was unusually high.
The rate of interstate migration to Queensland then slowed further, to be at its lowest in at least a decade. The effects of that on state population growth were compounded by a decline in international migration, something seen in all states. At the same time, finance became more difficult to obtain and lenders and borrowers alike became more risk averse. This happened everywhere, but its effects in Queensland seem to have been more pronounced. Since then, Brisbane housing prices have been declining relative to those in the southern capitals and the construction sector here has found it tough going.
I decided to check the facts. Below is a graph derived from the ABS Sept 2010 demographic statistics on State populations. The figures show that WA did in fact have a population growth spurt during 2008, but that WA and QLD still retain their claim to the highest population growth rates in the country. In fact, Vic also recorded declines in growth rates of a similar magnitude to QLD in 2009-2010, but home prices have been far better maintained there.
The only conclusion, to draw, if we believe the RBAs population explanation of home prices, is that with national population growth rates now down the gurgler, home prices nationwide can expect significant falls.
First to the governor’s housing commentary –
It surely is no coincidence that the two state capitals that have had the clearest evidence of declining house prices over the past couple of years – Brisbane and Perth – are the two that previously had the highest rate of population growth and that have since had the biggest decline in population growth. Moreover, it is hard to avoid the conclusion that changes in relative housing costs between states, while certainly not the only factor at work, have played an important role. Relative costs are affected by interstate population flows, but those costs then in turn have a feed-back effect on population flows. This is particularly so for Queensland.
Historically, Queensland has had faster population growth than the southern states, as it has seen a slightly higher natural increase, a rate of net international migration on par with other states and a very substantial net positive flow of interstate migrants. Net interstate migration to Queensland peaked around 2003 – not long after Sydney dwelling prices had reached a new high relative to other cities. Interstate migration at that time was contributing a full percentage point a year to Queensland's population growth. By 2008 this flow had slowed a bit, but international migration had picked up and Queensland's population growth increased, peaking at nearly 3 per cent. Western Australia's population growth was even higher, peaking at almost 3½ per cent.
Meanwhile, at least up to 2007, people were confident and finance was readily available. Brisbane housing prices, which had been a bit over half of the average level of Sydney and Melbourne prices in 2002, had risen to be almost the same by 2008, which was unusually high.
The rate of interstate migration to Queensland then slowed further, to be at its lowest in at least a decade. The effects of that on state population growth were compounded by a decline in international migration, something seen in all states. At the same time, finance became more difficult to obtain and lenders and borrowers alike became more risk averse. This happened everywhere, but its effects in Queensland seem to have been more pronounced. Since then, Brisbane housing prices have been declining relative to those in the southern capitals and the construction sector here has found it tough going.
I decided to check the facts. Below is a graph derived from the ABS Sept 2010 demographic statistics on State populations. The figures show that WA did in fact have a population growth spurt during 2008, but that WA and QLD still retain their claim to the highest population growth rates in the country. In fact, Vic also recorded declines in growth rates of a similar magnitude to QLD in 2009-2010, but home prices have been far better maintained there.
The only conclusion, to draw, if we believe the RBAs population explanation of home prices, is that with national population growth rates now down the gurgler, home prices nationwide can expect significant falls.
The eurozone is saving Germany
Over at Business Spectator, Oliver Marc Hartwich has laid out the reasons Germany is so keen to maintain the currency union even though Greece is effectively living on German welfare. A low value euro gives German exporters a massive advantage, probably more benefit than the cost of supporting Greece.
I recommend going over to BS and reading in full, but below is the crux of the article (with my emphasis in bold).
These figures explain why German politicians fear nothing more than a break-up of the eurozone. Apart from the inevitable repercussions for the global financial system, any scenario in which weaker eurozone countries departed from monetary union – let alone a scenario in which Germany itself pulled out – would inevitably have an impact on Germany’s exchange rate. It would appreciate substantially and thus undermine its export-dependent economy upon which much of Germany’s recent economic performance is built. No wonder then that German politicians still prefer to pay for Greece, Portugal and other struggling countries, however grudgingly.
