Tag: Collusion

July 24, 2018

Controlling Outcomes by Controlling Table Stakes

Nielsen estimates that 84 million people watched the first presidential debate of the 2016 election. That was 36.4% of eligible voters and 60.5% of actual voters. Given how many US voters watch the presidential debates, participating in the televised debates is considered a table stake for having a shot at being elected president.

The official sounding ”Commission on Presidential Debates” decides who gets to be on the debate stage. It’s formation and stated purpose is interesting:

After studying the election process in 1985, the bipartisan National Commission on Elections recommended “turning over the sponsorship of Presidential debates to the two major parties”. The CPD was established in 1987 by the chairmen of the Democratic and Republican Parties to “take control of the Presidential debates”. The commission was staffed by members from the two parties and chaired by the heads of the Democratic and Republican parties… (wikipedia)

The League of Women Voters had been the previous host of the debates.

In 1988, the League of Women Voters withdrew its sponsorship of the presidential debates after the George H. W. Bush and Michael Dukakis campaigns secretly agreed to a “memorandum of understanding” that would decide which candidates could participate in the debates, which individuals would be panelists (and therefore able to ask questions), and the height of the lecterns. The League… released a statement saying that it was withdrawing support for the debates because “the demands of the two campaign organizations would perpetrate a fraud on the American voter.” (wikipedia)

Ross Perot’s 1992 bid for president as an independent was disruptive. Perot took 19% of the vote and many believe that had he not run, Republican incumbent George H. W. Bush would have been re-elected instead of Democrat candidate Bill Clinton.

The CPD excluded Perot from the televised debates in 1996.

Changing the Table Stakes

Four years later, the commission changed the rules of the game entirely, requiring that candidates have at least 15% in 5 national polls in order to get on the debate stage. Which polls count are consider to be “national polls”? The CPD decides.

The creation of the Commission on Presidential Debates (a cartel) and the 15% rule clearly benefit the candidates of the two major parties in the United States at the expense of all third-party (or independent) candidates and the voting populace. This legal collusion has been extremely effective at controlling who has a serious shot at running for president and who ultimately becomes president.

So not only is being on the debate stage a table stake, but having 15% in “5 national polls” approved by the CPD is considered a table stake as well.

When structured in this way, table stakes can be a form of moat or barrier to entry. So whoever controls the table stakes can have tremendous control over the outcome. Check out Jeffrey Pfeffer’s Power: Why Some People Have It and Others Don’t for a few great examples of establishing and controlling tables stakes in corporate environments – even if you’re at the bottom of the power hierarchy.

December 15, 2017

The Raisin Cartel

In 1937 the US Department of Agriculture picked a group of raisin farmers and handlers and gave them the power to constrict the amount of raisins that all farmers could produce in a given year. This cartel, called the Raisin Administrative Committee, made it a federal crime to attempt to sell more raisins than they determined.

Fun facts: The United States Department of Agriculture, created in 1862, is part of the administrative branch but basically has the power to create laws – a role that’s traditionally reserved for the legislative branch. In 2017 the USDA employed over 105,000 people and had a budget of $151 billion, nearly 8 times NASA’s budget.

Even though cartels, collusion, price-fixing, and other monopolistic practices are clearly violations of US antitrust law, in 1937 a few lucky raisin farmers and handlers became part of a government-protected cartel. The stated purpose of the cartel was to “stabilize” the price of raisins.

Specifically, the Raisin Administrative Committee “a requirement that growers set aside a certain percentage of their crop” to give to the Government, “free of charge.” These raisins are then destroyed, donated, or sold in “noncompetitive” markets, which artificially increases the price of raisins for consumers like you and me (but not my mom – she hates raisins).

In the 2003-2004 growing season, raisin growers were required to set aside 30% of their crop. But that was a relief from the season before when growers were forced to set aside a whopping 47% of their crop.

But like it or not, the rules were the rules. Until they weren’t.

In 2002, when the Raisin Administrative Committee told Marvin and Laura Horne that they could only sell 53% of their raisin crop, they choose to disobey. “The Government sent trucks to the Hornes’ facility at eight o’clock one morning to pick up the raisins,” the Supreme Court opinion reads, “but the Hornes refused entry.”

They were fined $480,000 for the market value of the raisins – even though they would not be compensated that amount when forced to give them to the government – and an additional $200,000 for disobeying orders. Over the next 12 years, the case bounced around various courts until it finally reached the Supreme Court in Horne v. Department of Agriculture.

The court’s opinion was that “Raisins…are private property – the fruit of the growers’ labor – not public things subject to the absolute control of the state.”

