How Big Corporations Are Destroying the "Free Market"

As an economist, I wince whenever I hear someone say that we live in a true free market.

The reality is we live in a semi-free market where regulation stifles business and corporate money influences and distorts what would normally be a highly competitive marketplace.

And over the last two decades, the situation has only gotten worse for consumers, producers, and defenders of the so-called "free market."

From 2008 to 2010, 30 major corporations paid more money in lobbying fees than they did in taxes, according to the Public Campaign.

But while traditional lobbying once centered on altering tax rates and encouraging legislation to liberalize and deregulate the economy, it has now evolved into a competitive weapon for companies trying to box out competitors and raise barriers to entry in their markets.

It's a business phenomenon that I like to call the "Rise of the Fifth Rail."

You see, in traditional markets, companies compete on four specific principles: Price, product quality promotion, and place (market access). These principles are known as the "four P's."

The first three are self-explanatory in that customers want the highest quality product at the cheapest price. Companies use promotional techniques to instill a need for its products and do so by marketing against the offerings of a competitor.

The fourth principle centers on a company's ability to reach new markets and still provide low prices for high-quality products. A strong coordinated distribution network tends to make this possible.

Naturally, when all four work together, you end up with a company like Walmart (NYSE: WMT), which has the ability to provide low, everyday prices due to its best-in-class distribution network.

But over the last few decades, this new phenomenon of using lobbying as a competitive tool has altered the course of market economics, and driven fair competition into the ground.

And that phenomenon is rotting the American free market from the inside.

Corporatist Lobbying on the Rise

No longer are companies bound by the "four P's." In fact, I argue that now there are five P's, the fifth being "public policy."

We have seen an explosive growth of direct lobbying at the local, state, and Federal level to carve out markets and stifle competition. And it is troublesome to think that lobbying could potentially have an even greater impact on our markets and our society as each corporate donation whipsaws through the American economy over time.

Lobbying is not just a tool to curry favor with legislators. It has become a strategic weapon, one that distorts competitive markets in an effort to hurt rivals.

To illustrate the rise of this fifth "P" here are some prime examples of the worst corporate lobbying stories in recent memory. All them were designed to stifle competition:

• In 2012, Altria Group (NYSE: MO), formerly Phillip Morris, spent approximately $11million onlobbying. Most of it was designed to hammer Mom and Pop tobacco shops that allowed customers to "roll-your-own" cigarettes. The cost of rolling your own cigarettes in the shops on special machines cost the customer about $2 per pack. Altria lobbied to Sen. Max Baucus (D-SD), who recently put into law a note that redefined these Mom and Pop shops as "cigarette manufacturers," which essentially raised their costs, taxes, and regulations, effectively driving these popular, customer-friendly shops out of business.
• In 2012, down in North Carolina, Time Warner Cable (NYSE:TWC) , AT&T ( NYSE:T), CenturyLink (NYSE: CTL), and other cable and telecom companies engaged in a massive lobbying campaign to bar communities from building their own networks. The networks would have provided a cheaper network for customers, which would have forced the big boys to reduce prices or become more innovative to compete. The new laws these companies lobbied for and got passed now make new public deployments of cable and broadband impossible. By raising new barriers to entry, the larger cable and DSL now have more influence on future laws and effectively limit the marketplace to just their services.
• For years, large retailers like Wal-Mart and Costco (Nasdaq: COST) have supported and lobbied on behalf of higher minimum wage standards. Are they doing it out the goodness of their hearts and love for their employees? Hardly. Higher minimum wages provide another competitive advantage to larger businesses, which can absorb these costs. Meanwhile, smaller mom-and-pop stores absorb higher variable costs as a result. Higher minimum wages don't necessarily mean a more competitive, innovative marketplace.
• And the worst situation I've seen is the ongoing battle between the nation's two largest shipping companies. United Parcel Service (NYSE:UPS) is a unionized company, while FedEx (NYSE: FDX) is not. UPS has been lobbying for years to get changes that would enable and force unionization of air shipping workers. Doing so would raise costs for FedEx. In fact, some unionized UPS workers said they were forced to write letters to local lawmakers in support of stricter labor laws for FedEx. And this battle isn't going away any time soon.

Not a Distinctly American Problem

The Rise of the Fifth Rail is not a distinctly American phenomenon.

As I noted last week from my visit to Argentina, the relationship between the rail union and the trucking union has been so bad that political assassinations are a growing problem. On April 19, the former president of one of the Argentine rail unions (Unión Ferroviaria), was to 15 years in prison for murdering a member of the country's left-wing Workers Party.

It is the rise of corporate influence with expanded government influence over private sectors that is the hallmark of corporatism and fascism, a dangerous economic system that stifles innovation and competition, and drives massive divides between the richest and the poorest in a society.

If American companies were honest about their commitment to competition, innovation, and engaging in the true American Dream, then they would stop attempting to buy influence in an attempt to hurt the competition. The American standard of living relies on companies to engage in true competition, a driver of innovation, better products at lower prices, and greater commitment to customers. Competitive lobbying practices rot that standard from the inside.

We see on a regular basis what happens when a company has little market competition.

They aren't held accountable, and as a result, they are able to deny customers the service they expect and deserve.

Putting an end to this rot is something that is long overdue in Washington.

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