Regulation Is Almost Always Anti-Competitive

Continuing with a long-running theme here at Coyote Blog, here is another example of government regulation being anti-competitive and having the net result of protecting the margins of powerful, established incumbents against new entrants:

During a recent meeting, the Antiplanner was extolling the virtues of Houston's land-use policies, and a home builder at the meeting said, "Of course, no one here wants our city to be like Houston," meaning no one wanted Houston's land-use regime.

Why not? I asked. "There is too much competition down there. My company can't make a profit," he said. "You have to have some barriers to entry to be able to make money."

Those who accuse free marketeers of being supporters of big business don't realize that big businesses (and often smaller businesses) don't want a free market. In this home builder's case, he wanted enough restrictions on the market to keep out some of his competitors (most likely smaller companies that can't afford to hire lawyers and planners for every project) but not enough regulation to keep his company out

Several years ago my company had to obtain a liquor license in Shasta Country, CA. At one point, the issuance of the license had to be voted on by some group (County commissioners, the planning board, something like that). I was told the reason was that if they issued too many licenses, I would not be able to make money -- really, they were looking after me.

Well, not really.  First, the government seldom has any idea even how a business works.  Perhaps the liquor was a loss leader for my business, and I didn't care to make money on it at all.  Perhaps I had a better marketing concept.

And herein we get to the real flaw -- the implication is that somehow the dangers is to the new entrant in a crowded marketplace, but in fact the reality is often the opposite.   The actual competitive danger is often to incumbents, fat and happy with the status quo and unable to react quickly (due to all kinds of reasons from sunk investment to long held biases) to shifts in customer preferences.  No matter what their stated reason, the true effect of such regulation is to protect current competitors from new entrants, new products, and new business concepts.

I can see the effects of this right here where I am sitting, out near the end of Cape Cod.  Zoning and business regulation here is enormously aggressive - its is virtually impossible to start a new retail establishment here, particularly on virgin land.  As a result, every store and restaurant here feels like it is right out of the 1950s.  You'd hardly know there has been a revolution in retail or service delivery over the past few decades, because businesses here are sheltered from new entrants.  They don't need to adopt better practices or provide better products or services, because they know they are not vulnerable (courtesy of the government) to competitive attacks from new entrants using more modern strategies.

  • Esox Lucius

    I had the >ahem< "honor" of being associated the the inner workings of my town's trustees. A new liquor store was trying to move into town and a few of the trustees wanted to know what I thought about it. It was obvious from the tone of the questions that they did not want another liquor store. They mentioned that a new entrant to the market could weaken the existing liquor store (which was a dump anyway) to which I countered that they consider South West Airlines, a newer faster company that kicked the crap out of the old guard and created better service for all of us. I suggested that if the new liquor store kills the old liquor store, then the old one needed to die and the people were better served by making that choice themselves. The direct quote I got from them (in confidence, not in public) was, "I have seen this guy, he's just some Indian, he's no South West Airlines." I realized that logic and freedom were not going to win the day so I asked, if this were a hamburger stand that was moving in instead of a liquor store and if it was the 50th hamburger stand that this town had, could you stop them from moving in. The answer was "No". To which I replied, well I guess it's lucky for anyone that values their economic freedom that they don't let you guys decide whether or not any other store's than stores selling alcohol should move in or not. Then, I loudly thanked my lucky stars that no local bureaucrat could block my ability to start or run my business in this town.

  • ElamBend

    I've seen this happen in Chicago. Even had the president of a neighborhood Chamber of Commerce (which I found odd since she had no business) tell me that they didn't need any more banks or sandwhich shops, they wanted boutiques like another particular neighborhood. Then the sandwich shop that my employers were trying to get into his building was held up because they were worried about two existing ones. Later it turned out that the local alderman had an interest in one of them. Eventually, my employers got the sandwhich shop in and guess what!? All three sandwich shops are still open and doing well.

  • Tom Kelly

    Coyote- do you have any experience with New Mexico liquor laws? I've always wondered how they work. It must be real expensive because I've noticed that chain restaurants build connected buildings so two or more brands can share the same bar/liquor license.

    I've also notice some really horrible restaurants that seem to stay in business just because they are the only liquor serving joint in the area.

  • commieBob

    I'm torn by this. Some regulations are supposed to protect us. We license doctors, engineers, mechanics and even hairdressers. The result is that the numbers of people practicing some professions is artificially limited. We get ripped off. Wasn't it Adam Smith who pointed out that any group of tradesmen eventually get around to discussing how to rip off the public.

    What would happen if doctors didn't have to be licensed and anyone could practice medicine? My guess is that medical care would be a lot cheaper and perhaps better.

    On the other hand: I'm a Canadian. We have universal healthcare. We like it a lot. (Don't believe the broad in the commercial.) Like I said, I'm torn.

  • Not Sure

    "What would happen if doctors didn’t have to be licensed and anyone could practice medicine?" -
    commieBob

    What would almost certainly happen is businesses similar to Underwriters Laboratories or Consumers Union would emerge to certify willing applicants. Consumers would then have a choice- doctors who would voluntarily submit to screening and agree to standard practices, and doctors who wouldn't. It's not a stretch to imagine that doctors who refused to agree to certification would have a hard time attracting patients.

    Just a guess, but I'd suspect that, given the opportunity for competition, the certification companies would be much more responsive to consumers' concerns than the government is now.

  • Doug

    “There is too much competition down there. My company can’t make a profit,,,”

    "Nobody goes there anymore. It's too crowded." - Yogi Berra

  • Rolo Tomasi

    Doug,

    Awesome analogy. Just awesome.

  • Matt

    This of course applies to the investor-owned utility industry, which by its very nature is highly regulated. Ever try competing against one of them? Just look at how difficult it has been for the unregulated for-profit firm SolarCity to get approval from the Arizona Corporation Commission to build, install, and sell the output from photovoltaic solar arrays to the Scottsdale Unified School District.

  • Allen

    The only true monopoly is one backed by government laws.