Another raisin grower, Dan King, thought that Marvin Horne had acted unfairly: “I think that there’s a set of rules that everybody was playing by during the time that he was not. You know, it’s like everybody stops at the stop sign but not everybody. [If] somebody doesn’t, it causes a problem. And we needed to have the whole industry following the rules or nobody following the rules.”

This is exactly how cartels normally collapse – some members want more for themselves and begin to “cheat.” They produce more than their quota and soon enough everyone is cheating. Except in this case, “cheating” meant competing to supply the right product to the right customer at the right price. While the Supreme Court’s opinion may mean that the cartel members can no longer constrain supply and therefore inflate prices, it also means that consumers pay a lower price on the free market – a clear win for consumers.

Notes: 1) Apparently Dan King is a member of the Raisin Administrative Committee. 2) By the way, the ‘S’ to the far left of his name stands for “Sun-Maid Member Representative,” which collectively controls over 20% of the committee at present. Interesting that a private company has any say in a government agency, let alone a 20% say. 3) Also of note was that the Chooljian Family represents 3 members (and 1 alternate), the Kazarian family has 2 members, and the Sahatdjian family (related to the Sahatjian family) also represent 3 members. Together, these three families control an additional 17% of the member votes. 4) Finally, it turns out that “Sahatjian” v “Sahatdjian” is not a typo but that the two families are related. In fact, there was a real “Sahatjian” v “Sahatdjian” in 2014 – a huge (>$3.25m) lawsuit between the two related families that seems to suggest that things get ripe in the raisin racket frequently – even within families. (Screenshot: Dec 14, 2017)

While I’m glad that things worked out okay for the Hornes and for US raisin consumers, it does make me think about all the other places where consumers are paying artificially high prices because of cartels and how many of those cartels are being protected by those in power.

And while this is an amazing case of a farmer breaking bad rules in order to change them for the better, there was clearly a large element of “right time, right place” involved in the Horne case. Which makes me wonder: How do you know when to be the raisin rebel or when to surrender to the rules?

Credits & Sources:
I originally heard about the Hornes through the NPR Money podcast – one of my all-time favorite podcasts. And here’s the Supreme Court’s 42 page opinion.

December 13, 2017

Why You Should Buy Your Diamond Engagement Ring Online

As I mention in The Strategist’s Guide to Buying a Diamond Engagement Ring, if you’re trying to maximize value for your budget, you should strongly consider buying your diamond from an online retailer. I make the case for this tactic in this article. Also, be sure to read How to Evaluate a Diamond Engagement Ring.

Brick and Mortar Jewelers

Let’s start with a quick look at the brick and mortar retailers.

Buying diamonds at a brick and mortar jeweler is like buying bottled water at the airport – it’s never a good deal. You will – objectively – overpay for any diamond you buy from your local jeweler.

When you buy a diamond from a brick and mortar store, you are paying not only for their huge markup, but for the store’s sophisticated lighting systems, their rent, their security, the cost of holding inventory, insurance for all of the diamonds and jewelry, the salaries of managers and salespeople, and the profits that are returned to the owners and shareholders.

While this cost structure exists for basically every jeweler, there are high-end jewelers and low-end jewelers. The low end guys – any chain you’d find in a mall except Tiffany & Co – have the worst incentives. Generally, they buy the worst diamonds and try to fool you into buying them at an insane markup. I don’t even recommend visiting low-end stores because you won’t even get a good education from their sales reps.

So I strongly recommend going to the highest end store in your area to take a look around. While high-end retailers also have enormous markups, at least they buy decent diamonds, will treat you well, and help educate you. You also won’t find as much of the sleazy sales techniques at higher end jewelers since they’re mostly dealing with a less price-sensitive customer who wants gorgeous jewelry and will basically sell themselves on the jewelry. They literally serve a different market, not just a different price point.

If your area doesn’t have any high-end jewelers, go to the nearest Tiffany & Co. where you’ll get a pleasant and consistent experience. But if you’re looking for value, do not buy from them! Tiffany diamond engagement rings are 2 to 3 times more expensive than buying online and Tiffany doesn’t use a third party to certify their diamonds.

Why Buying Online is Better

Online retailers simply don’t have most of the costs that brick and mortar jewelers do. Their business model allows for them to pass most of those savings on to you while still being able to run a healthy and self-sustaining business.

Online retailers list diamonds that other manufactures or wholesalers have rather than buying and holding their own diamonds. A good online retailer holds no inventory and may never even touch a diamond they help sell. Their job is to be a trusted marketplace like Amazon or EBay.

Online retailers don’t have to rent expensive commercial real estate in malls and shopping centers, or hire fleets of educated sales people to convince you why their diamonds are somehow different from the diamonds across the street. Online retailers also don’t have to pay the expensive advertising rates for billboard, newspaper, magazine, direct mail, and television ads.

