The Guardian reported last year on how fire engines in London had been sold to a private equity firm for £2. Although fire services grew from private insurance companies, the modern fire service is a clear example of how certain organisations benefit from being owned and run by the government. There are very large positive externalities from a fire service – they not only stop a building burning, but prevent damage to everything else in the neighbourhood. People’s willingness to pay for a fire service is much lower than society’s benefit. Continue reading “Is it better to own nothing?”
The phenomenon of economies of scale can be seen in many industries – particularly where there are large fixed costs, such as a mobile base station network, a graphics engine for videogames, or the turbines on a wind farm. In order to reduce costs as far as possible, operations should be made as large as is feasible. However, companies only have a fixed level of demand, which limits their ability to take advantage of this.
One way of increasing demand is to merge with a competitor, and therefore acquire a large number of extra customers. This, of course, is a major exercise and involves regulatory problems, costs of due diligence, changes to operations and governance, and many other factors. Rather than this drastic step, companies can collaborate to share costs across their combined userbase. Continue reading “Sharing with competitors”