The issue of removing life-support to brain dead individuals comes up in the news quite often. The families normally want to give more time; but the expert doctors want to turn the thing off, probably to save costs, and let the patient die.
‘Brain dead’ son enjoys Xmas after dad armed with gun refuses to let medics end his life'
This is a major problem when medicine becomes a know-it-all cult, as it is in the US. The medics will not accept their own mistakes; and this story which fortunately has a happy ending is often times not even out in the press; because the medics are able to sell their "expert opinion" to the public. Often this is with social pressure-several of them will be together when taking this decision; so the family members think that they have really some knowledge here. Unfortunately, they are being lied too with group pressure.
Keep this in mind when someone goes into coma next time, and if need be, move them to a new country rather than a country where medics have more control over a patient than their own family members.
Sanjay
Probability fudging-drug companies with too many vaccinations, Randomized Controlled Trials (RCTs), airplanes safer than cars
In this article I cover some examples of probability fudging which goes on around us daily. The basic tenet of this post is:
When probabilities of two things are low (less than 1%), the comparison between these two things may makes you feel that your intended therapy or treatment improves things; but that doesn't mean it should be done, because
By focusing on the "x" distribution, the benefit is magnified; but in reality, the real distribution of interest is the 1-x, which is a stable distribution, and doesn't change much by vaccinating our children. And we subject the large number of 1-x to an unnecessary intervention/vaccine.
I broke this down into a separate article here.
Airplanes are safe, driving in cars is safe. Most people know this, and will take a plane or car ride from a place to another without thinking about safety-they will only worry about costs and the conveniences and inconveniences when comparing the two. However, you have all sorts of bad statisticians comparing airplane safety to car safety, and concluding that airplanes are safer (or unsafer) than driving. The error there is that the 1-x is the real distribution of interest: the probability of survival. That is maybe 99.95% over 10 years of car driving to 99.99% for plane riding, and those two are similar, dont you think? One thing is 99.99% safe, the other is 99.95% safe...we can agree that they are both quite safe. No one thought that planes are significantly safer or unsafer than cars. Both are safe, the 1-x is the real distribution.
When probabilities of two things are low (less than 1%), the comparison between these two things may makes you feel that your intended therapy or treatment improves things; but that doesn't mean it should be done, because
1) there is a cost of doing interventions, of hassling a large fraction of the population to save a few. A crude example: We can be safer from a meteor hit by walking around in a body armor all day; but the probability of a meteor hit being low, it is not something necessary to do. There is a cost of making people mandatorily walk around in body armor all day, it is darn uncomfortable, and must be considered in the equation. And,
2) there is a safety profile of interventions, you may be doing more secondary harm by the intervention than helping the few who are helped.
[This part was written before 2021. Since 2021, I don't believe there is an HPV virus at all-virology is all junk science. However, even if there were an HPV virus, the vaccine is useless at best, as this shows.]
HPV and rare disease vaccinations
[This part was written before 2021. Since 2021, I don't believe there is an HPV virus at all-virology is all junk science. However, even if there were an HPV virus, the vaccine is useless at best, as this shows.]
There is a lot of talk about Human Papillomavirus (HPV) vaccinations. Kids, especially girls, between the age of 10 to 15 years are recommended to get this vaccine. Let us look at the data, published by CDC here.
There are 79 Millions Americans (total population of about 300 Million) affected with HPV. There are 12 Million cases of new infections per year. Cancers attributed to HPV are 27000, of which 18000 are girls, the rest of 9000 being boys.
Since 1 in 4 Americans has the virus already, and 12 million get it every year, the virus itself can't be that bad. This is a classic case of measuring too much-if common bacteria presented in the mouth are measured, surely 1 in 4 have some particular "infection"...most Americans get on with their lives just fine, and HPV infection, even if they don't know about it, doesn't seem to be a big deal in everyday life. From this data, it is more common than the common cold virus-and you begin to wonder how (and why) they collected this data at the first place. But let's trust the data for a moment anyway.
The cases where you have severe effects (cancers) are interesting to us, 27000. It is a large number, but looking at the overall population of HPV infected people (79 Million), it is a very small percentage, about 0.034%. Only 3 in 10000 people are getting cancers attributable to HPV.
The pharma companies say we can eliminate this tiny percentage of people getting cancers by injecting them with the HPV vaccine. The side effects of thee vaccine appear on the same page: Out of 67 million doses of vaccine, 25000 people reported some side effects, and 2000 of these were serious. The serious side effects are about 0.00025%, or about 0.25 in 10000. We must remember that many people may not report a problem even if their child has some side effects, so this number 25000 is likely to go up.
At first instance, it will look like the benefit of the vaccine, eliminating 3 in 10000 cancers, is about 10 times better than the serious side effects of the vaccine (0.25 in 10000). But if the disease is rare to start with, like this HPV-cancer, does it make sense to vaccinate at all? I find it ridiculous that we are going to vaccinate 9997 kids unnecessarily, to potentially save 3. There is tremendous hassle and cost involved in vaccinating children, and society has to bear that cost, one way or the other. Obviously what's rare and not rare is subjective, but to me, a disease which will going to happen to 3 in 10000 is quite rare, and we should not hurry to vaccinate kids against it. Couple that with the problem with this specific case where there's no clear indication that the HPV is causing the cancer (they are confusing correlation with causality, and assuming that the HPV vaccine with prevent cancers 30 years from now, which is very speculative an assumption) and you see that HPV should not be a mandatory vaccine.
When probabilities are very low, the right distribution to look at is the 1-x distribution. That is the statistical trickery these guys are doing to convince us of the wonderful effects of the vaccine. If x is small, less than 0.1% (1 in 1000), you must evaluate 1) the risk of intervention causing more damage then the disease itself (the safety of the treatment or vaccine), and 2) just the hassle and cost of everyone undergo the intervention. Unless you have clear data that there is a strong benefit, don't administer vaccines (or other procedures).
Let us look at the 1-x distribution of the same data (placebo group).
99.9966% will not develop a cancer related to HPV if they are not vaccinated.
There are 79 Millions Americans (total population of about 300 Million) affected with HPV. There are 12 Million cases of new infections per year. Cancers attributed to HPV are 27000, of which 18000 are girls, the rest of 9000 being boys.
Since 1 in 4 Americans has the virus already, and 12 million get it every year, the virus itself can't be that bad. This is a classic case of measuring too much-if common bacteria presented in the mouth are measured, surely 1 in 4 have some particular "infection"...most Americans get on with their lives just fine, and HPV infection, even if they don't know about it, doesn't seem to be a big deal in everyday life. From this data, it is more common than the common cold virus-and you begin to wonder how (and why) they collected this data at the first place. But let's trust the data for a moment anyway.
The cases where you have severe effects (cancers) are interesting to us, 27000. It is a large number, but looking at the overall population of HPV infected people (79 Million), it is a very small percentage, about 0.034%. Only 3 in 10000 people are getting cancers attributable to HPV.
The pharma companies say we can eliminate this tiny percentage of people getting cancers by injecting them with the HPV vaccine. The side effects of thee vaccine appear on the same page: Out of 67 million doses of vaccine, 25000 people reported some side effects, and 2000 of these were serious. The serious side effects are about 0.00025%, or about 0.25 in 10000. We must remember that many people may not report a problem even if their child has some side effects, so this number 25000 is likely to go up.
At first instance, it will look like the benefit of the vaccine, eliminating 3 in 10000 cancers, is about 10 times better than the serious side effects of the vaccine (0.25 in 10000). But if the disease is rare to start with, like this HPV-cancer, does it make sense to vaccinate at all? I find it ridiculous that we are going to vaccinate 9997 kids unnecessarily, to potentially save 3. There is tremendous hassle and cost involved in vaccinating children, and society has to bear that cost, one way or the other. Obviously what's rare and not rare is subjective, but to me, a disease which will going to happen to 3 in 10000 is quite rare, and we should not hurry to vaccinate kids against it. Couple that with the problem with this specific case where there's no clear indication that the HPV is causing the cancer (they are confusing correlation with causality, and assuming that the HPV vaccine with prevent cancers 30 years from now, which is very speculative an assumption) and you see that HPV should not be a mandatory vaccine.
Look at the distribution of 1-x, not of x
When probabilities are very low, the right distribution to look at is the 1-x distribution. That is the statistical trickery these guys are doing to convince us of the wonderful effects of the vaccine. If x is small, less than 0.1% (1 in 1000), you must evaluate 1) the risk of intervention causing more damage then the disease itself (the safety of the treatment or vaccine), and 2) just the hassle and cost of everyone undergo the intervention. Unless you have clear data that there is a strong benefit, don't administer vaccines (or other procedures).
Let us look at the 1-x distribution of the same data (placebo group).
