Sunday, August 05, 2007

From Netflix to Free Markets

Here is yet another example that free market capitalism actually works for consumers: Netflix recently reduced the price its service plans such that our 3 DVDs at a time plan now costs $16.99, about a dollar less than we used to pay. The funny thing is that we did not have to request the reduction or to take any action in connection with this change. One day Netflix sent us a notice in the mail informing us that our price has been reduced.

Have the good people at Netflix switched from being ardent capitalists to firm believers in socialism? Not really. Market economics is at work once again. Netflix is facing mounting competition from Blockbuster, who is leveraging its retail stores to offer plans that allow consumers to rent via mail or through its stores for the same price. This increasing pressure has evidently convinced Netflix executives that a price cut is in order.

Nevertheless both Netflix and Blockbuster are firm believers in bilking their customers whenever they can. I haven't forgotten that just a few years ago Netflix arrogantly raised the price of its 3 DVD plan to about $22. They only dropped it back once their customers rebelled and they started to lose subscribers to the competition. Blockbuster on the other hand was, for years, content to rip-off hoards of consumers by charging ridiculous rental and late-return fees. They too only succumbed once free market competition emerged, in the form of Netflix.

What does all this tell you about capitalism? To me it says two things. First, capitalism clearly works. If you take the video rental market as an example, prices for video rentals have come down dramatically over the past several years. Second, free market capitalism can only work if there is indeed a free market. Netflix and Blockbuster would each immediately revert back to their predatory selves if they felt that competition was no longer a barrier to raising prices. By the way, I am not singling out these two companies. I could make the very same argument for pretty much any other business on the face of the planet.

As far as I am concerned, the bottom line in all this is self evident: the role of government is to ensure that the free market is operating correctly. It needs to ensure that every business in the country feels a healthy competitive pressure. From that point forward the market will make things right. This is true of health care, it is true of power utilities, it is true of airlines, it is true of agriculture, it is true of telecommunications, it is basically true of every single industry out there. I did not pick the above industries by co-incidence, these are some of the biggest industries which enjoy government protectionism, waivers from anti-trust laws, and subsidies. We would all be better off if the government created a truly free market and at that point acted simply as a neutral referee rather than as a protector of special interests.


plonkee said...

Yes, and no, is my answer. In general, we would be better off if the government simply ensured a free market except for the need to regulate for safety and so on (like in food or drugs).

Where there is a duopoly, then it is more difficult for a good market to be forthcoming but that doesn't excuse the aircraft manufacturing business who are so far from being a free market its untrue.

I also think that some things such as basic education and the provision of healthcare (or for that matter clean water) should not be in the free market. I accept that means that they won't be as efficient, but I don't think that's the goal of either from the point of view of society.

I don't want basic education (etc) to be efficient as much as I want it to be available to everyone whether they can afford to pay for their share or not.

Shadox said...

I agree with you about education and did not mention it as one of the target industries in my article.

With respect to healthcare, there is no real market at work. When I go to a doctor, I never know in advance how much the treatment will cost, in most cases I have no way of knowing which doctors are best, which insurance company would provide the best coverage - not to mention that I am tied to the insurance provider that my employer provides (if I want a reasonable rate). A free market cannot exist without competition and freely available information. The heathcare market has very little of either.

I always enjoy talking economics with you Plonkee. Thanks for the thoughtful comment.

plonkee said...

Have you read a book called "The Undercover Economist". There is a really good explanation in that on how you could use the market in healthcare.

Also some of the statistics it cites on the amount of money spent by the US government on healthcare blew my mind.

Shadox said...

I haven't read that one. I'll try to find it in our town library.