If buying a diamond online sounds risky, you need to do more research. The two most reputable online retailers – James Allen and Blue Nile – have better return, resizing, and upgrade policies than most brick and mortar retailers. And aside from the huge price differentials, online retailers also have much better selection.

Until the diamond cartel is broken up, you’re going to overpay for your diamond. But you don’t have to overpay twice.

After I bought my diamond and ring online, I stumbled upon this regretful article from a guy who almost bought a ring online and then, in his words, “chickened out.” If you’re on the fence about buying online, I recommend reading his story.

Knowing I could simply return the ring if I didn’t like it made my final decision much easier. And if I ever need to buy a diamond again, I won’t even consider a brick and mortar retailer.

Final Considerations for Buying Online

There came a point when I was confident that the diamond I was about to buy online was going to be fantastic. But I still had questions for James Allen – the online retailer I selected.

Q: Could I save some time, hassle, and money by buying the ring online too and have James Allen do the setting? Would they do a nice job?

A: Yes. At this point in the process I could feel myself becoming exhausted from the process of doing so much research and making so many decisions. So I took a break for a bit and then dug back in for one last round of research. People love their rings set by James Allen and I love how well mine was done too. I looked at the diamond ring I bought under 60x magnification and I was much more impressed by the quality and symmetry of the setting than I had expected to be.

Q: Was the shipping secure? Did I need to be there to sign for the ring?

A: Yes, shipping is secure and insured. Someone must sign for the ring and a note cannot substitute for a signature.

Q: Was the box discrete?

A: Yes, very. It doesn’t say James Allen or anything about rings anywhere.

The presentation of the ring (and associated paperwork) was classy and high quality. I’m very pleased with everything about the experience.

James Allen also has a 30-day, no-questions-asked return policy and a 60-day resizing policy. They also perform free inspections and cleanings, every 6 months – all you have to do is pay for insured shipping ($30) and they ship the ring back to you for free.

My biggest complaint about James Allen had to do with how you select the ring size. I knew that I needed a 4.75 size ring but the web interface only had options in half size increments. It wasn’t clear that they could make the ring a 4.75 and it wasn’t obvious where to even make this request. (As of late 2017 the answer is put notes like this in the “Special Instructions” box during the checkout process.)

The silver lining of this minor annoyance was that I had an opportunity to test out some of their customer support. I got a clear answer immediately and the person helping me didn’t try to nudge me at all to make a purchase. I tested their customer service a second time to better understand the process of getting a ring cleaned.

Finally, it’s worth mentioning here that I did research the other reputable online diamond retailer, Blue Nile. From my experience, their loose diamonds are very similar and you can find high-value diamonds on either site. I didn’t, however, like Blue Nile’s packaging and presentation and I was able to get a much better look at diamonds on the James Allen site. James Allen had 20x magnification for every diamond I looked at while some Blue Nile diamonds didn’t have images at all. Blue Nile is the only other online retailer aside from James Allen that the pros like, but it just wasn’t the right choice for me.

Be sure to check out:

December 13, 2017

Why You Shouldn’t Buy a Diamond

Diamonds are sort of terrible.

- They have poor a resale value and are therefore not a good store of value or a good investment.
- They are both expensive and over-priced.
- They are brittle and easy to lose.
- They are primarily in demand because of an incredibly successful century-long marketing campaign.
- They are a very complex product and jewelers use their information asymmetry to take advantage of buyers.
- They are mostly controlled by a cartel that artificially constricts supply (collusion) to inflate prices. The cartel is supported primarily by bribing government officials wherever diamonds are found.
- They are often mined by people in pretty terrible situations. And even though some people’s situations might be even worse if they weren’t mining diamonds, the industry might not be something that you want to willingly support.
- They often distract from the meaning that they supposedly symbolize (a couple’s love in the case of a diamond engagement ring).
- Finally, there are many substitutes and near-substitutes for diamonds like other gemstones, moissanite, cubic zirconia, and lab diamonds – each of which don’t have most of these problems.

But even though there are so many reasons not to buy diamonds, you may find yourself in a position where you’re going to get one anyway. This doesn’t make you or your fiancée evil. It just makes you human.

If you are lucky, there may be a diamond in your family that’s not being used. Ask for it. If your diamond is for an engagement ring, then using a family diamond not only adds more meaning to the gift but it’s also a smart financial move – wins for any budding partnership.

You have no control over the diamond cartels, their century of market manipulation, and their consumerist advertising – you’re already screwed there. But if you’re going to buy a diamond, you might as well not get screwed a second time by things you can control.

If this is the position you’re in, check out my other posts here: