Decades after the Sherman anti-trust laws ostensibly changed the landscape of competition in the United States, we still occasionally bump into the issue again, and today the Wall Street Journal is reporting that the Department of Justice is beginning an investigation of the three big flash memory manufacturers — Samsung, Toshiba and SanDisk — into whether they’re violating antitrust laws.
Given the precipitous drop in flash memory devices, notably Compact Flash, Memory Stick Duo and SD cards, I’m not surprised that this investigation has begun, though it’s actually more a question of whether the increasing price of NAND memory (as used in iPhones, etc) has risen faster than market conditions warrant. Wasn’t it just a few years ago that we saw the same investigation from the Department of Justice against RAM manufacturers, during which time we got to read claims from US manufacturers about how overseas manufacturers were dumping products at below cost to transform the marketplace?
What most interests me about this situation – and yes, I would be unsurprised to find that these companies are colluding on pricing, coming up with suggested retail prices that are related to their business goals, not their costs – is that we still find that it’s a problem for companies to manage their bottom line across products and establish prices based on market demand and what the market will bear.
That’s a phrase I distinctly remember from my MBA economics courses too. You always price your product based on both the going price and what you believe the market will bear: price it too high and the market will let you know. Price it too low and your bottom line will suffer. The “invisible hand” will help you end up at the right spot for your market, your costs and your revenue goals.
Think about this for a minute. The collusion between vendors to establish a going price that’s unattainable by smaller competitors is perhaps unfair, but how is this different to a restaurant that decides that it’ll offer free appetizers to anyone who buys an entré as a way of driving traffic? Clearly the cost of the ingredients that make up the appetizer is not reflected in the price of the dish.
Now let’s extend this a bit. Let’s say that all the restaurants in a particular neighborhood agreed that they would collectively offer that promotion for a weekend as a way of drawing more new customers to their area. Is that collusion? Well, yes. Is it unfair competition for the restaurants in other areas that aren’t running the promotion? Ostensibly. Is it illegal?
The final step of this analogy, to be meaningful, would be to talk about the little restaurant one block over that specializes in making appetizers and doesn’t actually have any entrés on their menu. They don’t have the flexibility of offering their fare for free: they can’t afford it. Therefore, they can’t afford to match the prices of their competitors who have a larger menu and more customers and can more easily balance their books by having free appetizers being a so-called “loss leader”.
This works in the other direction too. I bought a drink last night at the hotel in which I’m staying and was startled to find that it was $14 (a mediocre mojito, if you’re curious). The same drink somewhere else would have been half that price. Is that an illegal tactic, or just charging what the market will (begrudgingly) bear?
Now, how is this situation different from Samsung, Toshiba and SanDisk agreeing that they will charge a specific price for a specific product, a price that might be impossible for a smaller manufacturer to meet or that might actually be more than their costs plus standard profit margin? Isn’t that just business as usual in the cutthroat world of capitalism?
What do you think, dear reader? On the presumption that the Department of Justice investigation against these three big flash memory manufacturers is built around the question of whether they colluded on setting prices artificially low, should it really be illegal? Is it the role of “the government” to balance the pressures and consequences of capitalism?
I’m just not entirely sure I believe this any more… maybe, just maybe, Adam Smith was right when he talked about “unfettered capitalism”…