The Price of Everything - Eduardo Porter [13]
What really tames prices is the presence of more than one producer in the marketplace. If munchers had no other option but Frito-Lay products, the company would have less of an incentive to put more Cheetos into the bag and trumpet it to the world. Had there been no other confectioners around, Hershey’s might have raised the price of its chocolate bars even after shrinking them. But the price of a product must mesh within a universe populated by other brands of sweets and snacks. How well it fits will determine its overall success. This is consumers’ most significant defense against corporations’ power: competition.
The power of competition is writ all over the cost of a phone call. In 1983, shortly after the government broke up AT&T’s monopoly of the American telephone market, AT&T charged $5.15 for a ten-minute transcontinental daytime call. By 1989 it charged $2.50 for the call. Today an AT&T subscriber on the $5-per-month international plan can call Beijing for eleven cents a minute and London for eight cents.
In Britain, it was the government that held a monopoly over telecommunications. But in 1981 the government of Margaret Thatcher allowed Mercury Communications, a private company, to offer competing phone service, and in 1984 it spun off the state-run British Telecom. On February 1, 1982, the rate of a three-minute call from London to New York was cut from £2.13 to £1.49. Today, as long as one keeps each call at under an hour, BT’s international package offers an unlimited number of calls from London to New York for £4.99 per month.
Competition can protect us from runaway printing prices. Fat profits from overpriced ink allow companies like HP to compete by selling printers at less than what it costs to make them. Others employ different tactics. Kodak’s ESP printers are about 30 percent more expensive than similar models, but the ink cartridges cost as little as ten dollars and print about three hundred pages. Regardless of the mix of tactics, the overall price of printing should fall as printer makers vie to win market share.
CONSIDER WHAT HAPPENS when there is little or no competition in a market. Steve Blank, a former Silicon Valley entrepreneur who teaches a customer development class at the University of California at Berkeley, used to tell his students about Sandra Kurtzig, the founder of a company that in the 1970s designed the first business enterprise software for small companies that could run on microcomputers rather than huge mainframes.
When she walked in to make her first sales pitch, Ms. Kurtzig had no idea of what to ask for her system, so she mentioned the biggest number she thought a rational person would pay: $75,000. But when the buyer wrote the number down without flinching, she realized she had made a mistake. “Per year,” she added quickly. The company man wrote that down too. Only when Ms. Kurtzig added maintenance at 25 percent per year did the buyer object, so she cut it to 15 percent. According to Mr. Blank, the company buyer said, “Okay.” Ms. Kurtzig could do this because she was offering a unique service in a specialized industry with few competitors, and thus had great freedom to set her prices. But where there are many rivals it is impossible to achieve this kind of market power. The mere threat of competition can move companies to respond. Indeed, for many years the threat that Southwest Airways would start flying on a given route would prompt other carriers to lower fares on that route, to preemptively buy customers’ loyalty.
Walmart drove supermarkets to despair when it expanded into groceries in 1988, offering prices 15 to 25 percent cheaper than the competition. The opening of a Walmart supercenter caused sales