99.9966% will not develop a cancer related to HPV if they are not vaccinated.
100% will not develop a cancer related to HPV if they are not vaccinated, but 0.00025% will get serious side effects.
By focusing on the "x" distribution, the benefit is magnified; but in reality, the real distribution of interest is the 1-x, which is a stable distribution, and doesn't change much by vaccinating our children. And we subject the large number of 1-x to an unnecessary intervention/vaccine.
Randomized Controlled Trials (RCTs) are not what they claim them to be
I broke this down into a separate article here.
Airplane and Car driving safety
Airplanes are safe, driving in cars is safe. Most people know this, and will take a plane or car ride from a place to another without thinking about safety-they will only worry about costs and the conveniences and inconveniences when comparing the two. However, you have all sorts of bad statisticians comparing airplane safety to car safety, and concluding that airplanes are safer (or unsafer) than driving. The error there is that the 1-x is the real distribution of interest: the probability of survival. That is maybe 99.95% over 10 years of car driving to 99.99% for plane riding, and those two are similar, dont you think? One thing is 99.99% safe, the other is 99.95% safe...we can agree that they are both quite safe. No one thought that planes are significantly safer or unsafer than cars. Both are safe, the 1-x is the real distribution.
Related articles:
On allowing mergers of big companies who are competitors-they should never be approved!
Big companies who are competitors merge all the time in all countries. In almost all cases, this is bad for the country. Here's how to see this.
The most common argument used by companies to get approval from the Government (FTC, etc.) is that a larger company will be better scale, and economies of scale will lead to lower costs, which they will pass along to the customer in the form of lower prices.
They are telling only half of the story. The economies of scale may work to reduce costs, but they are not going to pass along the cost savings to the customer or the consumers! They will just keep the extra profit themselves. On the other hand, by merging, you have less competition in the marketplace, which in effect raises prices. That is the real reason why companies want to merge.
The price of something is decided by the market demand. If a company is able to lower costs, it will keep the extra profit to itself. It will lower prices only when 1) there is competition, and/or 2) they believe that lower prices will lead to much larger volume, leading to the net dollar value of the revenue (price x volume) being much larger than before. Since no one can be sure that the volume will increase on lowering prices, and it will need extra investment and hassle on the company's part to increase volumes, the safest bet is to keep prices unchanged; and that means they will just keep the extra cost savings to themselves. Only a foolish businessman passes along their extra cost savings to the customers; the intelligent one just keeps it himself!
The main reason why companies want to merge is to reduces competition, and therefore in reality increase prices for the consumers. The less the number of competitors in a sector, the less the downward pressure on prices. It is also easier to collude and raise prices when there are 2 to 3 actors in a sector than when there are 10 to 20. Mergers always will result in higher prices for the consumers. They should never be approved.
The only exception where mergers can be approved is when the product is international-e.g. crude oil, copper, etc. Since there are many big competitors in other countries, it makes sense for commodities which are easily shippable worldwide to have large players at home as well. But this should be done only if we can buy foreign goods easily and there are no undue restrictions on imports (to take advantage of lower prices outside our country, if some company outside offers lower prices). In many cases, there are significant barriers to imports; therefore, mergers in general are bad for the country's consumers.
But here I just wanted to point out the fallacy of the argument of economies of scale: lower costs-lower prices...it is simply economies of scale and lower costs, but that does not imply lower prices for the consumers. Those are two different things-lower costs are a benefit of economics of scale. But what lowers prices in the marketplace is competition. The producers always want to lower their costs, reduce competition in the market and therefore raise prices, and increase their profit margins from both ends (cost go down because of economies of scale, prices in the market go up because of less competition); and they use bogus arguments to get the Governments and anti-monopoly organizations to approve their mergers.
Prices are decided by the market, and do not depend at all on the costs. Market price (the sales price) and cost of production of a product are entirely independent of each other-this point is missed by most economics types, and even men of business. You may make plastic monkeys for a cost of $90 and may want to sell them to me for $100, a reasonable profit, but that doesn't mean I will buy them.