Unfortunately, the current German strategy to keep the eurozone together at all costs is extremely short-sighted. It leaves countries like Greece and Portugal permanently dependent on German transfer payments while burdening German taxpayers with enormous liabilities and risks. All of that for the dubious benefit of prolonging and amplifying existing trade imbalances within Europe.
When I pointed out to the advisor that the German government’s policies effectively turned Greece into one big welfare recipient, the answer I got was little more than a ‘Yes, that’s true, but we can still afford it’.
I recommend going over to BS and reading in full, but below is the crux of the article (with my emphasis in bold).
These figures explain why German politicians fear nothing more than a break-up of the eurozone. Apart from the inevitable repercussions for the global financial system, any scenario in which weaker eurozone countries departed from monetary union – let alone a scenario in which Germany itself pulled out – would inevitably have an impact on Germany’s exchange rate. It would appreciate substantially and thus undermine its export-dependent economy upon which much of Germany’s recent economic performance is built. No wonder then that German politicians still prefer to pay for Greece, Portugal and other struggling countries, however grudgingly.
Unfortunately, the current German strategy to keep the eurozone together at all costs is extremely short-sighted. It leaves countries like Greece and Portugal permanently dependent on German transfer payments while burdening German taxpayers with enormous liabilities and risks. All of that for the dubious benefit of prolonging and amplifying existing trade imbalances within Europe.
When I pointed out to the advisor that the German government’s policies effectively turned Greece into one big welfare recipient, the answer I got was little more than a ‘Yes, that’s true, but we can still afford it’.
Quarry Australia
Glenn Stevens' address to the Economic Society of Australia in Brisbane yesterday reiterated the RBAs forecast of our future - Quarry Australia. Is that where we want to be?
The speech was full of useful analysis and commentary on domestic and global economic trends, but I have many concerns.
First, I'm not sure why the benefits of the mining boom are not spreading to the States with the largest mining investments. The Queensland government is broke yet still feels the need to stimulate the construction sector to the tune of $10,000 per new home. Further, if the property market is a good indicator of overall economic performance, the resource states seem to be taking a hammering. And by the way, the federal government stimulus is still ongoing, with $2billion still to be spent even in June 2011. So the unstimulated state of the economy is yet to be seen in the data. I didn’t hear a peep about that.
Stevens did raise the issue of falling home prices in Brisbane and Perth, suggesting that the reasons were all down to population growth and risk aversion by households. If we believe his population explanation for home price (which is rubbish anyway), then we have to believe the whole country’s property market is due for a crash, with immigration rates falling rapidly since mid 2008 (see chart below).
Some of his comments on housing follow, but the bolded sentence still confuses me. I could paraphrase - "the bank has no idea why Brisbane and Perth prices are down, but most likely it is because they were too high. We have no idea if prices elsewhere are also too high"
It surely is no coincidence that the two state capitals that have had the clearest evidence of declining house prices over the past couple of years – Brisbane and Perth – are the two that previously had the highest rate of population growth and that have since had the biggest decline in population growth. Moreover, it is hard to avoid the conclusion that changes in relative housing costs between states, while certainly not the only factor at work, have played an important role. Relative costs are affected by interstate population flows, but those costs then in turn have a feed-back effect on population flows. This is particularly so for Queensland.
...
The rate of interstate migration to Queensland then slowed further, to be at its lowest in at least a decade. The effects of that on state population growth were compounded by a decline in international migration, something seen in all states. At the same time, finance became more difficult to obtain and lenders and borrowers alike became more risk averse. This happened everywhere, but its effects in Queensland seem to have been more pronounced. Since then, Brisbane housing prices have been declining relative to those in the southern capitals and the construction sector here has found it tough going.
My other major concern is the following comment which is the justification for placing all of Australia’s bets on mining and energy.
For a long time, the world price of foodstuffs and raw materials tended to decline relative to the prices of manufactures, services and assets. But for some years now the prices of things that are grown, dug up or otherwise extracted have been rising relative to those other prices. This is mainly due to trends in global demand. At any point in time for a particular product we can appeal to supply-side issues – a drought, a flood or a mine or well closure, or some geo political event that is seen as pushing up prices. But stepping back, the main supply problem is really that there has simply been more demand than suppliers were prepared or able to meet at the old prices.
We do not have to look far for the cause: hundreds of millions of people in the emerging world have seen growth in their incomes and associated changes in their living standards, and they want to live much more like we have been living for decades. This means they are moving towards a more energy- and steel-intensive way of life and a more protein-rich diet. That fact is fundamentally changing the shape of the world economy. Even if China's growth rate moderates this year, as it seems to be doing, these structural forces almost certainly will continue.
The graph of Autralia's terms of trade (below) show the pattern of declining raw material prices since WWII, which changed some time in the early 2000s (assuming that our terms of trade is somewhat representative of the relative prices of raw materials and manufactured tradeable goods).
As a general rule, raw materials should become relatively cheaper over time as capital makes us more productive and raw materials easier to extract. This is always true even if there are natural barriers to resource extraction. Changes from this trend caused by a surge in demand are almost by definition temporary.
The generic argument is that China and India are making huge capital investments, thus they need a lot of energy and minerals. These countries are also getting wealthier and consuming more (and meat in particular). But the boom is driven by capital investment – building roads, rail, bridges, dams, buildings etc – which cannot be sustained for long at such a high pace.
Remember, this a change in relative prices, not quanitites. Prices can fall extremely easily with the smallest of changes to the volumes of minerals and fossil fuels being traded.
The RBA, however, seems to think this price structure will be sustained for some time even though it never has in the past - the natural limit for the terms of trade appears to be around 80.
My main concern is that frighteningly, the RBA, and probably much of the government, sees Australia’s future as a single bet on mining, and is willing to sacrifice much of the remaining economy for this to happen. Unfortunately this is a lose-lose proposition for most of the country.
All other sectors of the economy lose while the mining investment booms. When it crashes, we all lose because there is nothing else left in the economy to absorb capacity in a relatively short period. Remember, the minerals will be in the ground if we don’t mine them now, but the decades of production chains elsewhere in the economy are easily destroyed and slow to rebuild.
I acknowledge that the RBA has a single tool in its toolbox, but surely the message we should be hearing is that a strong and stable economy is a diverse economy. Quarry Australia is a very volatile and risky place to want to be.
The speech was full of useful analysis and commentary on domestic and global economic trends, but I have many concerns.
First, I'm not sure why the benefits of the mining boom are not spreading to the States with the largest mining investments. The Queensland government is broke yet still feels the need to stimulate the construction sector to the tune of $10,000 per new home. Further, if the property market is a good indicator of overall economic performance, the resource states seem to be taking a hammering. And by the way, the federal government stimulus is still ongoing, with $2billion still to be spent even in June 2011. So the unstimulated state of the economy is yet to be seen in the data. I didn’t hear a peep about that.
Stevens did raise the issue of falling home prices in Brisbane and Perth, suggesting that the reasons were all down to population growth and risk aversion by households. If we believe his population explanation for home price (which is rubbish anyway), then we have to believe the whole country’s property market is due for a crash, with immigration rates falling rapidly since mid 2008 (see chart below).
Some of his comments on housing follow, but the bolded sentence still confuses me. I could paraphrase - "the bank has no idea why Brisbane and Perth prices are down, but most likely it is because they were too high. We have no idea if prices elsewhere are also too high"
It surely is no coincidence that the two state capitals that have had the clearest evidence of declining house prices over the past couple of years – Brisbane and Perth – are the two that previously had the highest rate of population growth and that have since had the biggest decline in population growth. Moreover, it is hard to avoid the conclusion that changes in relative housing costs between states, while certainly not the only factor at work, have played an important role. Relative costs are affected by interstate population flows, but those costs then in turn have a feed-back effect on population flows. This is particularly so for Queensland.
...
