Public companies can help create perfect competition outcomes in small markets

In micro economics theory, a perfect competition market is theoretical, not even commodities´ markets are perfect. This is because prices will respond to slight changes in quality, or cost production (technology and labor cost), or fashion tendencies, service and risk. This is why most big markets with similar products (like cereal) are a mixture between monopolistic competition and perfect competition markets. The difference between them basically radicates in that products from firm A are substitutes for product of firm B (perfect substition) and in monopolistic competition products are not substitutes. A perfect competition market has 4 basic characteristics: everybody has information about everybody, there are no obstacles to participate or retire from the market, no transaction costs and numerous participantes in the supply and demand side. In most literature and as well economists forget what the main objective of a perfect competition market is: to be efficient. Efficiency here involves reducing prices as much as possible and the erradication of rents or the ROE in private companies.

Perfect competition markets are most probable to form when there are numerous companies, numerous clients, simple production technology and knowledge and big markets. A big country by itself such as China can self contain a perfect competition market (or markets that closely resemble them) in their country because of the huge volume of competitors, consumers and money. Yet for small countries like Ecuador, it is very difficult, and as such, rents will tend to be higher. The only chance, as we knew it was that a small country will adhere itself to a trade agreement with other markets so that companies will become competitive in price and quality and take advantage of economies of scale. But not any more, here I present an idea that can help to take oligopolies towards perfect competition markets, especially focusing on achieving the main objective: to create competitiveness in quality and price for producers and low prices for consumers by developing and using public companies. The key: lowering the Rent over Equity of the big companies.

Public companies are a weird organism of the markets. Governments do not understand them well nor do they understand their potential, their role in the market, their autonomy, how to incentivate professional work from their labor force or how to set their goals. Actually governments just use them to increase their political activity in the short run, to dry their excess capital to finance fiscal shortages and to pay political alliances with job placements.

Different from direct executive institutions, public companies have to generate business, they have sell a good or service and be financially sustainable across time, just like private companies. But different from private companies, public companies not only have to generate a ROE, they have to generate economic benefits to their clients and to society. Thus, they are in the middle, juggling between producing economic benefits and financial sustainability. The problem arises when public authorities use them to execute political agendas in benefit of the political parties and divert them from their objective.

Yes, of course public companies will have to comply with public policy and undertake different projects which private companies would not engage or would do so at implausible prices, thus generating subsidies to society, but they should always engage without risking their survival. As well, governments should not use them as stakeholders to finance budget deficits, their excess cash should be used to produce more subsidy in their products and services.

If governments would stop using these companies as funds for the central governments´ budgets, respect their autonomy, incentivate correctly their workers and actually execute productive policies, public companies have a huge potential to contribute in the generation of efficient markets and the top of the cherry, generate political capital to the party at power just because they work and do economic benefits to society and prove the good management skills of the public authorities. Good work will be praised by itself.

Here we go. Public companies do not have to fight to show their returns over the equity ROE increasing constantly or be superior to other companies in their industry. They do not have to be the best stock, they do not have to produce financial benefits to their stockholders (the government). They just have to sell their goods and services as cheap as they can, with quality and providing when private companies would not do it. Actually, they should be the fiercest competitors in a market. They can use all the value that would go to the investors (if they would be private) and distribute them by reducing their prices and generating cross product subsidies to produce and sell beneath the cost in certain products. This would create enourmous economic benefits to society. On counter part, following a competitive market theory or bertrand competition, private competitors would have to lower their prices to even out the gap with the goods from the public companies, thus generating the effect of a perfect competition market or at least a competitive market, even if there are only a few competitors.

The potential of public companies to influence prices in markets, to eliminate intermediaries (essential in agriculture), to create economies of scale, to acquiere highly qualified labor force, to finance cheaply itself (the government), to congregate masses, to use other public services (tv stations, radio, media, etc) to grow and be a main player in any industry is incredible.

Their limitations, apart from the ones mentioned before (especially being used as the governments backyard bycicle), are that they must act according to the bureaucratic norms and law. They are rigid because they are normed just like any government institution, thus they do not have the flexibility of private companies. As well, reputation may be a weak spot for highly skilled managers to choose to work in public companies and there is lot of space for corruption. Corruption happens in private and public sectors, but it mostly happens in the public sector because there is less accountability and more bureaucratic processes that permitt it. Neverthe less, that is exactly one of the areas that governments should attend, reducing the rigidity of public companies in certain processes like purchasing and strenghthening the department of finance and control. As well they must have the best top technology and share it with other public institutions. Many areas may be optimized, others must be strenghthened and others relaxed, accordingly.

Usually there is a problem with the human resource at a public company. In some countries, a high percentage of workers have a sort of life closed contract or it is very costly to fire them, etc. This is really a huge problem. If a worker has one of these type of "life contracts" legally it is hard for the general manager to fire them, even if they do not work at all or comply as they should, and then the manager may face future liabilities and trials because of it. This is stupid, just plain stupid. There must always be a balance between job stability and a real threat of loosing a job. As humans, our basic drive which has defined our evolution is fear, if you do not have fear then you will pursue your own interests and the principal agent problem goes down the toilet. Work laws must be flexibilized for the public sector and at least be the same as for private companies. Now, not only is it important to create a real threat of job loss, it is important to generate good salary structures. Just pay everybody above market salaries in every position, and you will see people actually reciprocate, just like behavioral economics has proven and predicted. People like to get paid well, like the company to take care of them, and they will do their job as well as they can. Plus public companies will attract the best workers available. Plus, there is an intrinsic value to this kind of job (which should not replace a good salary), it is a filanthropist job in part.

Finally, there is the thing about managing public money without an identifyable face in it. It is not the same managing everybody´s money versus managing Mr. Smith´s money. The big number of owners , the central government or going further everybody´s money or society´s money, makes people relax in terms of accountability. This is an important matter, very important in fact. But if the same governance and processes are applied in a public company which are used in a multinational company, it should do the trick and make people more accountable and responsible. On top of that, I propose that public companies should generate stocks which are given to the different positions in the company and will act as a variable payment according to the whole institutions performance. So a small percentage of earnings may be distributed to every employee according to their stock, etc. This will make people care about accomplishing the goals of the company and will create peer pressure for other workers to perform. As well, public companies may generate stock in the local stock exchange, but this will reduce their capabilities of generating economic benefits in society and producidng subsidized services and goods.

Lastly, governments, as the main stock holders just have to be honest and set their goals with a few major lines. Set them a target ROE as low as needed for their survival across time and set their goals related to prices of their goods and services, subsidies given, and market share, etc.

In the end, just give and respect public companies´ autonomy, let them influence the market and generate competition, pay the workers above average (not too much though!), flexibilize work contracts, choose goals clearly and wisely, put faith in them, choose good experience managers, give stability inspite of political party changes and let them be. Economic and political benefits will be reaped!

Public companies have the power and potential to create close to perfect competition outcomes (concerning to prices) in markets if governments will let them do it.

Small countries like mine, actually need this yesterday. People will have access to cheap, good quality products, companies will learn to be productive and survive by it and not be rentist, goods will be competitive internationally, and it will help to reduce the increasing wealth inequality.

#publiccompanies #perfectcompetitionmarket #economicdevelopment #wealthinequality #economicbenefits #perfectmarketplayers