The most successful firms are those that have a source of thoroughly unfair competitive advantage. They qualify for investment by Warren Buffett who likes to invest in a firm “which any fool can run, because some day some fool will.” If you have a near monopoly on desktop operating systems, it is hard to fail even if some of your operating systems are mediocre at best: your ecosystem is locked in and the switching costs are just too high.
Many of the giants of the internet era have a source of “unfair” competitive advantage. They succeed because they have advantages which accrue to scale: the deepest and most liquid markets are most attractive to both buyers and sellers. Being number one puts you in a very strong position: Google for paid search; Uber for taxi hire; Just Eat for restaurant food delivery; Amazon for the online market place. While it is easy to name the number one player in each market, the number two is often hard to name. Reaching number one is intensely competitive and unprofitable; staying at number one is far easier and more profitable.
In the old economy, there is continual outrage at the high executive pay and poor service of the regulated utilities: regulation is rarely an effective substitute for competition, and it is the consumer who pays the price. But even where there is not a natural monopoly, profits are greatest where the competition is least. Sources of “unfair” competitive advantage are everywhere. If you have access to the lowest cost oil fields, or to a limited resource like Heathrow landing slots, you are in a good position to profit.
Firms are often happy to use government to entrench their competitive advantage. Boeing persuaded the US International Trade Commission to slap 300% duties on the Bombardier C series aircraft. That is an effective way to eliminate a competitor, at least until Airbus stepped in. I was living in Japan when the modest Mini was outselling the Big Three US automakers combined. It was obvious why: the US autos were too big, too unreliable, too expensive and had steering wheels on the wrong side. The reaction of the Big Three was not to compete better but to seek government remedies, which required the Japanese government to intervene in the market and give them more dealerships in Japan. The problem was that no one wanted to be a dealer in cars that would not sell.
Rent seeking is a legitimate business tool. If you can hire lobbyists who will ensure you get a regulatory break, IP protection, a soft loan, or a subsidy or contract from government, that is a cheaper and easier way to success than competing in the market place.
Inevitably, there is a price to be paid for rent-seeking behaviour. It may be the long-suffering taxpayer or suppliers to the monopoly, such as the gig workers who drive taxis and deliver food with minimal pay or protection. More often it is the consumer who pays with increased prices or poor service.
But rent-seeking CEOs are not the only cause of poor customer service. As customers we are often as much villain as victim when it comes to poor service. Our collective commitment to free or cheap means that many firms pursue the birdie strategy relentlessly: they go “cheap, cheap, cheap”. If you want cheap on a flight, do not be surprised with poor service, little leg room and repeated attempts by the airline to gouge you for everything. Cheap has consequences, and service is expensive.
As customers, if we do not get what we want we can blame rent-seeking CEOs and, just occasionally, we can blame ourselves.
Jo Owen is an author, a keynote speaker and the founder of eight NGOs. His latest book is Global Teams (FT Publishing/Pearson)