Counting the cost of the sum of the parts

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When our forefathers passed legislation to defend the financial interests and artistic integrity of future Leonardos and Palladios, it is unlikely they imagined that they were also protecting those whose creative talents are expressed in the sweep of a car fender or the flange of a toner cartridge. At the moment, regulation for original designs varies across the EU nations with poor consequences for both consumers and producers.

King Gillette, inventor of the safety razor, was a pioneer in marketing too. He discovered that he could give away razors because he would more than recoup the cost from sales of blades. It is a strategy that has been widely imitated. If you buy an inexpensive laser printer, you will soon find that a cartridge of toner costs almost as much as the machine itself. You may think the car you purchased was good value, but wait till you see the bill when someone breaks one of your tail lights.

Consumers are more sensitive to the advertised price than to the overall cost. And for a complex product such as a car, which needs to be insured and refuelled, maintained and repaired, that cost is difficult to calculate. That is why charging structures with an attractive initial proposition and high bills to come are more and more common in modern economies.

But the outcome does not serve anyone very well. Consumers often think they are getting a bargain but they are usually wrong. Too many people drive around with broken lamp assemblies because it is too costly to get them fixed. Durable goods are thrown away before the end of their useful lives because a replacement costs little more than a repair.

Buyers mistakenly think they benefit from the low prices of original equipment because they have not fully appreciated that the high price of spares is a direct corollary. Sellers mistakenly think they benefit from the high price of spares because they have not fully appreciated that the low price of original equipment is a direct corollary. The aggregate profitability of supplying goods over the lifetime of the product is determined by the overall competitive conditions in the original markets. In cars, printers and razor blades, rivalry is fierce.

Producers would be better off if they could establish a better relationship between prices and costs, but there is little that an individual manufacturer can do to bring this result about. If purchasers are locked into a particular supplier for spares and consumables, the price of these items will always tend to drift up. Eventually some producers achieve such a bad reputation for the high maintenance costs of their products that it begins to damage their initial sales.

Occasionally, companies respond with fair pricing initiatives, encouraging customers to look at the overall cost of supply rather than single elements of the package. The problem is that, as King Gillette discovered, shrewd sales people will always exploit the insatiable human weakness for a bargain, even if the benefit is more apparent than real. Who among us has not bought something we did not want because it was allegedly marked down from a much higher price?

These issues are scheduled to be debated at the highest levels of the European Commission today. Romano Prodi and his colleagues must decide what to do about a directive to create a single European market in the supply of parts for the repair of durable goods. The Commission has been lobbied intensively by different interest groups – particularly carmakers – and is split down the middle.

Some consumables and replacements – such as oil and car tyres – are standardised items produced by many manufacturers. There are other components for which only the original manufacturer has the knowledge and equipment required to make a satisfactory product. But there is a large grey area in between.

The degree of competition depends on the legal protection given to original designs, and different countries have different rules: these regulations are more restrictive in France and Germany than in Britain or Italy. When our forefathers passed legislation to defend the financial interests and artistic integrity of future Leonardos and Palladios, it is unlikely they imagined that they were also protecting those whose creative talents are expressed in the sweep of a car fender or the flange of a toner cartridge. But our modern concept of intellectual property embraces a broad view of originality, and that is why body panels available in the UK cannot legally be installed in France. Today’s debate seeks to establish a common European standard. It should be a liberal one. Competition is almost always in the best interests of consumers. This is one of the frequent cases where it is also in the best long-run interests of producers.

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