Too Many Fingers
Right now, there’s a palette of shrink-wrapped phone books sitting in the lobby of my building. Some new yellow pages. We’re not sure where it came from or what it’s for. It’s been there for several weeks now: no one can work up the energy to tear the plastic and take one, much less cart the worthless stack out to recycling.
Back in the old days, there was one phone company and one set of telephone books. It may not have been ideal, but at least it was useful. As a consumer, you had some reason to believe the listings were comprehensive. As an advertiser, you had reason to believe that the right people would see your ad.
Now there’s competition. But unlike most instances of the free market, this is one place where multiple options helps nobody. There’s no incentive for off-brand phone books to offer complete listings. Maybe it’s only their subscribers, or their advertisers. Who knows? Consequently, anyone looking in the book can’t be sure they’re getting a complete list of available services – maybe the cheapest, most convenient shop doesn’t advertise in that book. Likewise, businesses who want the benefits of a prominent ad in the phonebook – a proven performer in years’ past – now have to evaluate which directory gives them the best coverage, or else duplicate their advertising in two, three, five different competing books, with no way to accurately estimate usage or coverage because all of them are given (or left) free to every address.
Then there are the different listings publishers, all duplicating their own investments: multiple sets of ad sales forces, multiple production and distribution systems, printing and paper costs. It’s wasteful, but there’s a great incentive to stick it out, because the last one standing will then have access to all the ad revenues in the market. In the meantime, no single publisher gets a decent return on investment, consumers and advertisers are confused, there are mountains of paper being dumped into recycling unread and unused, and there’s no mechanism to weed the effective listings from the worthless ones. It’s a complete failure of competition and an argument for that rare bird of the free market system, the natural monopoly.
I point this out because free market ideologues have a blind spot when it comes to these sorts of situations. There are limited cases where the systemic costs of competition – poor information, redundant infrastructure, need to support multiple standards and practices around the same activity – exceed the benefits of choice and low prices. At the same time, the usual sorting functions of competition don’t work very well, either because the market players have no pricing power or because the lack of a clear market leader makes it necessary for customers to spend more than they ordinarily would to “cover their bets.” In these cases, competition creates inefficiencies that wouldn’t ordinarily exist.
We’re finally developing an awareness that our healthcare system may be a candidate for natural monopoly. A recent Boston University study estimated that nearly half the money we spend on healthcare in the US is lost to waste, inefficiency, overhead and fraud. One big reason for this is that there are no widespread standards for information interchange between providers. This not only drives costs through the roof, but results in inconsistent quality of care.
Because this problem is well-known and the benefits of coming out on top are so high, multiple competitors are asserting their own technology as the “standard.” More arrive at the table every day. The result is market confusion, duplication of investment, extremely slow adoption (because no one wants to be left owning a Betamax in a VHS world) and ongoing delay in realizing the enormous overall savings in a sector whose spiraling costs are crippling our economy.
This is a paradox for which the free market has no good solution. The longer we refuse to acknowledge these sorts of gaps in an otherwise-useful system, the more the problem will pile up. Just like the stacks of unused phone books in the lobby.
9:16:31 AM 
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