Thursday, April 11, 2013

The Crony Light-Bulb Story

By Timothy Carney

“Politics as well as optics have played a part in making LED lighting in general more popular,” notes this thorough Economist article on hi-tech lighting.

Among other things, the Energy Independence and Security Act, signed into law by President George W. Bush in 2007, with widespread support in both houses of Congress and backed heavily by the lighting industry, effectively outlawed the traditional incandescent light bulb, because of its profligate consumption of electricity.

Focussed more on technology than politics, the article never explores why the lighting industry heavily backed the regulations. The explanation that makes the most sense to me is the simplest: the lighting industry saw that they would profit off the regulations.

Here’s the thing about competition: even when there’s not fierce competition in an industry, the threat of competition can exert positive influences, such as a downward push on prices.

A few companies — Sylvania and GE — dominated the incandescent bulb market, yet incandescents stayed cheap. Why? Because there were very few barriers to entry. The technology was a century old. The materials were basic (glass, tungsten, an inert gas, a metal base…), and the manufacturing process was pretty easy to automate. So if GE and Sylvania tried to jack up its prices, someone else could jump into the market,  undercut them, and probably win Wal-Mart’s business.

Absent barriers to entry, light-bulb profit margins had to stay low. GE could make superior bulbs — soft white, etc… — but people are only willing to pay so much of a premium for those. After all, we’re dealing with light here, which is kind of a commodity.

So, where to find barriers to entry? Maybe higher-tech bulbs? LEDs, CFLs, or other bulbs that offer longer life and greater efficiency. GE, Osram, and Sylvania jumped into  those hi-tech bulbs, got some patents. R&D expenses, higher manufacturing costs, proprietary information — these created barriers to entry and allowed heftier profit margins.

But what if you made a super-efficient-long-life bulb, and nobody wanted it? What if you couldn’t convince consumers that these bulbs were good for them? Well, that’s when you thank your lucky stars that you are GE, with the largest lobbying budget of any company in America.

Read the rest here.

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