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Wednesday, July 17, 2013

Monopsony: monopoly through the looking glass

Government Should Leverage Its Size to Get Better Prices, Senators Say
“When Wal-Mart buys, I guarantee they get the best price, and when Honeywell buys, they get the best price,” said ranking member Sen. Tom Coburn, R-Okla.

Chairman Tom Carper, D-Del., called the Obama administration’s key procurement officers to respond to Government Accountability Office reports showing that the top four purchasing departments -- Defense, Energy, Homeland Security and Veterans Affairs -- were achieving only 5 percent of contracts using strategic sourcing’s careful analysis of spending needs and markets and rigorous monitoring of vendor prices. “Federal agencies appear to behave more like medium-sized, unrelated businesses than the largest purchaser in the world -- which is what the U.S. government is,” Carper said.

A defense of progress to date came from Joe Jordan, administrator of the White House Office of Federal Procurement Policy. The obstacles include “a decentralized process with a lack of visibility into what other agencies do,” Jordan said. But he cited progress in reducing what once was 4,000 separate wireless phone agreements with 800 plans to one contract vehicle, the saving of $600 million through shared contracts for janitorial services, and the General Services Administration’s office supplies contracts that have upped the rate of small business participation from 67 percent to 76 percent.

Dan Tangherlini, newly confirmed as administrator of GSA, said strategic sourcing in 20 agencies has saved $300 million since 2010. “Contractors are required to report transactional data on all program sales,” he said. “For the first time, this level of financial information collection provides us with a clear picture of agency spending behavior. Over the last several months, GSA has used this data to show contractors their pricing item by item, compared with their competitors in an anonymous fashion. This has empowered contractors to understand their competitive position, and in many cases offer better deals.”
I'm reminded of the post from a couple of days ago: Published benchmark costs bring procurement savings.

In the article in chief above, criticism of government procurement uniformly complained that the government did not achieve the market-leveraged savings of private business. Private business, of course, is not burdened with the many so-called "wealth distribution" programs (see, here) of the federal government, such as Buy American. And, WalMart acquires large parts of its product in China and other non-US production centers. Do we want our government to do likewise? We could do it.

America made a great leap forward economically at the start of the 20th century by dismantling the monopoly "trusts", a form of forced "creative destruction" of concentrated capital. The lesson learned is that too much concentrated market power is not good for the larger society or economy.

So, what is a Monopsony? According to Investopedia:
Definition of 'Monopsony': A market similar to a monopoly except that a large buyer not seller controls a large proportion of the market and drives the prices down. Sometimes referred to as the buyer's monopoly.

Investopedia explains 'Monopsony': People have accused Ernest and Julio Gallo (the big wine makers) of being a monopsony. They had such power buying grapes from growers, that sellers had no choice but to agree to their terms.

“The rule is, jam to-morrow and jam yesterday--but never jam to-day.'

'It MUST come sometimes to "jam to-day,"' Alice objected.

'No, it can't,' said the Queen. '
It's jam every OTHER day: to-day isn't any OTHER day, you know.'

'I don't understand you,' said Alice. 'It's dreadfully confusing!'

'That's the effect of living backwards,' the Queen said kindly: 'it always makes one a little giddy at first--'

'Living backwards!' Alice repeated in great astonishment. 'I never heard of such a thing!'

'--but there's one great advantage in it, that one's memory works both ways.'

‘I'm sure MINE only works one way,' Alice remarked. 'I can't remember things before they happen.'

'It's a poor sort of memory that only works backwards,' the Queen remarked.”
― Lewis Carroll, Through the Looking-Glass, and What Alice Found There

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