• 04 Dec 2000
  • What Do You Think?

Have We Overdone Deregulation and Privatization?

by James Heskett

Summing Up

Let's hear it for deregulation, at least its long-term effects. It's well worth the short-term disruptions and consumer confusion. That's the near-unanimous judgement of those of you responding to my recent piece on the subject.

Among the benefits cited for both industrial and individual consumers were that deregulation: (1) unleashes the power of a self-correcting free market (Jeff Struck), giving customers services at prices they are willing to pay and quality levels that they are willing to pay for (at least in the airline industry, according to David McLean), (2) encourages selective increases in capacity, new approaches to managing consumption, and increased merger and acquisition activity, with attendant realization of synergies and lower costs (Jill Feblowitz), and (3) has delivered on its promise of lower prices, at least in cases such as electric service in Australia and England (Joseph Ramsey).

Several respondents pointed out, however, that the benefits of deregulation are less obvious to consumers than its failures. The latter include short-term dislocations of demand-and-supply patterns and the confusion consumers experience in dealing with deregulation's effects. The highly publicized shortcomings of questionable efforts to deregulate are not encouraging—witness the case of the California electric power industry. It's not clear whether attempting to educate consumers about what to expect will improve or kill deregulation efforts, creating a kind of catch-22 situation for supporters.

Antidotes were offered to offset the negative perceptions that have arisen from some efforts to deregulate industry. First, consultant Rebecca Lula suggested that a more balanced approach to deregulation at various levels in the channel of distribution would help. In the California power industry, for example, she questioned the deregulation of wholesale markets first.

Second, in response to consumer confusion, an anonymous respondent suggested that government could play a role in insuring that consumers have access to unbiased comparative price information. That way, everyone might learn how to get the most for themselves out of complex pricing schemes.

The general consensus is that deregulation can have widespread benefits, albeit complex ones that are sometimes slow in coming and not equitably distributed, which may help explain the implementation strategies adopted to date. What we are experiencing in California and elsewhere may be a massive "on-the-job training" exercise that will lead to better-informed efforts to implement deregulation in the future. What do you think?

Original Article

During the Jimmy Carter administration, Congress enacted legislation that had become known as "the Federal Express bill." It was designed to test the idea of deregulation by allowing air freight carriers to fly planes of any size on any routes, without federal price controls.

The bill accommodated the persistent lobbying activities of one Fred Smith, the young CEO of Federal Express, who had been required under previous regulation to use small, inefficient aircraft to transport freight or else submit to stringent government regulation. It was regarded by Congress as an experiment carried out in a small, obscure industry which, if unsuccessful, would have little economic impact.

Little did Congress realize that true believers in deregulation, like Alfred Kahn, a Cornell economics professor whom Carter had appointed as chairman of the Civil Aeronautics Board, would champion the extension of the idea to the entire airline industry, and then into areas such as brokerage fees and other professional services.

In recent years, the deregulation movement has spread to industries with which consumers interact daily, such as electric power and telephone service, whose dependability and equitable pricing were generally left to government and not thought much about.

There seems to be an increasing feeling among consumers that much of this ended with the deregulation and privatization of these industries. According to neocritics of deregulation, for example, we are confronted with a melange of telephone and electric service "deals" with a confusing array of prices. We are confronted with the possibility that those doing their homework are receiving better service and lower prices than we are, that equitable pricing may no longer exist. We can't even make sense of the bills we receive for such services. We are forced to think about something that we used to take for granted.

A recent study by the research firm Yankelovich Partners suggests that, while consumers generally want more control over their lives and purchasing decisions, there are some things (electric power and telephone service among them) that they just don't want to have to study or worry about. Life is already complex enough.

Willis Emmons of the Georgetown University faculty and author of a new book, The Evolving Bargain (HBS Press), has spent several years studying the implications for managers of deregulation and privatization. He maintains that the impact on consumers is complex. Sometimes consumers are winners and sometimes losers. And sometimes they're both, as in the case of lower prices for air travel of inferior quality "on many dimensions."

In spite of the facts, can we expect mischievous consumer-driven backlash for any idea that rewards those who take initiative? Is deregulated service really inferior? If so, by what measures? Have we such short memories that we have forgotten what it was like before deregulation? Or have we gone too far, requiring consumers to spend far too much time trying to figure out the system, let alone obtaining services that best meet their needs?