Firms Compete at Multiple Margins

In response to my earlier post on consumer protection law, Peter asked:

"Could the issue be one of the availability and reliability of information in consumer transactions? "

Producers, of course, have more info regarding characteristics of their products compared with consumers. Sellers would be compelled by competition to try the best they could to lure customers. One way to do so, of course, is to compete against in each other in doing the best they could to inform customers about their products.

In other words, competition is multi-dimensional. It entails not only price, quantity and quality, it would include after-sales services like warranties to address the information asymmetry problem as well in producers' bid to draw customers.

Peter also asked:

"Take a law against misleading or deceptive conduct, for instance. We already have such a law in the form of section 7M of the Telecommunications Ordinance, but it only applies to telecommunications licensees. What's your view on the need for/effectiveness of this prohibition in what is a very competitive industry (there are a number of decided cases on the OFTA website www.ofta.gov.hk)? Could it be of greater utility in other industries? "

I would caution against attributing the well-functioning character of the telecom market to that section 7M. One has to bear in mind that once HK starts liberalizing its telecom market, competitive forces are unleashed, and my argument is that these competitive forces would ensure that the information aysmmetry problem would be adequately addressed.

Hence, one should be careful about the reverse causality problem here. That is, the well-functioning of the telecom market as a result of the intense competition introduced after liberalization creates the false impression that the causality runs the other way (ie the smooth working of the market is a consequence of the existence of section 7M in the Telecom Ordinance).

Success is Not an Entitlement

A very, very interesting story in WSJ about Starbucks reported that:

"People close to the Seattle company said they weren't surprised when Chairman Howard Schultz sent a memo to executives on Feb. 14 warning that the chain's growth had moved Starbucks too far from its roots. In the memo, which surfaced on a blog last week, Mr. Schultz lamented the loss of the coffee-bean aroma in stores and conceded fast-food chains and other competitors threaten to steal Starbucks's customers."

Read more here.

Starting out as a coffee shop famous for offering personal touches and drinking experiences to drinkers, Starbucks encounters problems when it begins an aggressive expansion plan.

To ensure quality and ease of management (in technical jargon, to minimize transaction costs), Starbucks needs to standardize and do things, while good from an efficiency viewpoint, that would diminish the unquiness of the drinking experience that it once offers its customers.

The experience of Starbucks seems to suggest there is a negative relationship between number of outlets and the kind of experiences such outlets could offer their customers. More outlets, less of a unique experience offered to customers.

This conjecture seems to be supported indirectly by the fact that when McDonalds decides to offer gourment coffee and compete with Starbucks, the company does not simply sell better coffee at its ordinary outlet. Instead, McCafe is set up for this purpose.