(c) Copyright 1998: Graham Strachan
Economic rationalists claim that ‘competition’ leads to ‘improved consumer choice and customer service’. These are simply the original claims made for a genuinely competitive market, but as it has been shown (1) what economic rationalists define as a ‘competitive market’ is really oligopoly: market control by a few large firms. The claims are 80% baseless. In practice consumer choice increases for about 20% of consumers: the most profitable customers. Of the other 80%, the middle 60% have to put up with reduced choice and increased charges, while the bottom 20% run the risk of having no choice or service at all. This situation is assisted by the proven tendency of economic rationalism to concentrate wealth in the top 20% of the population at the expense of the rest.
This reverses the general trend of the post-World War II period, when mass production was tending to lead to mass consumption, increasing the range of goods and services affordable by everybody. But because economic rationalism excludes social policy considerations (that in an affluent civilised society everybody should be able to afford the products and services) from the economic equation, big business policy is now to court the best paying customers at the expense of the rest. Its professed concern for the public generally is pure public relations, to project a good public image. To maximise profits the corporation gets rid of unprofitable services and unprofitable customers, and competes with other oligopolists for the most profitable end of the market. It’s known as ‘skimming’ (the cream).
This causes particular concern in the case of the privatisation essential services such as electricity, water, postal services and health. When these were provided by government (or by private monopolies licenced by government on condition they make the service affordable to everybody) a process known as ‘cross-subsidisation’ took place. Profitable services or routes were used to subsidise less profitable ones so that everybody could afford them. But cross-subsidisation is not consistent with the purely economic rationalist goal of profit maximisation. When essential services are privatised, big business either sheds the unprofitable services (to country towns, for example), or hikes the price to make them profitable, which makes the service unaffordable, especially to lower income groups. The responsibility for providing for these groups again falls on the government, which has now sold the means of providing them.
Under economic rationalism, the policy that any-customer-is-a-good-one is replaced with one of boosting sales to the most lucrative customers (2). ‘Downsized’ corporations become mindful of the 80-20 rule, sometimes called Pareto’s Principle: that 20% of customers usually generate 80% of profits, and they are the ones to concentrate efforts on. Customers are classified as ‘high-end’ or ‘low-end’, according to how much they spend, and in the race for profits the company that gets the most high-end customers wins. The losers are the 80% of people classified as low-end consumers. They have to put up with reduced choice, increased fees, and shoddy service. Services to the low-end are cut to pay for increased services to the high-end customers.
This is why, for example, the last bank branch in the shire of Kilkivan, west of Gympie, is to close, leaving only a credit union facility, in the entire shire (3). Banks now regard themselves as resource institutions for medium to large ‘investors’. They don’t want to know about small depositors.
America’s second-largest bank, is increasing the minimum balance for a standard, no-fee checking account to $6,000 in New York and $7,500 elsewhere. Executives say the aim is ‘to encourage customers to do more business with the bank’, but the move effectively drives away small customers. Certain banks are offering high-end customers substantially better interest rates on personal loans and other products than low-end ones (4).
In the American airline industry the highest-paying 10% of travelers account for almost half of airline revenues while the lowest-paying 50% account for a mere 5%. Consequently, airlines are reducing the size of economy class cabin space to make room for more first-class seats. Services and comfort to economy class flyers have been cut back. Leg room in economy class has been reduced 15% by some airlines, while lower-fare passengers are permitted only one carry-on bag while full-fare business passengers continue to enjoy the traditional two.
American telephone industry studies show 5% of accounts generate 50% or more of profits. Big business long-distance calls are the profit makers. The other customers, the 15 million to 20 million people who make few long-distance calls and contribute only minimally to profits, are categorised as ‘occasional users’ (5). Big-spending customers get to speak to an actual operator when they call about their bills, while everybody else talks to a computer. It is getting to the point where no company wants to be stuck with having to provide the least profitable residential telephone services.
Similar things happen in privatised health. Wealthy customers get private rooms and lobster salads on the menu. The bulk of the community put up with reduced services and higher health care premiums, while around 20% of the population have no access to any health care at all because the cost of health cover is beyond their means (6).
Companies deny that they are trying to get rid of ‘low-end’ customers, saying they are merely trying to target the high-end ones. They claim they still want to continue serving a full range of customers. “Targeting is not the same thing as exclusion,” they say. But the trend is clear.
Economic rationalist ‘competition’ does not lead to better consumer choice or service for the community as a whole. It leads to cutbacks and price hikes for the majority in order to provide more VIP services to the best-paying minority. It’s a form of reverse cross-subsidisation. Instead of the wealthy subsidising the poor, the poor subsidise the wealthy.