Clay Christensen: Competition Doesn't Drive Prices Down
Even though I've heard him say it before, the words from Harvard Business School professor Clayton Christensen always bring me up short.
Speaking to a group of health care professionals recently, Christensen said:
"Competition doesn't drive prices down."In fact, he said prices increase 8 or 9 percent a year in industries characterized by sustained innovation. Think of universities, where student fees climb year after year even though competition is fierce. That's because, to compete, these schools have to build ever better athletic facilities, food services and other costly upgrades, all of which drive up their costs.
So what drives prices down? Those of you familiar with Christensen's work know the answer: disruptive innovation. Essentially, the process whereby an upstart can win away customers from established industry leaders with a product or service that fills the customer's basic needs in a simpler way and at a much lower price. PCs disrupted the minicomputer business, Japanese car makers disrupted Detroit, and now Korean automakers are disrupting Japan.
Health Care Debate
This theory provides an interesting lens through which to view proposed solutions to escalating prices that rely on the introduction of more competition.
The Obama administration's proposal for the "public option," essentially a government-operated health care program to compete with the private sector, will not meet its goal of controlling prices if it simply sustains competition, according to Christensen's theory (He did not address this issue specifically in the talk I saw). The public plan would have to fundamentally disrupt the current model in areas including patient information technology, payment, service delivery, and regulation to be successful in its goal.
What's your opinion on this issue of competition versus disruption in setting prices? Can you think of examples where industry prices dropped dramatically without a disruptive innovation at the heart of things?