Poor regulations lead to lacking customer service

By Michael J. Hicks

A great deal of ink has been spilled over the United Airlines fiasco in Chicago. The dragging and walloping of a customer has fueled widespread commentary on business malpractice, epic communication gaffes, airline safety and the bizarre role of local police to enforce commercial contracts.

The inevitable anti-capitalist rants accompany some humorous internet memes, along with glee felt by many a disaffected traveler at the enormous stock plunges that gripped United Airlines. What is missing is a frank discussion of the role of regulation in creating this atmosphere.

Economists in general take a wide view of the regulation of commerce. Some of my colleagues prefer a very light hand of government; others wish to see broader government intervention. Those who desire more regulatory intervention typically want to see rules that affect environmental and social problems.

Many also wish to force businesses to be more transparent with their businesses dealings and on the contents of their products. Skeptics of the efficacy of these efforts typically support deregulation in the hopes that markets will sort out these problems. I am fairly middle of the road on these issues.

Despite the wide differences among economists on the scope of commercial regulation, there is nearly universal agreement that a clear line of demarcation exists for something we call “natural monopolies.”

All economists I know argue that some businesses; like water, sewer and electrical services, must be regulated on price and quantity of the good provided. This is simply because the overhead costs of delivering these services precludes competition. Economists also widely concur that beyond this very narrow scope, regulation should tread lightly on directly influencing price and quantity. Even those who argue for more regulation respect the role of consumer choice, and prefer indirect influence on prices through taxes or some other instrument. This leads directly to the United Airlines problem.

Customer dissatisfaction with businesses is common, and we typically vote with our dollars. For this reason, most businesses fail quickly, to be replaced by better firms. So, outside the occasional very bad customer experience, there is rarely viral anger involving most businesses. Walmart did not even have a crisis communication strategy two decades ago, and that should tell you something about the role of markets in disciplining business transactions. The company didn’t need one.

The real consumer dissatisfaction appears to come in airlines, banking and cable TV/Internet services. Ironically, these are all places where government tends to create false local monopoly power through haphazard and ill-designed regulations.

So, the viral anger over United Airlines, or Wells Fargo or Comcast builds directly from our own experience with these badly regulated industries.

Ironically, none of these industries operate in a natural monopoly, and without government regulation would be forced to face the direct consequences of bad business decisions. Instead, we consumers don’t have easy access to alternatives in many places because rules limit competition and allow businesses to treat customers poorly.

Airline barriers to entry limit choices on many routes, banks that are “too big to fail” restrict choice, and in many states, archaic telecommunications regulations stick us with too few choices on broadband or telephones. All of these features are due to government’s poor attempts to control the price and quantity (and therefore quality) of services.

I am not so naïve as to expect a wave of deregulation to follow in the wake of the United Airlines’ terrible treatment of a customer. Nor would I wish for broad deregulation to occur on a whim.

Still, when next you find yourself discomfited, ill-treated or ignored by a business and have no alternatives, just ask yourself whether the industry is intricately regulated. What you will find is that in most cases, it is, and there’s no good economic rationale for that regulation. Rather, the rules simply help the business dodge competition and helps make the reputation of a lawmaker at the expense of consumers.

Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].