Is the Consumer Always Sovereign in the Free Enterprise Market Economy

Theoretically, the free enterprise market economy produces a situation in which the law of supply and demand, in conjunction with a competitive economic environment and well-informed consumers guarantees consumer sovereignty. The consumer possesses a significant advantage over suppliers who must compete for their custom, effectively placing economic power in the hands of the consumer. However, problems arise when this theory is applied to the realities of national and international business economics.

These disparities will be examined further in this paper.To begin with, it should be noted that at present no truly free market economy exists anywhere except in theory. Western liberal democracies, particularly the US, proclaim, promote and actively enforce the virtue and practice of free market capitalism, whilst stoically clinging to mercantilist principles of protectionism and monopoly control. This corrupted version of the free market has been termed 'Managed Liberalism'.1Micro economic systems, such as those which continue to function in small communities at the local level, do display characteristics convergent with the classic theories of the free market as expounded by the early economic thinkers.

Small firms compete for a limited supply of business, and in such a competitive market a near Horizontal Demand curve develops."Each firm in a perfectly competitive industry faces a horizontal demand curve...

However much the firm sells it gets the market price. If it charges a price above Po it will not sell any output: buyers will go to other firms whose product is just as good. Since the firm can sell as much as it wants at Po [Market Price], it will not charge less than Po. The firms demand curve is horizontal.

2If supply outstrips demand or if firms fail to meet consumer expectations of quality, service, integrity and cost, demand for their services falls and they go bankrupt. At this level a considerable amount of power rests with the consumer, indeed a firm that fails to meet the expectations of even a relative minority of potential consumers can suffer disastrous consequences.This is due to the fact that individual consumers posses the power to directly affect the income of the firm and can also easily co-operate with other consumers to disseminate information about the quality, efficiency, cost and desirability of the product or service the firm offers. This allows easy avoidance of unscrupulous or otherwise inferior firms, forcing companies to consider the wishes and opinions of their customers.The efficiency of this system rests on the variety of consumer choice and availability of adequate consumer information. It is vital that monopolies and cartels do not exist and that consumers remain aware of the practices of firms and are willing and able to share this information and act upon it.

3Macro economic environments, as have developed over the past 50-60 years, where large and powerful conglomerates control large sectors of the market operate in reverse of the micro economic system.National and particularly Trans-National Corporations (TNC's) are able to manipulate the supply/demand curve, creating their own demand and cushioning against any consumer backlash Their interests are spread over such a large area that only truly global trends are felt by them in the long term. If demand falls in one area goods can be redirected to an area of higher demand, thereby increasing profit in the second area and pushing down supply in the area of lower demand, increasing virtual demand and with it price and profitability4. The spread of multi-media advertising has also served to undermine consumer information and perception. In this manner, it is possible for the vastly powerful corporations to squeeze smaller firms out of the market, thereby reducing competition and choice and hence the power of the consumer.The free market system is destined to create or at least attempt to create monopolies and cartels.

Legislation to prevent this has proved to be ineffective and insufficient of a deterrent. For instance Microsoft was recently fined �330 million (497 euros) by the EU commission for antitrust infringements, however this admittedly large sum represented only two weeks of revenue, a paltry amount when compared to the benefits of the practice and the assets of the firm, ($53 billion in cash)5Corporations aim to maximize profitability and stability whilst maintaining the highest level of economic and capital flexibility. In order to achieve maximum stability and profitability it must be the goal of any company to control as many economic and political variables as possible. The ideal situation in which to do this is a monopoly or cartel. If a company controls potential supply, its workers and can effectively manipulate the demand of the consumer then it will achieve its optimum operating situation. Therefore, despite legal controls conglomerates seek to achieve this directly where possible and indirectly otherwise.

A good example of this is the diamond suppliers De-beers, which controls the vast majority of diamond production in Africa and as this constitutes a large proportion of the world's supply (50%), it is able to keep the price of diamonds artificially high by controlling their release on to the market, although it has recently stated that it will abandon its expensive cartel6.As well as controlling supply, corporations also carefully manipulate consumer demand (or greed) for the products and services it produces. By doing so it creates a more elastic demand curve, tightening its grip on the consumer and increasing its market share as much as possible, while maintaining greater capital flexibility than would otherwise be possible, it is therefore understandable and not unsurprising that they attempt to do so.The greater the grip and the larger the share of the market a corporation holds the greater the profitability and power of the corporation.The manipulation of consumer taste through advertising and aggressive marketing tactics is highly evident in the snack food industry. Over a period of 10 years from the early 1980's to the mid 1990's Walkers snack foods, itself a wholly owned subsidiary of the American giant Pepsi, increased its market share of the UK potato crisp market by 34% over its competitors in a zero sum calculation, pushing its rival Golden Wonder to the brink of bankruptcy and assimilating the products of its competitors, namely Golden Wonder What sits and Smiths Salt n' Shake.

7This deliberate, but wholly understandable, move by international corporations toward a more and more comprehensive control of the global, national and local markets, and the assimilation of smaller competitors has served to dramatically undermine the choice, information and the influence available to consumers. This highlights the natural competition between the interests of consumers and suppliers. The side effect of this competition is a fundamental weakening of the consumer position within the market, slowly creating a situation in which the consumer, as both consumer and employee, have a gradually reducing capacity as rationally self-interested individuals and active powerful participants in the workings of the market.Globalisation and the increasing integration of international business has led to the emergence of huge multinational conglomerates, many of which generate more profit per annum than many developing and some developed countries. For instance General Motors grosses far more annually (�120 Billion) than New Zealand (�60 Billion)8.

Smaller firms are squeezed out or assimilated by their larger competitors, creating even more monolithic conglomerate structures making it increasingly difficult for new companies to invade areas of the market already dominated by large corporations. If it is achieved at all, it will be in marginal areas. An example of such is the chocolate industry, currently dominated (in the UK) by the three giants, Cadbury, Mars and Nestl�. The Green and Blacks Chocolate Co, a comparatively small company specialising in high quality, fair trade chocolate increased its market share by 180% in 2003. However shortly after the potential of the brand became apparent Cadbury acquired a 5% stake in the company.9Large corporations are also diversifying into more and more fields of service and production, extending their interests further afield, many acquiring stakes in media/communications and financial companies.

This gives further control of consumer demand, through advertising, credit limits and interest rates, and positive endorsement of short-termist business practice and procedure. The former attacks the range of consumer choice, for even if they buy products that appear to be competing, (Cadbury Vs. Green ; Blacks) they are in fact continuing to support a single supplier, and the latter undermines consumer information and their ability to make rational self-interested choices.As the concept of the free market is based on the concept of rational self-interested individuals the large corporations and their activities makes it impossible for consumers to make well informed, rational decisions, as accurate information is difficult to find, and is fast becoming a rare commodity. Thus the free market concept is undermined.

The UK, despite continuing to posses a non-corporate owned information service, the BBC, is still suffering a high level of consumer power retrenchment at the hands of TNC's and prevailing political/economic trends. This is in part because Britain is far more globally integrated and internationally dependent than its other G8 counterparts and is therefore more open to the pressures of the international business community."The UK is the only really 'Globalized' large industrial country in the G7 group. Its pattern of heavy dependence on overseas trade and foreign investment makes it compatible with much smaller and traditionally highly internationalised country's like Belgium or the Netherlands. Its pattern of dependence on inward foreign investment makes it look more like an upper echelon developing country such as Mexico or Malaysia than a member of the G7.

10"As corporations tighten their hold on the UK through Foreign Direct Investment (FDI) and mergers, the opportunities for consumers to significantly influence the operations of a company become less and less11. The consumer is increasingly assailed by manipulative marketing strategies and a lack of real choice. Modern companies have become adept at manipulation and misdirection and frequently undermine even well organized consumer groups. For instance, the McDonalds Corporation has repeatedly crushed opposition by wageing long and costly court battles in the civil courts which no private individual and few consumer groups can afford to pursue over a prolonged period.Consumers find it increasingly difficult to easily acquire information about both the products and services they buy and from where they originate. This leads to increased apathy on the part of consumers who increasingly feel that they have no control and indeed no right to control companies or the business sector.

An opinion fostered by the prevailing Neo-Liberalist climate of political economy that exists in Britain, America and Europe today.The combination of these factors, the emergence of conglomerates, the changing political climate (in favour of business rather than the consumer) and increasing Consumer/Voter apathy has critically weakened consumer power. "The effect of high levels of inward and outward investment and of a relatively high trade to GDP Ratio is to expose the domestic economy very directly to external shocks."12However, despite this, major trends do still dramatically affect firms and businesses. An example being increased health awareness in developed countries; sale of junk food and tobacco have reached unprecedented low levels in recent years.

As a result companies such as McDonalds have begun to offer healthy alternatives to their standard products, 'Salad Plus' as an alternative to the 'Big Mac'. This demonstrates that despite the best efforts of corporations, mass consumer taste does still posses power in the economic community.Many TNC's now seek to control wider shares of their own and other profitable market sectors in order to lessen the impact of consumer trends and economic crises, the latter being the more frequently quoted.As previously mentioned, the more market variables a company controls, the more stable and profitable its position within the market economy. Unfortunately, one of these variables is consumer choice.

Diversification and vertical integration have created a situation where companies can control multiple subsidiaries under the direction of a parent company13. For instance Tate and Lyle, the sugar retailers, have diversified into sweets and confectionaries, whilst vertically integrating sugar cane farming, refining, importing, packaging and retailing. This makes them vastly less vulnerable to mass consumer trends and market fluctuations, saving an economic collapse.Conglomerates have also begun to invest in the stock market, further reducing the direct influence of the consumer. A greater proportion of their income is generated not through the sale of goods and services, but from the stock market.

The ability of consumers to affect a company through direct purchase is reduced, thus strengthening the position of business and weakening that of the consumer. "What is good for business may not necessarily be good for the economy overall"14Even in the developed world Governments are forced to accede to the pressures of TNC's whilst subsuming the best interests of the consumer. "International competitive pressures are now held to dictate every aspect of government policy, from promoting industrial efficiency, to education, to social welfare15."However strong Governments do still posses the ability to affect the working of business directly, an example would be minimum wage or environmental controls.

Despite the efforts of corporations these measures have gone ahead.Governmental controls of this type are now the only real control that consumers can hope to wield against corporations all be it indirectly. The vast majority of consumers are voters, therefore governmental action can be seen as indirect consumer action and it is in this area that consumers retain a level of powerful influence. It is vital that government provide increased corporate controls both at the local, national and international levels, providing they are in line with the majority view of there electorate, the consumers.Once an economic community grows over a certain size, once its number of consumers grows beyond that which can effectively collaborate and share information to counter advertising and media propaganda the balance of power within the economy shifts away from the consumer and in favour of the supplier.

This can only be effectively be countered by government or some other powerful supra-national body. Evidence for the necessity of consumer coordination and cooperation is amply available at the micro economic level. Word of mouth advertising is the most effective, both in the positive and negative sense. In the macro economic sector close consumer cooperation is unavailable.

If the consumer is to achieve sovereignty in the macro economic sector it is important that this void be filled.It is the conclusion of this paper that in micro economic environments, such as those which existed in the time of Adam Smith16 and continues to exist today at the local level, do produce a system in which the consumer possesses considerably more power than suppliers, through virtue of consumer choice and the easy dissemination of information, effectively maintaining consumer sovereignty in their economic environment.However, today's increasingly Macro economic environment, the large multinational conglomerates that operate within it increasing diversification, vertical integration and the globalisation of economic markets has led to the increasing diminishment of consumer power.Whilst the market is still vulnerable to mass trends and fluctuations, these are increasingly transferred away from the corporations and onto the consumer and/or employees. Through control and manipulation of the media and advertising corporations also exert significant control over the demand as well as supply curves, rendering the consumer powerless as an individual or small group.The most stable situation for any corporation is to fully control the market, and since insufficient measures have been taken, or indeed advocated to address this, the consumer is no longer sovereign in the free enterprise market economy.