The Tao of Consumer Welfare and Handset Exclusivity
Why the "Tao" of consumer welfare and handset exclusivity? Why not the "Zen" of consumer welfare and the art of handset exclusivity? Well, here's why: Bruce Lee (no relation) entitled his book "The Tao of Jeet Kune Do" ("Jeet Kune Do was the name Bruce Lee gave to his sui generis martial art), and Bruce Lee was voted by Time Magazine as one of the most influential people of the 20th century. Plus, I also saw a show a few months back on the History Channel called "How Bruce Lee Changed the World." Enough said. So, who am I to pick a different term to describe seeking to distill the essence of a subject to its fundamental, essential, definitive principles?
Said differently, in this particular post we want to focus on the under-appreciated, misunderstood, is of how "exclusive" agreements between wireless handset manufacturers and wireless service providers affect consumer welfare. But, to do so, we must properly consider the question, and what is not the question. The chief complaint of the chief complainers is that not every consumer has access to the "exclusive" of their choice. This is just another way of saying that not every consumer has access to the service provider of their choice. This is not a trivial concern, or a concern to be brushed off and ignored by policymakers; however, contrary to how this issue has been characterized, this is a spectrum scarcity issue, and NOT a competition issue.
So, to clarify, this post is about the tao of the practice of wireless "exclusives" and how this practice relates to consumer welfare. I explained it in a previous post, but, alas, the tao was buried in an ineffective attempt at a comedy monologue.
So, what is the answer? What is the fundamental "is" of how "exclusives" affect consumer welfare? Well, if you missed it, here it is: each party to the "exclusive" arrangement has an incentive to bargain hard to get the other firm to offer prices at lower than competitive prices, because each party is selling a complementary product (service or handset)--the profit on which is maximized by getting the other partner to offer its piece of the package at an inefficiently low price.
Let's break it down further. The wireless handset provider/service provider "exclusive" looks like a "bundle" to the consumer, but it is not like a traditional "bundle" or "tying agreement" where the seller is also the manufacturer of both complementary products. When one seller makes two, complementary, products--say peanut butter and jelly--but that seller has market power in one market (say peanut butter), the concern is sometimes expressed that the firm's market power in the "tying" market (peanut butter) forecloses competition in the other, otherwise-more-competitive, market for the "tied" product (jelly). In the antitrust economics literature, there are competing arguments as to the effect on consumer welfare of traditional "tying" agreements, but none of these are relevant here because the producers of the bundle are different parties.
The "wireless exclusive" is best thought of as a cooperative venture between two parties seeking an edge over their respective competitors. Much like a product that is the result of cooperation between labor unions and producers, each party wants the deal to work, because each has to answer to their members/shareholders, but each--in their black little hearts--really wants the other guy to end up picking up the tab. With a dynamic like this, how can consumers not just sit back and enjoy the game? As I noted, with links to data, in the earlier post, this is exactly what consumers have been doing!
It's also kind of important to recognize that, not only is the wireless "exclusive" the result of two equally-situated bargainers, neither of which has market power, but also that neither party can forecast the future--each must take a risk. This last point is critical, because this is how we know both markets are competitive. Non-competitive markets tend to be predictable and static, but with wireless exclusives, someone will get the short end of the stick--even if the bundle is a success, the profits are not fairly divided. This is why a lot of people say Apple got the best of AT&T (though both did pretty well) off the iPhone. On the other hand, how do you think the "star" of the "it" exclusive, Palm (of Palm Pre/Sprint) felt when it found out that its provider-partner was turning over its network provisioning/management to infrastructure equipment provider Ericsson, which also makes handsets through its joint venture with Sony?
The tao of wireless handset/service provider partnership exclusives? Maybe east and west agree. King Solomon said, "[a]s iron sharpens iron, so a friend sharpens a friend." Similarly, the notion of strength through diversity is recognized through the concept that complementary opposites comprise the beneficial balance of the whole: the yin and the yang. The bottom line: complementary product/service providers combine to provide their best, and to coax the best price/service from their partners, and this happens with many combinations of device and service providers. Consumers can only benefit from this practice.
Leave a comment