Market Structure, Political Parties and Collusion

Political parties are like firms in the marketplace. The same principles that drive the behavior of firms drive the behavior of political parties. They collude if they can, and gain from their collusion at the expense of the consumers.

Here I will outline my conjecture about the two major national political parties in India. If you are a supporter of either the Congress or the BJP, you may be disappointed by my analysis. Especially if you are a BJP supporter, you may wish to skip this post. BJP is complicit in Congress’s crimes.

In the following, I will lay out briefly how markets are structured (to take up where I left off in my previous post on the matter) and then reason analogically that the BJP and the Congress are not competing but rather they are colluding.

Markets and Competition

The invention of the idea of market is an uber-invention: every other invention flows from it. How so? Recall that nearly all human activity can be categorized as production, consumption and exchange. Exchange takes place in markets. Exchange involves competition and the field upon which the great game of competition takes place is the market.

Competition is important because it gives rise to the improvements that go into everything useful. Of course, you can ask whether the use is overall beneficial or harmful. After all, intercontinental ballistic missiles also improve from competition. Let’s sidestep that question for the moment and narrow our focus on things that are evidently useful. The claim here is that all improvements regardless of the ends that they are put to arise from competition.

Firms compete in the marketplace. A specific example would be the competition between, say, consumer electronics manufacturers such as Apple and Samsung. They keep innovating and improving their products not because they are motivated by altruistic impulses but because they want greater market share. Absent that competition, we would not have the increasingly sophisticated devices we have come to expect them to bring to market regularly.

Apple tablets are good because of Samsung, and vice versa. They compete and the unintended consequence of that competition is evident in our hands. Same goes for every product category, hardware or software. Toyota cars are good because of Honda, and vice versa.

Competition between sellers picks the winners and weeds away the losers in the market. Any firm that falls behind in this race is mercilessly rejected by the consumers. Because the consumers are free to choose, the firms are forced to compete to be better than their competitors.

A company is only as good as its major competitor. You have to thank Samsung for Apple’s great tablets and thank Apple for Samsung’s great products.

Buyers’ and Sellers’ Markets

Market structure makes a difference in the outcome which is reflected in the prices, quantities and quality of the products and services produced by the firms in the market. In a competitive market many firms compete and the outcome is good for the buyers. It is a “buyers’ market” and buyers pick the winners. If the market is dominated by one monopoly supplier, it is a “sellers’ market”: the monopolist restricts quantity and is thus able to charge prices much higher than its cost of production. The consumers lose and the seller makes humongous profits.

A notable distinction between a monopoly firm and a firm in a competitive market is that the former has the ability to dictate the price and consequently make profits (economic profits, not just accounting profits), while the latter has no control over the price and is a “price-taker” and therefore makes zero economic profits (although it may make accounting profits.)

Monopolies sometimes exist due to technical reasons (called a “natural” monopoly, which we will not go into now) and sometimes they are legally imposed. Through laws, the government can establish a monopoly. Government mandated monopolies can be either in the public sector or the private sector. Either way, the effect on welfare is the same: poor quality, insufficient quantity and high prices.

One way to establish a private sector monopoly is to pay off the people in the government (politicians and bureaucrats) and make them grant a “legal” monopoly. The money to buy off the politicians is then recovered from the monopoly profits earned by the private sector firm.

A public sector monopoly gives those in government a more direct route to rip off the public. The politicians and bureaucrats directly enjoy the profits without having to go through the private sector. The bottom line is that by restricting competition in the market, super-normal profits are made and the people who are involved in that restriction of competition gain — while the consumers lose.

Restricting competition in the market is fun for those doing the restricting. Which is why in all Banana Republics, market competition is restricted by the government. Mind you, no one in government comes out and declares that “we are restricting competition in the market to rake in the moolah and screw you all.” No, they say, “We are doing this because this product is an essential good and that means the market cannot be depended upon to deliver it. So out of the goodness of our hearts, we are going to take charge of its production and distribute it equitably to all — rich and poor alike.”

Two Dominant Firms

There’s another market structure that is of interest here. You can have a few firms — as few as just two — that function very similarly to the two extremes of market structures: either a monopoly or a competitive market.

If you have two dominant firms in the market (a duopoly), the outcome (in terms of quantities and prices) can be very close to the competitive outcome; or the outcome can be what obtains from a monopoly. Let’s discuss the competitive market outcome.

Each of the dominant firms in the duopoly competes with the other, and in its goal to acquire market share, increases it quantity and decreases its price, and thus the outcome is very close to the competitive market outcome (where there are many firms in the market and the competition ends in dragging the price down close to the costs.)

Collusion

The other outcome is where the duopoly acts as a monopolist. That is obtained with the two firms collude and behave like a monopolist. Collusion among many firms is hard to maintain but between just two dominant firms is not as hard or not as rare.

Hence there are laws that seek to prevent collusion. For instance, in the US, there are laws against firms colluding. They are called “anti-trust” laws. Banana Republics don’t have those laws. Indeed they have laws that restrict competition in the market.

The basic idea is that two firms must not be able, through an agreement among themselves, to raise prices and restrict quantities and rip off the consumers. That is, they cannot enforce prices in the market by agreeing amongst themselves to maintain a certain price level.

