There are some people in our industry looking for ways to raise the standards for contractors and widen the gap between them and the smaller companies. The idea is to raise the standards so high that it would eliminate the smaller guys and stop the stiff competition they offer.
The argument is to qualify all contractors through a certification program. Supposedly, that plan would raise the standards for members, who are the more established contractors, thus raising prices and disqualifying or eliminating the little guys that are not yet established. The underlying thought is to freeze out the small contractor and his low bid.
One argument in favor of this plan is to do something different, expecting differing results. However, change doesn't always produce improvement. Certifying will not stop price gouging. They just become certified price gougers.
A very wise man said long ago, “It's what you think that determines what you become.” Warren Buffet said that “fear and greed drives the stock market.” If that is true, then it is fear and greed that drive our economy. Fear and greed are what drive prices down. Certifying certain contractors will not change the way they think. We are where we are because of fear and greed; in other words, the basic way we think.
A program that brings contractors together by certifying or by encouraging those to be a member of an association presents some problems. For example, how do you keep people in the program? You can't force them and you can't bribe them. So how do you keep the members current and in good standing? You can promise them more and higher profits. But, then how do you deliver? There would have to be a continuing benefit for them to stay certified.
Another problem would be how to get the contractors to raise their prices. Some would and some would not. As soon as the contractors that raised their prices became aware of those that didn't, they would be forced to lower their prices back down to compete. Then the tendency would be to urge (or strongly encourage) everyone to cooperate in this price increasing campaign. The plans would be a close cousin to collusion.
It may be beneficial to discuss the concept of collusion, which refers to acts of cooperation or collaboration among rival entities. In the study of economics and market competition, “collusion” takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market form of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion.
Practices that facilitate tacit collusion include:
- Uniform prices
- Penalty for price discounts
- Advance notice of price changes
- Information exchanges
- Swaps and exchanges.