Generalizing this, if you produce something at cost X and I want to pay only Y for it (at a given volume V of units sold), and if Y is less than X, you will go bankrupt as a company, and that is not my problem. I as a consumer care only about my dollars, and will only pay Y for your product. It is your job to make sure that X is less than Y, your profit is (Y-X)*V. But note that Y has no relationship to X, Y is decided by the consumers, the marketplace, the market; X is decided by the producer, the capitalist who brings the product into the market. Y is reduced by more competition, that's the surest way to lower prices for consumers, which should be the goal of the economics and anti-competitive agencies, or governments in general. Lowering X does not necessarily mean that Y will be lowered. When companies merge, they may be able to lower costs (overlapping departments of marketing are cut down, etc.) but even if they are not successful in lowering costs, they will definitely benefit by increasing Y, because they will not be forced to bid against each other in the marketplace.
I can't stress enough that the costs of producing a product have nothing to do with the prices you get in the market for that product-prices are decided by the consumers, costs are decided by the skill of the company. Consumers (or the customers, if the company sells to other businesses, B-B sales) are the deciders of prices. Managing costs is your problem, not theirs. The consumers will buy less if goods are priced higher-and if you want to keep the volume at a fixed level (e.g. 1000 units a day) the ultimate pricing of those products will be decided by the consumers for that volume. If you increase the price, you will necessarily reduce the volume. I give this simplistic example to explain the concept involved; but I hope you can see clearly that costs are an internal part of the company, whereas final prices are an external dynamic, determined by the marketplace, and companies have no bearing on them directly, except that all companies make competing offers in the marketplace. Indeed, getting rich in life means that you can sell products at a very high price at a good volume, and that those products cost really low to produce. The statement "costs determine prices" is false, if a company tells you that they are raising prices because their costs are rising, it is a lie; they are raising prices because they can. After all, if they knew that they could raise prices without sacrificing volume, they would have done so already, increasing their profit margins.
Next time a trade body like the FTC of your country approves a merger, tell them this! Almost all countries in the Americas, both North and South, have a problem in the banking, telecom, transportation and pharma sectors. The telecom monopolies are really horrible for the country's consumer. This is why Carlos Slim is so rich-he has little competition, and Mexico has given him a license to screw over all Mexicans by having little or no competition. Any time you have fewer than five or six actors in a place for a sector, they essentially combine to raise prices. This was explained well by Smith; and instead of simply never allowing this to happen at the first place, or at least not encouraging it by allowing mergers, governments regularly approve mergers even when very few actors are present, to the vast detriment of the consumers/customers.
Competition and presence of many actors lowers prices for consumers. Mergers do the exactly the opposite.
An easy way to see all this is the extreme case-that if mergers were good for consumers, we should allow all mergers and should only have one company in each sector! If companies were as nice as they would like you to believe when they say stuff like "we will pass on the cost savings to consumers/customers" and knowing that, in general, the economies of scale do lead to lower costs for two companies which merge, it necessarily means that the extreme case of just having one company do everything is the most efficient for everyone: the costs are the lowest because of massive economies of scale, the company is going to pass on all these low costs to the consumers in the form of lower prices, and everyone will be happy getting the products at the cheapest possible price. This extreme case of just one company doing everything is the same as everything owned by the government, which we all know is contrary to lower prices (or abundance of products, which is the same thing). The extreme case of mergers is therefore clearly a disaster for the consumer. Therefore, if there are five companies producing a product, and you allow two to merge based on the logic that increasing cost savings of the merger of these two companies (and them passing along these cost savings to the consumers) will lead to lower prices in the marketplace, why not merge all five of them and have the costs even lower? If a merger of all companies into one company is bad for the market, as should be obvious, any time you push the market closer to that by allowing two to merge, you are in effect increasing prices for the consumers by lowering competition.
In situations where there are only a few big companies left, it is not a bad idea to have a state-owned (central government or regional government owned) company exist side by side. In small countries like Chile and Canada, there are four or five large companies in important sectors like transportation, banking, telecoms, etc. The presence of a state actor is a good solution. This is also true in critical services like health-care, where a large state actor always lowers prices for the consumers-by providing the confidence that they will be taken care of when they really need help. Companies always find ways to collude and raise prices of goods and services, and the government can't possibly keep up with the newer and newer ways they find of doing this (they do give them fines when they find out they have colluded; but it is always too late). It is best to have a state owned enterprise in such cases. The privates can exist side by side with the state owned enterprise; I don't see a problem with that. But the presence of a state owned actor helps the consumers a lot. In Chile, the state owned Banco del Estado is by far the biggest of all banks (there are about 5 independent banking companies). The state backed health insurer, Fonasa, has about 80% of the market share; all other privates, about 5 in number, share the rest of the 20%. Consumers do prefer a state actor even when free choice is provided in critical services like banking, healthcare, etc. This point is lost on free market lovers; the presence of a state owned actor in addition to private actors is a good thing for consumers, and can only help in lowering prices.
