Virtuous Markets & The New Firm
What makes firms corrupt, and how can we fix them...?
I was doom scrolling, when I came across a video of a lady explaining how Coles and Woolworths, the two biggest supermarket retailers in Australia are being sued by the Australian Competition and Consumer Commission (ACCC) over offering “illusory” discounts.1
Now, I hadn’t been shopping at these stores precisely for this reason. Their prices were just too high compared to other retailers like Aldi. But many customers are reluctant to switch. The Financial Times has made the case that customers are paying a Lotalty price. But this loyalty was arguable bought through price manipulation tactics. These stores would artificially increase the price, and then offer the same product at a discount at the same or higher price than initially.
Many experts have argued that this has been a dominant driver of inflation and cost-of-living pressures.
Regardless of how this affair goes, it raises some important questions over the relationship between Corporations, and Consumers. More precisely, why in a supposed “Developed Country” do corporations engage in this behavior?
We don’t just see it with Coles and Woollies though. The entire mythos of the corporation is built off taking advantage of the consumer. No one was surprised when they heard about this story, just like they weren’t surprised over Harvey Norman making more than $22 million in profits from Job-Keeper payments through COVID-19.
This is a ubiquitous dynamic we see in corporate-consumer relations. Which indicates a structural cause, rather than just noise.
So, why do corporations take advantage of consumers? If we can identify the cause, then maybe we can design better firms.
But first we must learn some concepts.
Game theory: Competition and Cooperation
Learning some “Game Theory” will provide us with the proper framework to tackle this.2
In game theory, there are relationship patterns we see emerge from agent interactions. The most common of these are Competition, and Cooperation.
In competitive games, players' interests are directly opposed, meaning one player's gain is often another player's loss. This is because Competition is understood to happen in zero-sum environments, where the proverbial “pie” is finite. Chess is a classic example of a zero-sum game, since only one person can win.
However, if the pie is not finite, cooperation is incentivized. In cooperative games, players work together to achieve a shared goal to improve their individual payoffs.
Producer-Consumer Dynamics
Understanding cooperation and competition, we see that zero-sum perception can cause competition.
What occurred to me, however, was that it was almost as if Corporations and Consumers were in competition with each other.
We can think of the market in the Bazaar, where you must haggle with the seller to get the best price possible. Similarly, consumers want lower prices while corporations aim for higher profits.
Neither of them is trying to get to the equilibrium point in the Supply-and-Demand graph, but you are competing for that little bit of surplus value above or below that equilibrium.
They also compete for a myriad of other things, such as Information Asymmetries, and Consumer Attention.
These competitive dynamics cause these co-ordination failures we see through Coles and Woolworths price-gouging i.e., competing against the consumer for surplus value.
So, what are the solutions?
Consumer Connectedness
The competition between consumers and producers is largely characterized by a level of disconnectedness.
This is quite abstract, but more specifically disconnected information flows, incentive flows and goals. To have two entities in competition in often means for those two entities to be separate in some way from these flows.
The remedy for competition, is therefore to increase the connectedness between those entities.
Co-Creation is one way of doing this.
1. Co-creation refers to a collaborative process where consumers actively participate with producers or companies in the design, development, or improvement of products, services, or experiences.
Instead of being passive recipients, consumers contribute their ideas, preferences, and insights, which helps businesses tailor offerings to better meet their needs.3
“Eventually, the roles of the company and the consumer converge toward a unique co-creation experience, or an ‘experience of one’.”
A stakeholder model of capitalism can also connect the customer.
2. Stakeholder capitalism is another way of connecting consumers to corporations. This is a model of capitalism that prioritizes the interests and well-being of all stakeholders involved in a business, rather than focusing solely on maximizing profits for shareholders.
This is done through ESG investment, B-Corp certification or CSR Initiatives.
This hopefully aligns the incentives of companies with that of their consumers.
Theoretically this would facilitate collaboration between the companies and the consumer.
But there is one thing holding these methods back from taking over.
The New Market: Producer Cooperatives
Whilst these ideas which set out to connect consumers with producers, they ultimately fail in their implementation in the market system.
I argue that this is due to Market Pressure.
When a company seeks to integrate CSR and ESG, or Co-creation practices into their strategy, they face underperforming their competitors.
University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings.
“Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high-sustainability funds outperform low-sustainability funds.”4
This is the key problem; it doesn’t matter if how responsible your company is, if it isn’t able to compete in terms of performance. If you can’t then market share will be taken away from you, you might be bought out, lose talent, customer loyalty, and ultimately exit from the market.
If we want responsible business practices, they need to not only be competitive but outcompete the whole market.
This is where I think Producer Cooperatives can come in.
We often think of companies cooperating as a bad thing, as monopolies are seen as bad for innovation and low prices – it can result in the type of collusion we see from Coles and Woolworths.
But what if we had cooperation between Producers that also cooperated with their Consumers (or stakeholders)?
We would have the Consumer strategies such as ESG, CSR and Co-Creation, combined with Producer strategies, cooperation with other companies with aligned visions. We would have a virtuous governance system, with the manpower capabilities to outcompete the rest of the market.
Kind of like a ripple of good vibes throughout the market.
Think about it.
The only reason we disallow gigantism in markets is because the power imbalance is abused towards the incentives of the company.
But if the incentives of the company were aligned properly through these Consumer-Connected strategies, then the negative effects of that gigantism wouldn’t occur.
For this new type of firm, we don’t just want Producer-Consumer Connection, we need Producer-Producer Connection so that at all levels the components of the system are able to effectively coordinate and synchronize themselves according to the situation.
I’m not saying that all institutions should cooperate, but that there should be both dynamics of cooperation and competition at the same time between all levels and stratifications.
This would be quite a radical transformation in the industrial system, but this is exactly the reason why this idea must be investigated.
Conclusions
To summarize, current competitive dynamics between corporations and consumers, as seen in cases like Coles and Woolworths' price gouging, reflect deeper structural issues within the market system. Business models where not just competition, but cooperation extends to consumers and producers alike—are necessary to transcend the traditional industrial system into a sustainable industrial system that can outcompete and provide long-term transformation.
Now, I understand this is all very Utopian, but that’s the whole point of this post. I also understand that designing an industrial or market system through theory alone is insufficient. Real world implementation and experimentation is necessary, of which I think needs to be done, and which I hope to do in the future myself.
But I invite you to chip in too. If you have any thoughts or comments on the effectiveness, or caveats of the ideas I’ve presented here I would love to hear them.
This explains why only a few days ago I bought a packet of chicken mince from Coles for only $3.50AUD, when only a few weeks ago it was around double that. These supermarkets, noticing they’re in hot water are trying to soften the Australian public by lowering prices.
Game theory is a mathematical framework used to analyze decision-making in situations where the outcomes depend on the actions of multiple decision-makers, called players or “agents”. It helps understand strategic interactions where each agent tries to maximize their benefits or “utility”.
Design Thinking is an entrepreneurial philosophy which echoes Co-creation.
If competition is characterized by separability, then cooperation is characterized by oneness.