The rate of interstate migration to Queensland then slowed further, to be at its lowest in at least a decade. The effects of that on state population growth were compounded by a decline in international migration, something seen in all states. At the same time, finance became more difficult to obtain and lenders and borrowers alike became more risk averse. This happened everywhere, but its effects in Queensland seem to have been more pronounced. Since then, Brisbane housing prices have been declining relative to those in the southern capitals and the construction sector here has found it tough going.
My other major concern is the following comment which is the justification for placing all of Australia’s bets on mining and energy.
For a long time, the world price of foodstuffs and raw materials tended to decline relative to the prices of manufactures, services and assets. But for some years now the prices of things that are grown, dug up or otherwise extracted have been rising relative to those other prices. This is mainly due to trends in global demand. At any point in time for a particular product we can appeal to supply-side issues – a drought, a flood or a mine or well closure, or some geo political event that is seen as pushing up prices. But stepping back, the main supply problem is really that there has simply been more demand than suppliers were prepared or able to meet at the old prices.
We do not have to look far for the cause: hundreds of millions of people in the emerging world have seen growth in their incomes and associated changes in their living standards, and they want to live much more like we have been living for decades. This means they are moving towards a more energy- and steel-intensive way of life and a more protein-rich diet. That fact is fundamentally changing the shape of the world economy. Even if China's growth rate moderates this year, as it seems to be doing, these structural forces almost certainly will continue.
The graph of Autralia's terms of trade (below) show the pattern of declining raw material prices since WWII, which changed some time in the early 2000s (assuming that our terms of trade is somewhat representative of the relative prices of raw materials and manufactured tradeable goods).
As a general rule, raw materials should become relatively cheaper over time as capital makes us more productive and raw materials easier to extract. This is always true even if there are natural barriers to resource extraction. Changes from this trend caused by a surge in demand are almost by definition temporary.
The generic argument is that China and India are making huge capital investments, thus they need a lot of energy and minerals. These countries are also getting wealthier and consuming more (and meat in particular). But the boom is driven by capital investment – building roads, rail, bridges, dams, buildings etc – which cannot be sustained for long at such a high pace.
Remember, this a change in relative prices, not quanitites. Prices can fall extremely easily with the smallest of changes to the volumes of minerals and fossil fuels being traded.
The RBA, however, seems to think this price structure will be sustained for some time even though it never has in the past - the natural limit for the terms of trade appears to be around 80.
My main concern is that frighteningly, the RBA, and probably much of the government, sees Australia’s future as a single bet on mining, and is willing to sacrifice much of the remaining economy for this to happen. Unfortunately this is a lose-lose proposition for most of the country.
All other sectors of the economy lose while the mining investment booms. When it crashes, we all lose because there is nothing else left in the economy to absorb capacity in a relatively short period. Remember, the minerals will be in the ground if we don’t mine them now, but the decades of production chains elsewhere in the economy are easily destroyed and slow to rebuild.
I acknowledge that the RBA has a single tool in its toolbox, but surely the message we should be hearing is that a strong and stable economy is a diverse economy. Quarry Australia is a very volatile and risky place to want to be.
Thursday, June 9, 2011
Realities of cycling
I've probably whinged about the inadequacy of bike lanes before, but this guy makes the point with a little more style. Enjoy the video.
Wednesday, June 8, 2011
Australian retail playing catch up
The price differences are astounding. Books delivered to your door from the UK for $8 when local bookstores are asking $24 for the same book. Shoes that retail locally for $200 are just $100 delivered from the US. It seems that if you can’t find online prices for less than 50% of the local retail price you just aren’t trying.
The Australia Institute (TAI) conducted a survey of online shopping and has some great examples of the price differences between local and online foreign retailers. A Sony Bravia television is half the price to buy online from the US ($995 instead of $1999), DVDs are usually half the price online, and even high end bicycles are half price if you get them delivered from the UK ($1599 instead of $2999).
Even more bizarrely my local bottle shop has a six-pack of imported German beer for $10 – that’s $4 less than the XXXX that is delivered a mere two kilometres from the brewery (and yes that is the brewed in Germany beer, not the locally brewed German style).