What I have written above is for horizontal mergers, where two companies who are direct competitors in a given sector are looking to merge. What about vertical mergers, where you buy your suppliers or your customers if they are companies themselves? Cost savings in such cases are doubtful-as I have already covered here. In addition, they are equally bad for the consumers eventually, because any time you are decreasing competition and the marketplace has less players, whether it be the final companies who sell to the consumer or intermediaries who sell to consumer companies, you effectively raise prices in the vertical supply chains. The goal should be to have many companies at all levels of the supply chain-the system is far more competitive in that case.
Many people do not realize that division of labor works vertically, not horizontally. A simple example of a baker who makes bread will suffice. The bakery buys flour from the flour mill, who in turn buys raw wheat from the farmer. There are three vertically integrated businesses here: The farmer, The flour mill, and the bakery. They are normally done at different parts of the country, and can even be done in different parts of the world (you can import wheat or flour). The division of labor as talked about by Smith is this. If all three operations were combined under the same roof you would see the division of labor easily, but just because they are in different parts of the country or world does not mean that it is not division of labor or is less efficient.
If you combine these operations of the farmer, flour mill and baker, you will not reduce your overall cost; it is likely you will increase it. Each specializes in what they do best.
You often hear from economics and business folk that bigger companies have lower costs because of higher economies of scale, because of the same fixed capital distributed over a larger stock. This is not true.
Fixed capital is a small part of most businesses, even for capital heavy businesses like mining or car production. Most of the capital is still employed in circulating capital (materials) or labor. Furthermore, the fixed capital itself scales up as you increase the size of the factory. You need more buildings, more machines, more office space for the workers, etc. etc. as your factory size increases. The idea that the same fixed capital is used as the factory size increases is not true.
But division of labor and economies of scale work vertically, and even if you have a large factory of producing something, you depend on many supply chains to make things work.
This article is closely related to whose side the government must take-the consumer's or the producer's? It must always be the consumer. Here's the article which explains this.
The most common argument used by companies to get approval from the Government (FTC, etc.) is that a larger company will be better scale, and economies of scale will lead to lower costs, which they will pass along to the customer in the form of lower prices.
They are telling only half of the story. The economies of scale may work to reduce costs, but they are not going to pass along the cost savings to the customer or the consumers! They will just keep the extra profit themselves. On the other hand, by merging, you have less competition in the marketplace, which in effect raises prices. That is the real reason why companies want to merge.
The price of something is decided by the market demand. If a company is able to lower costs, it will keep the extra profit to itself. It will lower prices only when 1) there is competition, and/or 2) they believe that lower prices will lead to much larger volume, leading to the net dollar value of the revenue (price x volume) being much larger than before. Since no one can be sure that the volume will increase on lowering prices, and it will need extra investment and hassle on the company's part to increase volumes, the safest bet is to keep prices unchanged; and that means they will just keep the extra cost savings to themselves. Only a foolish businessman passes along their extra cost savings to the customers; the intelligent one just keeps it himself!
The main reason why companies want to merge is to reduces competition, and therefore in reality increase prices for the consumers. The less the number of competitors in a sector, the less the downward pressure on prices. It is also easier to collude and raise prices when there are 2 to 3 actors in a sector than when there are 10 to 20. Mergers always will result in higher prices for the consumers. They should never be approved.
The only exception where mergers can be approved is when the product is international-e.g. crude oil, copper, etc. Since there are many big competitors in other countries, it makes sense for commodities which are easily shippable worldwide to have large players at home as well. But this should be done only if we can buy foreign goods easily and there are no undue restrictions on imports (to take advantage of lower prices outside our country, if some company outside offers lower prices). In many cases, there are significant barriers to imports; therefore, mergers in general are bad for the country's consumers.
But here I just wanted to point out the fallacy of the argument of economies of scale: lower costs-lower prices...it is simply economies of scale and lower costs, but that does not imply lower prices for the consumers. Those are two different things-lower costs are a benefit of economics of scale. But what lowers prices in the marketplace is competition. The producers always want to lower their costs, reduce competition in the market and therefore raise prices, and increase their profit margins from both ends (cost go down because of economies of scale, prices in the market go up because of less competition); and they use bogus arguments to get the Governments and anti-monopoly organizations to approve their mergers.
