Tan Kin Lian's Blog: Free market (2)

Thursday, September 24, 2009

Free market (2) - a regulated market

Some people think that a free market should be unregulated and that deregulation will lead to innovation.

This is partly true but largely false. An unregulated market can lead to exploitation and cheating. The people with the information and financial resources can take advantage of the consumers and make excessive profit.

A good example of a regulated, free market is the stock exchange. The regulator knows that it is easy for the retail investors to be taken exploited by by people who can manipulate the stock prices. The regulator writes and enforces regulations to ensure that the market is fair, and that information is readily available to all participants. Insider trading, manipulation of prices, release of false information and other unfair practices are disallowed. Those guilty can even go to jail.

Medical services used to be self-regulated. The medical profession sets guidelines on the prices to be charged for various common procedures and services. They are published and made know to consumers. They set the benchmark for fair prices and protect the consumer. When the guidelines were abolished by the Competition Commission, it was actually a step backward. Instead of helping consumers, this change actually caused more problems for consumers.

The regulator allows taxi companies to set their fares, calling charges, peak hour surcharge and other charges. This is supposed to allow free competition, but it is confusing to the public. The commuter does not know what is the fare, as it depends on the taxi company. If the commuter is at a taxi stand and an expensive taxi comes along, it is difficult for the commuter to reject that taxi, without causing unpleasantness.

A better approach is for the regulator to set the standard rates for the basic taxi service (which applies to taxis picking commuters along the road or at taxi stands. Premium services can be made available to commuters who call a taxi on their special hotline, as the commuter know and accept the charges for that premium service.

We need a regulated market to be fair to all parties and to improve efficiency. We can promote competition by giving choice to consumers (e.g. to choose the doctor) and for service providers to decide if they wish to provide the service at the regulated rates. In the stock exchange, an investor has the choice of buying or selling a specific stock. This is how competition can work in a free market to give better outcome and fair prices.

Tan Kin Lian

6 comments:

C H Yak said...: An important issue lies with the purpose of regulations and how they are implemented. Who should benefit from such regulations? We should draw a lesson from the recent crisis of toxic financial products.

The US finally see the need for greater greater governance and regulation in the post-mortem.

Singapore is well known as a country with strong "governance" but we see very different final results here versus economies like Hong Kong.

The important issue :- "Are we regulating against the strong mighty corporations to safeguard the general interest of the weak and innocent public?", or "Are we regulating the general public to follow the strong regulations which favour the sustaining of strong mighty corporations in our economy and at the expense of true fairness and spirit of consumerism?".

I see a stronger need to regulate against big corporations while leaving it more "organic" for the weak consumers to support a "free" market. And because consumers are generally weak and innocent, they must be protected.; September 24, 2009 11:00 AM
Tan Kin Lian said...: I dislike structured products that are designed by financial institutions and sold to the public. These products have charges and profit margin that are not disclosed to the public and benefit the institution. The consumers are not aware that the terms of the product are to their disadvantage.

These products include the capital guaranteed products, credit linked notes, equity linked notes, currency linked notes and life insurance savings products.

We need these products to be regulated to be fair to consumers.; September 24, 2009 12:29 PM
Anonymous said...: It's a shame that Singaporeans don't have a high regard for Arts subjects like history.

A lot of our current debates about "free markets" versus "regulation" cover ground that the Americans have been wrestling with since the late 1800's to early 1900's.

In particular, mini-bond investors should read about the reasons of America's stockmarket crash of 1929. And the Glass-Steagall Act (of 1933) that was enacted to prevent another 1929 crash.

And how the Glass-Steagall Act was repealed in Nov 1999 in order to allow "free markets" to flourish. And surprise, surprise, we have another big crash in 2008.

Read about the Glass-Steagall Act (1933) and compare it with our current banking practices in Singapore today. And ask yourself if mini-bonds would have been allowed under the Glass-Steagall Act.

"If you think education is expensive, try ignorance."; September 24, 2009 1:25 PM
Anonymous said...: "It's a shame that Singaporeans don't have a high regard for Arts subjects like history"

True and right.

The outcome today: social unrest, legal dispute, fall sick or commit suicide !

Please read beyond Investor Book/News/Advertisement.; September 24, 2009 3:20 PM
Vincent Sear said...: I agree with the principle of free but regulated markets in commercial practices. It's the same as a society having freedom but also the rule of law to prevent anarchy.

There're many meaningless competition in public transport in Singapore. For example, from my place to Shenton Way, I have to take Bus #107 (SBSTransit); if to Bukit Merah, I have to take Bus #61 (TransIsland). I choose the route, not the company.

The competition underlying is negotiation with PTC, bidding for rights to more profitable routes and obliging to service less profitable routes. To the commuter, they make no difference. There's no choice and actually no need for choice between one or more companies, as long as the network of major roads in the country is comprehensively covered and served. There's single card payment system and a common fare structure.

For commuters boarding taxis by roadsides or at taxi stands, there's a difference. Different taxi companies have different fare structures, and we don't know what's the next taxi in line that's going to come along.

Therefore, I agree with T.K.L. that there should be a standardised flag-down fare structure for all taxi companies. They should compete for booking passengers with their service reputation and booking fee. Deeper into another level, they should also compete for taxi drivers renting their taxis with rental charges and benefits for drivers.; September 24, 2009 3:46 PM
Anonymous said...: Enjoyed your post. I am currently researching if free market pricing is better than regulated market pricing especially as it affects declines and increases in stock prices. I live in Nigeria, and the Nigerian Stock Exchange only allows for shares to appreciate or depreciate by a maximum cap of 5%. I would be glad to hear your opinion on this subject. Thank you.; October 29, 2009 7:07 PM