And one thing that really bugged me was that at the Hofer supermarket in Vienna a couple of years ago - Australian wine was 2.5euros a bottle, but the same wine here is more than $10.
What is going on!
We have a situation where not only are Australian products more expensive locally, but so are imported products!
My theories are -
1. Adjustments to higher exchange rates are very slow. If the dollar appears to stabilise around $1.05USD we can expect local prices to slowly converge to international prices.
2. Australian retailers are simply years behind their European and US counterparts in terms of adopting more efficient business models (think Aldi, Ikea),and especially for online retailing. Again, we can expect this to change slowly.
3. Australians still feel wealthy and don’t feel compelled to hunt for the best deals. This is changing as the TAI survey showed.
4. Many have suggested high rents for well located retail space as part of the explanation. This might be a contributing factor but I imagine that the trend for retail rents is down.
5. People get upset when prices fall. Remember the milk wars, the beer wars?
6. Local producers have no incentive to sell locally below the price they receive from export markets (as I discussed here).
I’m open to any other suggestions, but there really doesn’t seem to be one factor to explain this retailing discrepancy. I also believe that the price differentials between local and foreign online retailers are likely to shrink from now on.
Tuesday, June 7, 2011
Dwelling finance springs back
The ABS released their April dwelling finance data today, and there was quite a bounce for owner occupiers across all States, but investor finance continues to fall.
Taking a look at the big picture it is hard to know whether this one month's data is particularly meaningful.
Taking a look at the big picture it is hard to know whether this one month's data is particularly meaningful.
Monday, June 6, 2011
Great Stagnation?
Tyler Cowen has an ebook that presents his hypothesis that America is undergoing a great stagnation. What he means is that teh rate technological change and economic growth has slowed since about 1973. You can get most of his message from the TEDx talk in the below video.
While Cowen acknowledges the great leaps in communication technology, I feel his presentation glosses over a lot of medical technology which is highly valuable and has continued to improve life expectancy.
He also glosses over a lot of other changes that people value but don't get recorded in the statistics (for example greater equality of genders and races or lower crime rates). The more effort society directs towards these social advances, the less effort it can direct towards technological marvels.
Overall it's a very interesting video for anyone curious about economics and modern history.
While Cowen acknowledges the great leaps in communication technology, I feel his presentation glosses over a lot of medical technology which is highly valuable and has continued to improve life expectancy.
He also glosses over a lot of other changes that people value but don't get recorded in the statistics (for example greater equality of genders and races or lower crime rates). The more effort society directs towards these social advances, the less effort it can direct towards technological marvels.
Overall it's a very interesting video for anyone curious about economics and modern history.
Wednesday, June 1, 2011
Queensland’s Strategic Cropping Land
I have been critical about the farming lobby’s reaction to the Murray-Darling Basin Plan, and I have also been very critical about the value of food security, especially when used as a justification for agricultural subsidies.
My general belief is that farmers should be treated like any other business and face risks from their investment decisions. Because this belief I strongly support Queensland’s new Strategic Cropping Land Policy.
The policy under development gives farmers a chance to opt out of mining and gas production on their land. Currently land owners must allow mineral and gas exploration and development on their land. The mining industry has legislative power behind it to explore for, and mine, the States mineral resources (have a look at your title deed and you will note that even freehold land owners don’t own the minerals under their land).
This means that miners do not need to buy any property rights from existing land owners to conduct activities on privately owned land. They do however need to provide some compensation for disruption to activities (as prescribed under the relevant acts).
In the greatest of ironies, agricultural policies in this country have protected farmers from their own business decisions (eg. subsidising water supplies, making drought and flood payments - I argue these events are part of the natural weather cycle and should be anticipated), yet have not protected farmers from external threats to from mining.
It took a while for the food security lobby to realise that the food production of the country rests in the land, soil and water, not in the individual businesses of farmers. If a farm business fails, the productive capacity remains for the next buyer of the property. But if land, soil and water is irreversibly damaged, then potential food production capacity is destroyed.