Prices are decided by the market, and do not depend at all on the costs. Market price (the sales price) and cost of production of a product are entirely independent of each other-this point is missed by most economics types, and even men of business. You may make plastic monkeys for a cost of $90 and may want to sell them to me for $100, a reasonable profit, but that doesn't mean I will buy them.
Generalizing this, if you produce something at cost X and I want to pay only Y for it (at a given volume V of units sold), and if Y is less than X, you will go bankrupt as a company, and that is not my problem. I as a consumer care only about my dollars, and will only pay Y for your product. It is your job to make sure that X is less than Y, your profit is (Y-X)*V. But note that Y has no relationship to X, Y is decided by the consumers, the marketplace, the market; X is decided by the producer, the capitalist who brings the product into the market. Y is reduced by more competition, that's the surest way to lower prices for consumers, which should be the goal of the economics and anti-competitive agencies, or governments in general. Lowering X does not necessarily mean that Y will be lowered. When companies merge, they may be able to lower costs (overlapping departments of marketing are cut down, etc.) but even if they are not successful in lowering costs, they will definitely benefit by increasing Y, because they will not be forced to bid against each other in the marketplace.
I can't stress enough that the costs of producing a product have nothing to do with the prices you get in the market for that product-prices are decided by the consumers, costs are decided by the skill of the company. Consumers (or the customers, if the company sells to other businesses, B-B sales) are the deciders of prices. Managing costs is your problem, not theirs. The consumers will buy less if goods are priced higher-and if you want to keep the volume at a fixed level (e.g. 1000 units a day) the ultimate pricing of those products will be decided by the consumers for that volume. If you increase the price, you will necessarily reduce the volume. I give this simplistic example to explain the concept involved; but I hope you can see clearly that costs are an internal part of the company, whereas final prices are an external dynamic, determined by the marketplace, and companies have no bearing on them directly, except that all companies make competing offers in the marketplace. Indeed, getting rich in life means that you can sell products at a very high price at a good volume, and that those products cost really low to produce. The statement "costs determine prices" is false, if a company tells you that they are raising prices because their costs are rising, it is a lie; they are raising prices because they can. After all, if they knew that they could raise prices without sacrificing volume, they would have done so already, increasing their profit margins.
Next time a trade body like the FTC of your country approves a merger, tell them this! Almost all countries in the Americas, both North and South, have a problem in the banking, telecom, transportation and pharma sectors. The telecom monopolies are really horrible for the country's consumer. This is why Carlos Slim is so rich-he has little competition, and Mexico has given him a license to screw over all Mexicans by having little or no competition. Any time you have fewer than five or six actors in a place for a sector, they essentially combine to raise prices. This was explained well by Smith; and instead of simply never allowing this to happen at the first place, or at least not encouraging it by allowing mergers, governments regularly approve mergers even when very few actors are present, to the vast detriment of the consumers/customers.
Competition and presence of many actors lowers prices for consumers. Mergers do the exactly the opposite.
An easy way to see all this is the extreme case-that if mergers were good for consumers, we should allow all mergers and should only have one company in each sector! If companies were as nice as they would like you to believe when they say stuff like "we will pass on the cost savings to consumers/customers" and knowing that, in general, the economies of scale do lead to lower costs for two companies which merge, it necessarily means that the extreme case of just having one company do everything is the most efficient for everyone: the costs are the lowest because of massive economies of scale, the company is going to pass on all these low costs to the consumers in the form of lower prices, and everyone will be happy getting the products at the cheapest possible price. This extreme case of just one company doing everything is the same as everything owned by the government, which we all know is contrary to lower prices (or abundance of products, which is the same thing). The extreme case of mergers is therefore clearly a disaster for the consumer. Therefore, if there are five companies producing a product, and you allow two to merge based on the logic that increasing cost savings of the merger of these two companies (and them passing along these cost savings to the consumers) will lead to lower prices in the marketplace, why not merge all five of them and have the costs even lower? If a merger of all companies into one company is bad for the market, as should be obvious, any time you push the market closer to that by allowing two to merge, you are in effect increasing prices for the consumers by lowering competition.
