State Power and Industrial Standards

My friend Ben Laurie bought a tiny bit of plastic and he’s pissed. It seems that he bought a CD and it doesn’t work. He thinks, quite reasonably, that this he was shipped faulty goods. Digging a bit deeper he’s becomed convinced that the manufacture intentionally shipped out faulty goods. It seems likely that everybody in the distribution channel knew these were faulty goods.

That seems all bit criminal, so Ben’s gone off to appropriate authorities to bring this criminal activity to their attention. So far, the authorities are confused, but Ben’s helping them to see the light.

One critical function of standards, like the audio cd standards, is to reduce market friction. What you lose is product diversity and in exchange get to eliminate whole bucket of costly activities: negotation, contracting, haggling, quality assesment, etc. This lowers risks for both buyers and sellers. One of my cliches: Standards are a substitute for lawyers.’

It also enables the market to grow and the producers to consolidate. The reduction of risk allows producers to justify making large capital investments – i.e. building a factory that builds machines to build audio CDs. While the loss of product diversity reduces the mutations that might allow the market to evolve the emergence of large producers provides a substitute means for changing the standards; i.e. industrial standards making. For example forking the audio CD standard to create a standard for digital CDs.

Standards set the rules of a game. Sellers have a huge incentive to cheat. If they can label the product as conformant with the standard but get away with cutting corners it’s pure profit. Other industry participants hate that. If you commit to a 100 million dollar factory and somebody else cheats the scale of your response is typically greater than Ben’s. The airline industry had to write specifications for things like lunch because some of their breathren were handing out crackers instead of sandwitchs. Buyers hate it too. You let your guard down. You casually buy a product. You get home and the damn thing doesn’t work. Unlike the guy with the million dollar product your rath is limited – but unlike the producers there are billions of consumers and some of them can get pretty testy.

Big rich guys allied with terrifyingly angry customers makes for a powerful lobby. So it’s easy to get the state’s police power brought to bear to enforce market standards. Who’s going to argue against it? Cheaters will. Market participants who are close to monopolizing the market will; since they are then free to set their own standards. When markets become dominated by an oligarcy; those producers will often argue for it.

The key point: consumer protection regulations benefit more than just the consumer. They function to to make the market less risky for all participants. They are public goods and once there is an installed base of consumers with the guard down and producers with huge sunk costs you mess with them at your peril.

Which brings us to the fundamental question. Are Ben’s bogus CD’s conformant with the relavent standard?

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