What happens when markets do not work perfectly?
If you have a cell phone, at some point in the past you may have thought about changing your service provider. Perhaps you wanted to get a new phone that your company did not offer, or maybe you wanted to switch to a cheaper plan. Or perhaps you were annoyed because your provider had raised your rates or altered other terms of your contract. But changing companies might have meant breaking your contract and paying a stiff penalty. So most likely, you swallowed your frustration and did nothing.
Sound familiar? If so, you were not alone. As Bob Sullivan, an investigative reporter specializing in technology and business, has observed, millions of Americans have found themselves stuck in “cell phone jail“ with no easy way out. In this situation, says Sullivan in Gotcha Capitalism (2007),
You don’t act like a rational consumer in a normal, functioning market economy. You don’t go buy the new phone, or get the cheap new plan. you don’t reward the more efficient company with your business. You can’t. You ’re in jail. imagine if you couldn’t switch coffee shops or grocery stores without paying hundreds of dollars in penalties. Preposterous? No not in the world of cell phones.
What is going on here? How could cell phone companies operate differently from, say, coffee shops or grocery stores or car dealerships? The cell phone companies defended their behavior by arguing that they provided phones to their customers at low, subsidized rates. Thus, the companies had to cover the costs of these phones if people were to break their contracts. Although there is some truth to this argument, it is not the real reason people found themselves trapped in cell phone jail. The real reason was that through 2013, a few major companies have dominated the cell phone industry, and these companies all acted pretty much the same.
What about the freewheeling competition that is the hallmark of a market economy’ What about the laws of supply and demand? Well, the truth is that even in a free market economy, not all industries and markets are equally competitive, and when they are not equal, it is usually the consumer who suffers.
In this chapter, you will read about various types of markets and how and why they differ. You will also learn about the effects of imperfect and inefficient markets on our economy and society.