In situations where there are only a few big companies left, it is not a bad idea to have a state-owned (central government or regional government owned) company exist side by side. In small countries like Chile and Canada, there are four or five large companies in important sectors like transportation, banking, telecoms, etc. The presence of a state actor is a good solution. This is also true in critical services like health-care, where a large state actor always lowers prices for the consumers-by providing the confidence that they will be taken care of when they really need help. Companies always find ways to collude and raise prices of goods and services, and the government can't possibly keep up with the newer and newer ways they find of doing this (they do give them fines when they find out they have colluded; but it is always too late). It is best to have a state owned enterprise in such cases. The privates can exist side by side with the state owned enterprise; I don't see a problem with that. But the presence of a state owned actor helps the consumers a lot. In Chile, the state owned Banco del Estado is by far the biggest of all banks (there are about 5 independent banking companies). The state backed health insurer, Fonasa, has about 80% of the market share; all other privates, about 5 in number, share the rest of the 20%. Consumers do prefer a state actor even when free choice is provided in critical services like banking, healthcare, etc. This point is lost on free market lovers; the presence of a state owned actor in addition to private actors is a good thing for consumers, and can only help in lowering prices.
Vertical mergers
What I have written above is for horizontal mergers, where two companies who are direct competitors in a given sector are looking to merge. What about vertical mergers, where you buy your suppliers or your customers if they are companies themselves? Cost savings in such cases are doubtful-as I have already covered here. In addition, they are equally bad for the consumers eventually, because any time you are decreasing competition and the marketplace has less players, whether it be the final companies who sell to the consumer or intermediaries who sell to consumer companies, you effectively raise prices in the vertical supply chains. The goal should be to have many companies at all levels of the supply chain-the system is far more competitive in that case.
Division of labor works vertically. Benefits of economies of scale (horizontally, by mergers, growing a company) are overestimated
Many people do not realize that division of labor works vertically, not horizontally. A simple example of a baker who makes bread will suffice. The bakery buys flour from the flour mill, who in turn buys raw wheat from the farmer. There are three vertically integrated businesses here: The farmer, The flour mill, and the bakery. They are normally done at different parts of the country, and can even be done in different parts of the world (you can import wheat or flour). The division of labor as talked about by Smith is this. If all three operations were combined under the same roof you would see the division of labor easily, but just because they are in different parts of the country or world does not mean that it is not division of labor or is less efficient.
If you combine these operations of the farmer, flour mill and baker, you will not reduce your overall cost; it is likely you will increase it. Each specializes in what they do best.
You often hear from economics and business folk that bigger companies have lower costs because of higher economies of scale, because of the same fixed capital distributed over a larger stock. This is not true.
Fixed capital is a small part of most businesses, even for capital heavy businesses like mining or car production. Most of the capital is still employed in circulating capital (materials) or labor. Furthermore, the fixed capital itself scales up as you increase the size of the factory. You need more buildings, more machines, more office space for the workers, etc. etc. as your factory size increases. The idea that the same fixed capital is used as the factory size increases is not true.
But division of labor and economies of scale work vertically, and even if you have a large factory of producing something, you depend on many supply chains to make things work.
This article is closely related to whose side the government must take-the consumer's or the producer's? It must always be the consumer. Here's the article which explains this.
On putting your own people as suppliers, your distributors and customers, etc. to lower costs
A big company like Amazon sometimes gets into crazy ventures to "lower costs". They believe they can do everything, and therefore cut out all the profits and sales which they have to give to other companies. Sounds like a groovy train of free profits, right?This is because of a poor understanding of Economics. Here's what promoted me to write this piece.
Amazon is in talks to lease 20 cargo planes to build its own overnight air operations
The summary is that Amazon wants to eliminate Fedex and UPS eventually by setting up it's own distribution and logistical network.
What's wrong? Why doesn't Amazon go even further and plant it's own wheat, that way it can feed it workers cheaply, and therefore lower costs further? Or build houses and then make the workers live in them, and therefore keep the "rent" these workers give as it's own profit?
This can't work because your capital is finite. Whatever you put in a new venture, you take away from your existing venture. In other words, if Amazon will lease these planes to make deliveries, it will necessarily do it at the expense of it's core retail operations (warehouses, inventory of items, etc). Since capital is not infinite, by putting your capital in new ventures, you are always taking away capital from your existing ones. Since the existing ones are your competitive advantage, you are almost always making a mistake.
This was explained well by Adam Smith. Wholesalers can't become retailers just because they are envious of them. They will need to take away the capital they have in wholesale goods to supply the retailers, and that means that if they put retail stores, their wholesale operations necessarily shrink, or are reduced in size (grow at a smaller rate).
You normally want to allocate more capital to your core competency, and move to newer ventures only if you fear that you have saturated out your core businesses. I doubt this is the case even for Amazon.
A few years ago there was a company called Molycorp (it went bankrupt) which was extracting rare earth minerals from Nevada. Since the allocation of capital was never clear to these people, they went ahead and bought out their own customer Neo Materials in Canada (Neo made rare earth magnets. Molycorp supplied them with the raw materials, the rare earth minerals). They thought they could keep the profit of the magnet maker too! Well, they took away capital from their core operation of extracting rare earth minerals from the ground, and note that you take away capital not just in the form of money, but by diverting the attention of Management on another business, or sending your employees to the new business, etc. So instead of one problem, they had two problems now. Sure enough, the company couldn't handle all this; and they went bankrupt in a a couple of years.
So remember this next time someone wants to cut costs or increase profits by buying their own suppliers or customers; they are in almost all cases making a terrible mistake. The part of capital allocation and the that capital is finite is often ignored by most businessmen and economists; when they are going into new ventures, means necessarily less capital for existing ones.
Amazon has as good a chance in building a successful logistics and distribution network as Fedex has of building an online retailer. Both are moving away from their core-competency; and in doing so, probably making a mistake, and will cause losses of this capital.
Update: This is also true for companies trying to move sideways into new businesses....whatever capital they use to buy the new company, they necessarily take out from their existing business. This is what Tesla seems to be doing with Solarcity-which they offered to acquire today (22 June 2016). Following that logic, Tesla should buy a wheat producer too, because certainly the family who wants to buy solar cells and Teslas needs to buy wheat as well, and some narrative of synergies and cross-selling wheat to Tesla owners can be proposed.
Amazon is in talks to lease 20 cargo planes to build its own overnight air operations
The summary is that Amazon wants to eliminate Fedex and UPS eventually by setting up it's own distribution and logistical network.
What's wrong? Why doesn't Amazon go even further and plant it's own wheat, that way it can feed it workers cheaply, and therefore lower costs further? Or build houses and then make the workers live in them, and therefore keep the "rent" these workers give as it's own profit?
This can't work because your capital is finite. Whatever you put in a new venture, you take away from your existing venture. In other words, if Amazon will lease these planes to make deliveries, it will necessarily do it at the expense of it's core retail operations (warehouses, inventory of items, etc). Since capital is not infinite, by putting your capital in new ventures, you are always taking away capital from your existing ones. Since the existing ones are your competitive advantage, you are almost always making a mistake.
This was explained well by Adam Smith. Wholesalers can't become retailers just because they are envious of them. They will need to take away the capital they have in wholesale goods to supply the retailers, and that means that if they put retail stores, their wholesale operations necessarily shrink, or are reduced in size (grow at a smaller rate).
You normally want to allocate more capital to your core competency, and move to newer ventures only if you fear that you have saturated out your core businesses. I doubt this is the case even for Amazon.
A few years ago there was a company called Molycorp (it went bankrupt) which was extracting rare earth minerals from Nevada. Since the allocation of capital was never clear to these people, they went ahead and bought out their own customer Neo Materials in Canada (Neo made rare earth magnets. Molycorp supplied them with the raw materials, the rare earth minerals). They thought they could keep the profit of the magnet maker too! Well, they took away capital from their core operation of extracting rare earth minerals from the ground, and note that you take away capital not just in the form of money, but by diverting the attention of Management on another business, or sending your employees to the new business, etc. So instead of one problem, they had two problems now. Sure enough, the company couldn't handle all this; and they went bankrupt in a a couple of years.
So remember this next time someone wants to cut costs or increase profits by buying their own suppliers or customers; they are in almost all cases making a terrible mistake. The part of capital allocation and the that capital is finite is often ignored by most businessmen and economists; when they are going into new ventures, means necessarily less capital for existing ones.
Amazon has as good a chance in building a successful logistics and distribution network as Fedex has of building an online retailer. Both are moving away from their core-competency; and in doing so, probably making a mistake, and will cause losses of this capital.
Update: This is also true for companies trying to move sideways into new businesses....whatever capital they use to buy the new company, they necessarily take out from their existing business. This is what Tesla seems to be doing with Solarcity-which they offered to acquire today (22 June 2016). Following that logic, Tesla should buy a wheat producer too, because certainly the family who wants to buy solar cells and Teslas needs to buy wheat as well, and some narrative of synergies and cross-selling wheat to Tesla owners can be proposed.