Thursday, May 23, 2013

Asymmetric Market Power, Competition and Ethics

The French Digital Economy Minister, Fleur Pellertin, “is reported to have stepped in to help a French firm after its mobile phone application (AppGratis) was suddenly dumped by Apple”.
Apples’ contract enabled the small firm to employ 45 people largely on AppGratis products and, on the basis of this contract it projected a 22.25 million euro turnover and planned to expand with another 50 jobs.  The sudden end of its contract threw these plans into disarray and it turned to the government for help.
And the socialist Digital Minister’s solution?
“This is not virtuous behaviour appropriate to a firm of  [Apple’s] size.  I’m asking Apple to act responsibly and to have an ethical behaviour fitting its brand image,” adding: “the abusive behaviour of certain giant firms must lead to us thinking about new laws.”
This is not uncommon in industry where strong large brand-image firms and major government departments negotiate contractual relationships with smaller suppliers.  The terms imposed on suppliers tend to be onerous and tend to be accepted, despite the risks to innovating firms like AppGratis in pursuit of their dreams.
Government defence contracts are a specialist sector in their own right, of which I had some experience while at Edinburgh Business School.   Private sector firms have similar onerous ‘one-way street’ contracts with their smaller (often much smaller) sub-contractors.   And when all else fails, bigger firms intimidate smaller contractors into accepting onerous terms, including with little or no compensation cancellation clauses**, the size alone of the buyers enables the imposition of costly consequences on the smaller companies.  The remedy of legal process tends to fail because the outcome is determined by which party has the deepest pockets.
Minister Fleur Pellertin’s default stance of “thinking about new laws” is probably an idle threat because what exactly is she proposing in law?  What is she going to get her civil servants to draft?  Granted the top of the French civil service is among the best educated of any civil service in the western world but their drafting new laws to circumvent the naked monopoly/oligopoly powers of big business, suggests that their probability of designing workable “virtuous” new laws to ensure extra-contractual “ethical behaviours” between large and small contractors is not high.  Moreover, the problem is not diminished in public sector procurement.  In France, government is even bigger and state spending is a bigger proportion of GDP than in the UK.
“New laws” are the default stance of politicians but usually end as a complication to already complex legal processes without affecting the underlying power asymmetry. 
That is why Adam Smith’s hostility to monopolies is still valid but is not easily remedied in complex societies with wide disparities in market power.  His remarks about the benefits of competition fell on deaf-ears; the monopolising Town Guilds continued for decades, merchants and manufacturers and their hostility to foreign imports were still functioning up to two centuries later, including Imperial, and later Commonwealth, Preferences in food and raw materials, and national defence expenditures (an obvious monopoly) remained and remain high, and all monopolies are now subsumed in the European Customs Union.
Fleur Pellertin stepping in to “help” the very small AppGratis firm with “new laws” is probably well meant and not just a new politician’s sound bite.  The next steps for a socialist Minister is to consider advocating public ownership as a rhetorical device to be seen by the electorate as trying to do “something” for smaller firms.  I do not suppose that Apple executives will lose much sleep over that or that anything will come of it.

** As a consultant negotiator (1987-2005), I found that drafting legal “getting out of legally-binding contracts” a minor speciality.


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