Wednesday, September 12, 2012

Information Inequality: Bain Capital Edition

One of the foundations of neo-classical economics is the existence of "perfect information" by all parties.  This "Perfect Information" model is the basis by which activities are measured in the real world.  The model presumes:

  • Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price.
  • Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market.
  • Perfect factor mobility – In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions.
  • Perfect information – Prices and quality of products are assumed to be known to all consumers and producers.
  • Zero transaction costs – Buyers and sellers incur no costs in making an exchange (perfect mobility).
  • Profit maximization – Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
  • Homogeneous products – The characteristics of any given market good or service do not vary across suppliers.
  • Non-increasing returns to scale – Non-increasing returns to scale ensure that there are sufficient firms in the industry.
  • Property rights – Well-defined property rights determine what may be sold as well as what rights are conferred on the buyer.
Those of us who've worked in the real world know that these are completely spurious concepts.  None of these, with the possible exception of the last one (property rights) exists, ever existed or will ever exist.  So using these as a model for economic behavior is preposterous.  Yet when you hear the "free marketeers" spouting off, this is exactly the model they're basing their utterances upon.

In Bain’s biggest acquisition, the $32.1 billion purchase of the hospital giant HCA in 2006, competitors agreed privately to “stand down” and not bid on the company as part of an understanding with Bain to divvy up companies targeted for leveraged buyouts, according to internal e-mails. 
The documents have become part of a lawsuit in Federal District Court in Boston brought against Bain and other firms by shareholders who say the firms’ bid-rigging artificially deflated the sales price of more than two dozen companies and cost them billions of dollars.
Bain and other private equity firms were colluding, forming an illegal cartel, to fix the price of assets they were seeking to buy.  In other words, they were manipulating the system to deprive the seller of access to the "perfect information" the model requires and now they've been caught red-handed doing it.  But of course, that's always and ever how these systems operate.  So in one fell swoop, the neoclassical model collapses and Bain Capital is revealed as the manipulative vultures they really are.  The system is thoroughly rigged and corrupt.
Documents filed in the lawsuit this week show that many of Bain’s takeovers last decade did exceedingly well for the company — a result, the lawsuit charges, of buying the businesses at deflated prices because of collusion with other equity firms. Plaintiffs in the case are former shareholders of the acquired companies.
I'm shocked, shocked to find that collusion is going on in here!

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