“If someone gets an advantage in the market surely that’s a bad thing, won’t they be able to charge not only higher prices but ANY price they like? ” I’d hate to think how many times I hear this comment when talking about my views on economic development, it is usually followed up with, “that’s why the rich keep getting richer and the poor poorer, there’s no equality in that system.” That part is simply not true but it’s not the paradigm that I want to dispel in this article, I’ll come back to equality and the super rich another time.
Conversely, competitive advantage also is not really the starting point of this conversation; the bigger issue is what happens when it is abused!
Abuse of competitive advantage creates the situation where a business can certainly charge what they want without fear or risk of the consumer rejecting that price because competition in the marketplace has been prevented. This usually ends up creating the scenario of a monopoly sometimes duopolies and the consumer does not have any other choice to turn to…… We regulate though our statutory authorities to prosecute and punish businesses that abuse or use unfairly their competitive advantage.
Sometimes, governments introduce regulations or legislation that has unintended consequence creating unfair competitive advantage. The Telstra Corporation Act 1991 is a great example of this, when privatized to pay down debt, Telstra was sold by and large as a going concern, this meant that the infrastructure as well as the retail arm remained as one business. The unintended consequence of this decision is that Telstra retail is able to operate in the market in an environment where their competition is forced to adopt the same business model as Telstra ie when they buy access to the poles and copper the pricing is on the same basis and in order to make money the other retail Telco’s have to operate on a volume model.
Telstra is precluded from restricting access to their infrastructure but they operate the network on the basis that suits their own retail arm. A much better solution to privatizing Telstra would have been to separate the two arms and either just sell retail or if sold, sell infrastructure to an at arms length operator. Whoever runs the infrastructure then has an incentive to meet the demands of the market ie consumers rather than simply their own interests.
The proof of the pudding as they say is in the eating, I’d love to hear how many consumers love their Telco and think that they go way over the top for them, how great it is to call up and speak with someone who understands their problem and is empowered to make a decision to fix it there and then on the spot……
So what is competitive advantage and why is it good for consumers!
There are only two ways that a business can operate that sends a signal to consumers that it is best to buy from that particular business. The first is scale ie volume, when you buy more the transaction costs are lower pro rata and if you choose to create a competitive advantage you pass on those lower costs to the consumer and the product or service is cheaper. This is the Telco’s model and the usual consequence in a volume market is that service and satisfaction suffers but the consumer is begrudgingly happy as the price generally offset the poor service.
The second way and the best way for small business operators to compete successfully in the market and gain an advantage over the big boys is to differentiate. There are innumerate ways to be different in the market, but they all boil down to one overarching truth – “If we understand the problems our customers are experiencing from their point of view and offer a solution that overcomes them …. the consumer understands the value they are getting and the price barrier is lowered.”
We will all generally speaking pay a fair price for the value we perceive, of course there’s a limit but that is subjective for each individual. To deliver value to consumers should be the starting point and the price to value ration will settle itself.
I was at a meeting in my local RSL Sub-Branch recently and this very issue came up in relation to us endorsing a preferred Doctor within our veteran community. The concern is that we could get the other Doctors in the area off side and also be creating a monopoly, which would be anti-competitive. I will say upfront, that these discussions were in confidence and I won’t disclose the outcome from that meeting. Lets look however of the detail of what was involved and the concern some members at the table had; which principally boiled down to “Were we creating a monopoly and upsetting the community as an unintended consequence.”
First point. Is price a typical consideration when attending a Doctor, and the answer is generally no. If finances are an issue we go to Bulk Billing GP’s which we can’t compare on a price basis but 99% of people who go to co-payment practices don’t ask for the fee schedule to compare prices when determining which GP they will attend. Price is not a determinant factor in health care; we choose a Doctor that we think will be best for us for a number of reasons most of which are generally subjective.
Second Point. Lets make an assumption that there is real benefit in having a preferred medical provider. Understanding veteran issues and dealing with DVA is a good example but lets say that it is something the Sub-Branch sees high value in.
The Main Point is whether an RSL Sub-Branch will send a signal to the market that will create a monopoly by having a preferred medical supplier. Is it anti-competitive behavior, will it result in a situation where esteemed members of our community, ipso facto Doctors get upset that we are forcing customers away from them….. or, will the outcome actually be better services and value to veterans on the whole regardless of whom they see as a consequence?
The demographics in our area are about 80,000 people, and the number of Doctors around 150. The veterans in our sub-branch number 180 people with maybe one new person a week coming in to see our advocacy officers, these drop-ins may or may not need medical referral. Most veterans will already have a preferred GP with whom they are comfortable seeing, happy with the relationship and see high value in continuing with that Doctor. The effect on the market however is that their Doctor will be conscious of the option their patient has to shift to one who is specializing in Veteran care if they allow the relationship to slip for any reason and they intuitively work harder to make sure that this never occurs.
All in all we are talking about 500 people a year maximum most who would already have a GP they visit. The GP concerned wants to create a competitive advantage through specializing in veteran health, there is no doubt that a market exists for this specialty and that veteran health would benefit as a consequence both through his increased attention to the area and other GP’s staying ahead of the game and ensuring they don’t lose their veterans to his clinic. Worst case we would if we sent 10% of our veterans we influence to a preferred GP would be 50 people that in no way creates a monopoly in the market or even influences the market through our actions. The real outcome however is that there is an incentive for the medical profession to continue delivering the excellent service they currently provide while at the same time looking at how they can improve even further.
Even in the medical field, competition creates a healthy environment to ensure that the consumer receives maximum value.