Why the customer doesn’t always come first in capitalism

First of all, meeting customer needs may not be the primary way companies increase profits. Businesses are motivated to make profits and increase those profits. But being the best at meeting customers’ needs isn’t the only way, or even the predominant way, to make businesses successful, says Sims.

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It is difficult for a company to stay ahead of its competitors by continuously improving its products and services. And finally, another company figures out how to do things better and cheaper than you.

“Commerce strategy is therefore mainly about building defenses against the forces of competition. To make it difficult for other companies to develop a better product. Or, if they do, to restrict access to customers,” he says.

Another reason is that corporate executives are under significant pressure from stock markets to boost short-term profits. Companies seek growth because it attracts investors, increases the value of their shares, and increases their rewards for their top executives.

According to Sims, many companies set high growth targets to meet stock market expectations. Often these targets are higher than economic growth, which means that not all companies can meet or exceed market expectations.

In some cases, therefore, business leaders see no alternative but to push the boundaries to achieve the set goals.

This is bad, but it gets worse when the bad behavior of a few causes the normal competitive pressure to always be better than the rest to reverse and become a race to the bottom.

Sims says that in well-functioning markets, companies compete for their merits. Companies that offer what consumers value are crowding out companies that don’t. But the opposite can happen when bad behavior goes undetected and unpunished, giving bad players a competitive advantage.

“Companies can win customers by misrepresenting their offerings and using high-pressure sales tactics,” he says. Such behavior not only harms consumers, but also harms competing companies, enticing them to defend their market share by employing the same questionable tactics.

Another problem occurs when companies don’t see anything wrong with what they’re doing, but their customers do. They (and economists) see nothing wrong with offering new customers a better price — or interest rate — than they charge their existing customers.

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But these older customers often react with indignation when they realize they’ve been paying more than they need to for years. They feel their loyalty has been abused.

Speaking of loyalty, Sims’ final explanation for why customers might be treated poorly is that executives feel that their obligations to their company compel them to seek the greatest possible profit, even if their behavior is pushing the envelope too closely law goes and it is. t the behavior they would engage in privately.

So what to do about all these “market failures” – where markets don’t deliver the wonderful benefits that economists tout?

Sims has two remedies. First, as he strongly argued as head of the Competition and Consumers Commission, stricter merger laws are needed to prevent anti-competitive mergers. The courts require evidence of what will happen after a merger, but it is difficult for the Commission to prove what has not yet happened.

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“The courts seem largely unwilling to accept commercial logic; that if you have market power, you will use it. The courts sometimes seem naïve,” he says.

Second, we need an unfair practice law, like the ones we have in the United States, Britain and most of Europe.

“Our current laws are ill-equipped to stop behavior ranging from manipulating consumers online to processors saying they would refuse farm goods unless the prices agreed before the goods are shipped are lowered now. “

In the end it’s easy. All claims that capitalism will benefit consumers are based on the assumption that companies face stiff competition from other companies to keep them going.

But when too many markets are dominated by a few big companies, service falls and prices rise more than they should.

Ross Gittins is a business editor.

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