With these bizarre policies in place it is possible to have the situation where a farmer is receiving drought relief payments on the one hand to save his business, while the government is supporting the demise of his ability to farm on the other hand by allowing coal seam gas wells to be peppered across his fields.
In the Darling Downs the preservation of the water quality in underground aquifers is especially important. These aquifers are a significant source of water for agriculture and there is a reasonable probability that drilling through this aquifer many thousands of times to reach the deeper coal seam will contaminate the water. And unlike a river system which flushes water readily, underground aquifers may take hundreds of years to recover (or water users will need to treat the now contaminated water before applying to crops).
The irreversibility of mining and coal seam gas impacts is one of the key reasons that farmers should be given some ability to opt out of such activities on (or even near in some cases) their land.
The outcomes from this type of policy should satisfy a broad range of interests.
1. Land use conflicts are more easily resolved by given some powers back to existing land owners.
2. By protecting the land itself those who want food security and local food produce benefit.
3. Those who want ‘agricultural open space’ benefit (people actually like knowing there are farming communities and driving through the country).
4. Farmers who want to be free to run their own business, protected from irreversible land damage benefit.
5. Those who want mining can do so if the impacts on surrounding land owners are sufficiently low.
Of course there will be problems to overcome during implementation, but in principle the policy appears sound. An indeed, the minerals and gas remain in the ground should future circumstances require their extraction.
Tuesday, May 31, 2011
The telco confusopoly
The authority also wants to prohibit what it says are misleading advertising practices, such as the use of the term "cap" on mobile and broadband plans.
"It's not a cap, it's not a maximum, it's a minimum," Mr Chapman said
"We want to prohibit that unless its a genuine hard cap, so that if you exceed your limit the service ends or you get the opportunity to upgrade." (here)
Most recently I have been comparing mobile phone plans. Some of the cheap plans don't allow you to call 13, 1300 and 1800 numbers under the cap, and they all have different call rates, flag fall and penalties for exceeding cap limits. To actually compare providers you need to know your calling needs in advance and have the mathematical skills to run this call profile, and other scenarios, through a model of each available phone plan. Insanity.
As I previously wrote -
By consciously manipulating these two criteria of a free market [low barriers to entry and perfect, or at least good, information], all firms in the market are able to avoid a state of true competition that would produce the most efficient allocation of services, and are able to artificially inflate the value of the commodity, hence producing more profit for each firm in the market.
This is not meant to sound like a conspiracy, because indeed each firm does not need to meet in back rooms with the other firms in the market and all agree to limit customer information and the comparability of their products. They each simply need to aspire to the great marketing ideal of product differentiation, a concept that is fundamentally designed to artificially eliminate direct competition by removing direct comparability.
...
The power of product differentiation, through its ability to remove comparability and create an information gap to distort what could be a perfectly competitive market, can be demonstrated by the case of the term life insurance market in the US in the late 1990s. There was a mysterious and dramatic drop in prices across all firms that did not correlate to price drops in other forms of insurance, which themselves where steadily rising.
According to economist Steven D. Levitt, this can be attributed to the realisation of a perfect market through the power of the internet. Although term life insurance policies had been quite homogeneous before this period of time, the process of shopping around for the cheapest price had been convoluted and time consuming, whereas websites such as Quotesmith.com suddenly made the process almost instantaneous.
In just a few years, the value of the term life insurance market in the US had dropped by USD$1bilion because of the new found ease of comparability. What insurance firm would want this to happen? Even if you were a small player in the market, say a 1% market share, your turnover had just dropped by $10million. It is perhaps one of the great recent examples of the power of perfect competition in allocating resources efficiently, yet possibly one of the greatest blunders by the insurance industry.
I believe that the power of private enterprise is its innovative response to the financial risks it incurs, but with very simple regulation the innovative confusopoly, which comes at a cost to cosumers, can easily be avoided. Indeed, most of the pushback against the telco confusopoly is from webpages which keep up-to-date tabs on plans from each service provider and enable you to take some rough guesses about future use and compare the cost effectiveness of each offering (eg here)
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