Co-Opetition - Adam M. Brandenburger [82]
It’s more or less the same story with every one of the twenty-five students with whom Adam negotiates. Even though Tarun is not in the room, his presence is felt in every negotiation. All the students will get a worse deal—and that includes Tarun. When he returns from his interview, he’ll be quite disappointed to see how the Card Game played out.
MFCs are counterintuitive in their effects. The natural guess is that customers do better with the protection of an MFC. And they would—if MFCs didn’t change the game. But they do change the game.
If you were surprised by this result, you aren’t alone. On more than one occasion, the United States Congress has chosen to play Tarun’s role. It has left negotiations to others and been content to take the best price. Did the government do any better than Tarun did in the Card Game? Let’s find out.
Favoring the House One of the many fringe benefits that members of Congress enjoy is that they get to make the rules. And others have to play by them. Needless to say, some of the rules nearest to Congress’s heart are those that concern elections and campaign expenses.
Back in 1971 members of Congress figured that they could spend less time fund-raising if they could find a way to lower the cost of election campaigning.4 A particularly expensive campaign item was television spots. Thus, Congress passed the Federal Election Campaign Act, which requires television broadcasters to automatically give candidates a rate for campaign spots equal to the lowest rate given to any commercial customer. The politicians effectively voted themselves an MFC for buying airtime.
The law didn’t have quite the desired effect. Knowing that, in an election year, politicians are going to purchase significant chunks of airtime, the networks want to get as much as they can for these campaign spots. So with an election coming up, how will a network respond when a commercial customer, such as a Procter & Gamble, comes to negotiate the rate for an ad spot? It’ll be very tough on price. Giving P&G a price concession, even to fill up slack airtime, is extremely costly, since any discount to P&G must be extended to all the politicians buying spots. The network would likely end up losing more from the lower price paid by all the politicians than it would gain from getting some extra P&G business. The bottom line: P&G doesn’t get the discount.
One result of the law was that the networks ended up making more money than before. They used the fact that the politicians had an MFC to restrain themselves from giving price breaks to all their other customers. For these customers—Procter & Gamble and others—the law was like a hidden tax. In fact, the politicians may have succeeded in taxing themselves. Even though they got the best price, the best-price provision led the networks to charge everyone else more. Thus, that best price could well have been higher than the price they would otherwise have had to pay. Passing the law may have actually made the politicians worse off.
This wasn’t the only time Congress shot itself in the foot this way. In 1990, as part of the Omnibus Budget Reconciliation Act, Congress reformed Medicaid reimbursement. Looking for ways to control drug prices, Congress was frustrated by the fact that some of the large HMOs had gotten lower prices than the government itself had. So Congress changed the game. It passed legislation specifying new rules for how Medicaid would pay for any branded drugs. Henceforth, Medicaid would pay 88 percent of the average wholesale price, or the best price given to anyone in the retail pharmaceutical trade, whichever was lower.
How did the government fare in the new game? Not as well as it expected. Look at the new game from the perspective of a drug manufacturer. With the new law, it’s not worthwhile for you to offer anyone a price below 88 percent of the average price. If you did, you’d have to extend this low price to the government, and that would surely cost you more than you