Still, regardless of the laws, firms figure out ingenious ways to collude. What may appear to be great competition in the marketplace could be a disguised way of collusion. Remind me to discuss that one of these days. For now, let’s just baldly state that if the dominant firms in the market collude, it helps them make super-normal profits at the cost of the consumers.

Collusion Among Political Parties

You may ask what’s with all this about competition among firms in the marketplace have to do with political parties in India. The fact of the matter is that human nature is pretty rigid and human behavior is fairly predictable. If you know what motivates humans, you can guess how they will behave. The owners of firms do what it takes to make a profit and the leaders of political parties will do what it takes to maintain the status quo that gives them the chance to profit from their position. Simple. Not quantum mechanics.

Political parties are like firms in the marketplace. Thus the theory of firms quite parsimoniously explains the behavior of political parties. If you understand how firms behave, you can explain how political parties behave. Therefore I have been going on about competition and collusion. The same principles that drive the behavior of firms drive the behavior of political parties. They collude if they can, and gain from their collusion at the expense of the consumers.

Here’s what I have been leading up to all this while. The Indian National Congress (henceforth Congress) and the BJP are the two dominant “firms” in the Indian political market. The impression that most people have is that the Congress and the BJP compete in the political marketplace. If you accept that to be the true state of affairs, then it becomes hard to explain some generally observed facts.

The leaders of the BJP on numerous occasions behave rather solicitously towards the leaders of the Congress — especially the Nehru-Gandhi-Maino dynasty. The BJP leaders don’t appear to be too keen to prosecute evidently clear cases of gross corruption by the Congress. They don’t appear to care about the reckless waste of public funds by the Congress. In short, the BJP does not seem to be interested in safeguarding the public interest.

All this is puzzling if you start off with the assumption that the BJP is in competition with the Congress. Drop that assumption and instead assume that the BJP (more specifically the people who dictate the BJP’s policy) is colluding with the Congress, and it all starts to make sense. They are colluding and in effect acting as one would expect firms to behave in the marketplace that is characterized by two dominant colluding firms.

The most important feature of two firms dominating the marketplace is that, absent any constraining safeguard, they will collude. They will find a mutual accommodation that allows their owners to reap super-normal profits at the expense of their consumers.

If they were to really compete, it would lead to mutually assured destruction — the competitive market outcome where nobody makes super-normal profits and it is all so boring to be in business. So they reach an understanding that they will shadow-box for the sake of appearances but not really fight.

The leaders of the BJP accommodate the leaders of the Congress. When the BJP is in power, it does not aggressively pursue cases against the Congress; and as part of the mutual accommodation, the Congress when it is in power does the gentlemanly thing and does not expose the BJP leaders. Perhaps the Congress leaders have files on the BJP leaders. I don’t know if that is so but it appears that it must be the case because the BJP leaders don’t really seem to be particularly interested in exposing the Congress, and vice versa. I have no proof and am merely conjecturing as a disinterested observer.

In any case, from my point of view it appears that the BJP and the Congress leadership don’t rat on each other. I refer you to all the various Congress scams the BJP could have exposed but did not do for unknown reasons. Well, the reasons could be as simple as honor among thieves. Or in economics terms, collusion among firms.

Collusion, not Competition

I claim that the BJP and the Congress are colluding. Which means that they are not in competition. Another way to state that is to say that they are mostly indistinguishable.

Recall that in the case of firms, it is competition that drives innovation and performance. Apple is good because Samsung provides the necessary fire under its butt; and vice versa. They don’t accommodate each other. They fight tooth and nail for market share and dominance. If one slips up, the other will have the other’s lunch. Consistently mess up and the firm will be history.

Congress has been making major messes (to put it mildly) and still is in business. Why? Because the BJP does not provide it with any incentive to be any better. Ergo, it is because the BJP is bad that the Congress is bad. If the BJP had been good, the first scam by the Congress and it would have been history. But instead, we have scams by the dozens and yet the Congress does not die.

The Congress survives because the BJP lets it. The question we have to ask is what compels the BJP to collude with the Congress in the rape of the country. That is the point of this long exercise.

I believe that we can parsimoniously explain a whole set of facts — the dozens of multi-billion dollar Congress scams, the elevation of a half-wit as the future savior of the nation, the vicious campaign against Modi, the steady march down the road to serfdom, the pernicious division of the population into caste and religious groups, the encroachment of the government into the private lives of people — all can be explained by positing that the two political parties are colluding.

The Strange Case of Mr Modi

So then, what can we expect from the shadow boxing between the Congress and the BJP? It easily explains the case against Modi. Modi is the joker in the pack. He is a BJP party guy but really he is the party-pooper. He is the spoiler in the nice little game that the BJP leaders are playing with the leaders of the Congress. They want him to come and spoil the game as much as they want a hole in their heads. In other words, the Congress and the BJP have an interest in colluding to torpedo Modi.

Modi will end the cosy relationship between the BJP and the Congress.

So let’s talk about why the interests of the BJP and the Congress are aligned as far as Modi is concerned. Both don’t want that Modi takes control. The reason is simple. Modi has declared and demonstrated that he is neither interested in being bribed nor in allowing others to be bribed. So, as the BJP and Congress leaders would naturally ask, what’s the fun in being in power if there are no pecuniary benefits? Modi is simply persona non grata, as much to the BJP as the Congress.

Next let’s explore in more detail why they all hate his guts.