In the main, financial markets have – over time – developed pricing mechanisms to cater for risk and service. Price is used in banking as a risk differentiator. As we saw in the recent movie “The Big Short” not all of it works well but if you compare it to other industries (and I will), then it holds up ok.
“All hope abandon, ye who enter here.” – from the Divine Comedy by Dante Alighieri.
I moved into my current home over nine years ago. It’s in metropolitan Sydney. One of the first things I noticed was how slow my internet connection was. So I contacted my ISP, Telstra, and asked why. They told me that whereas I had cable at my previous home I only had copper wire at my new home (ADSL). Yippee.
Worse, I was 5 kms from the nearest exchange. But, 400 metres away I could see tantalizing cable overhead but didn’t have overhead wires at my place (all underground). Nine years later and after complaints to the ombudsman, the CEO and around 12 visits from technicians, my internet speed is no better.
It would’ve cost Telstra less to run cable 400m…but I digress.
Here’s where financial markets have it all over the telco industry.
For my internet connection, I pay the same price as the person, who lives next door to the exchange for the same package – but clearly I receive a far inferior product – in case you’re wondering, all other providers are the same or worse.
If I applied for a home loan and I only had 5% deposit, I would be charged more than someone who had 20% deposit – by way of lenders mortgage insurance. Also, more and more lenders are rewarding a lower LVR with rate reductions. This will invariably lead to early re-financings as lenders’ home prices increase or their debt levels decrease.
The retail industry is also a good citizen when it comes to price. If you see a chook at your local supermarket with three days prior to the used by date, it will be priced cheaper than one with seven days before going off.
Same with fashion, this season’s fashion will be heavily discounted at the end of the season. So why do some industries still stick to a one price fits all model? Simple, they’re either operating a monopoly, duopoly or oligopoly.
Let me explain. In Australia, we often look at prices of goods and services in other developed nations and wonder why we pay a premium. Well, it’s easy, because we have a population that supports only so many companies in a particular industry. We have roughly the same population of greater Los Angeles but have the same land mass as all of the US.
However, the worst protagonist of gouging us for higher prices has to be the gas industry. I just checked what I’m paying now per unit to what I was paying a few short years ago. It’s almost a 300% increase. The gas industry maintains that that’s the price that their customers in Asia are prepared to pay and so must we.
There’s a simple answer to this – substitutes. In the resource industry the big bogey is renewables. That should be having a significant impact on all energy prices (and it is – see the price of oil). How can gas justify such an increase?
A good example of how deregulation has slowly unwound monopoly/duopoly positions is in the Airline industry. It’s still heavily regulated but we now have choice (at least in the international routes) and I can fly to Europe today for around the same price as I could 25 years ago. Anyone remember the fierce competition between Qantas and Ansett? Particularly when a third airline, Compass, entered the frey.
So, next time you complain about bank fees, interest rates, the price of petrol, airfares etc, remember we live (and I’m quoting a former Prime Minister here) “at the arse end of the world” with a population of a city and the land mass of a continent and just cough up.