Thursday, July 8, 2010

Economics: Ultimate Frisbee Not The Answer

TORONTO, ONTARIO - This blog has long been interested in creative approaches to change the incentive structure in the corporate world, which currently is, to over-simplify in one word, perverse. Therefore, discouraging creativity by criticizing new proposals in this regard is not something this blogger delights in doing. Yet, analyzing a not-completely-serious proposal to have CEO's play ultimate Frisbee offers some insights worth noting.

In a Christian Science Monitor opinion piece last month, well-pedigreed UN employee Christine Bader suggested that having "bankers and other titans of industry join a weekend ultimate Frisbee game in their local park" would "benefit us all" since "they'll spent a few hours in a world where there are no designated enforcers but everyone follows the rules--not just in letter, but in spirit." As someone who played (not very well and not very often) ultimate as an undergraduate myself, I know Bader isn't being misleading about what happens in that sport. Players do call penalties on themselves, and it does work to create an environment that is rare if not unique in western culture.

The problem is that I think business people already know how to operate this way. In essence, an ultimate Frisbee game is the exercise of a duopoly (or, perhaps more accurately in a league of teams, of oligopoly, but the same principles apply). There are only two teams. If one team doesn't cheat, it simplifies its future by not giving the other team any reason to cheat. With a gentleman's agreement (please just consider that a gender-neutral term, though women don't seem to need such things in the first place) to play by the rules that each team has agreed to, the sport can be enjoyed by all.

In too many industries, business are operating in a duopoly, or limited oligopoly. Think of railroads, where depending on what part of North America one is situated, the two choices might be BNSF and Union Pacific, CSX and Norfolk Southern, or Canadian Pacific and Canadian National. Think of beverages, where it's basically Coke and Pepsi. Think of high-speed Internet access, where it's usually the local phone company and the local cable provider. Businesses in these industries don't tend to play dirty with one another. The railroad duopolies compete for business, but they also make deals with each other all the time--the biggest one may have been CSX and Norfolk Southern deciding to carve up third competitor Conrail between themselves in 1999. They may not exactly call penalties on themselves, but they tend just not to commit competitive infractions in the first place.

Why do such situations persist? One doesn't have to go beyond Economics 101. Duopolies may not disadvantage their customers as much as a monopoly, but neither do the supply and demand curves meet at the same point as they do in a pure market. Customers end up paying more for products and services in a duopoly situation. Since the situation is legal, businesses realize this a pretty good situation to be in compared with a true market, and while they may fight to protect the duopoly or oligopoly, they don't tend to do anything that would place it too far out of balance where it might become a monopoly and start receiving public attention.

Too many people don't understand that most narrowly-defined markets in the western world are not really "free" markets in the economic sense of the word; they are oligopolies. Some, because of barriers to entry or other factors, always will be. There's not necessarily anything wrong with that--in fact, in cases like the Canadian banking system, it may actually be an optimal situation--but it is not widely admitted. By pretending that a market is "free" when it really isn't, it distorts the debate about what level of regulation might be appropriate for the market, and sometimes leads to poor political decisions.

So, I would contend that the bankers and other titans of industry wouldn't actually have to adjust all that much to the environment of ultimate Frisbee. They would just have to think of the other team as their duopoly partner and they'd get in to the mind set right away.

Getting them to think of the spectators first--somewhat analogous to their customers in this conceit--might be considerably more difficult. If anyone has any ideas on how to do that, I'm listening.

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