This week, my ECONS102 class covered monopolies. Monopolies arise because of barriers to entry - there is something that stops other firms from getting into the market and competing with the monopoly. Not all markets with barriers to entry result in a single firm operating (a 'pure' monopoly). However, all markets with barriers to entry convey some market power on the firms - the firms can set a price that is above their marginal cost, and make a profit.
One way that barriers to entry arise is when the government grants an exclusive right to produce and/or sell some good or service, or where being a seller requires a license. Patents are an example of an exclusive right granted by the government, while occupational licensing (like the licenses required to practice medicine, or to be a teacher or taxi driver) is an example of the latter.
A slightly weaker (but similar) form of barrier to entry to occupational licensing is created by a certification regime. Certification doesn't keep sellers out of the market, but it does convey some information to consumers. It is a form of signal of the quality of the seller. For signals to be effective, they must be costly (and a certification involves a cost to the seller who wants to be certified), and costly in a way that low-quality sellers would not want to attempt. Certification may impose restrictions on the practices of sellers, like requiring them to follow a code of practice, having a third party audit the operations of certified sellers, and/or having a public register of certified sellers, as well as a record of sellers who have lost their certification. Any of these characteristics of the certification regime would make becoming certified costly for low-quality sellers in such a way that they wouldn't want to become certified in the first place. And because the certification limits the number of willing sellers, it creates a barrier to entry.
Which brings me to this article from the New Zealand Herald from February:
New Zealand’s one and only SPCA-certified doggy daycare in Whangārei is urging other daycare centres to sign up so owners can start to “expect the best” for their pets.
The Grooming Lounge & Daycare is the first doggy daycare to join the SPCA-certified programme, which lets dog owners know of businesses willing to be independently audited to maintain high animal welfare standards.
Owner Rebekah Thompson said she signed up after a futile attempt to find daycare standards and guidelines when starting her business in 2020.
“There’s no guidelines or certification for doggy daycares, it’s completely unregulated as an industry...”
Currently in New Zealand, anyone can set up a doggy daycare facility with no minimum experience or qualifications.
SPCA developed a set of voluntary standards so businesses could raise the bar and help pet owners choose centres that put animal welfare first.
It costs $800 a year to get certified and businesses get audited twice a year. One of the visits is scheduled and the other is unscheduled.
“I went with it to show my customers I have nothing to hide, and that a third party is validating what we’re doing,” Thompson said.
Notice that the certification, as described in the article, corresponds almost exactly to the case I laid out at the start of the post. It provides a signal that "lets dog owners know of businesses willing to be independently audited to maintain high animal welfare standards". The signal is costly ($800 a year), and the twice-yearly audits will make the certification unattractive for low-quality doggy daycare centres, since it would reveal the real quality of the centres to dog owners.
What happens next will be interesting though. This could be just the start of a creeping regime of regulatory capture. The SPCA and certified doggy daycare operators could start lobbying government for mandatory regulation of the sector - note the scare quote in the article: “There’s no guidelines or certification for doggy daycares, it’s completely unregulated as an industry...” The government might introduce licenses for doggy daycare centres. That would make the barrier to entry into the doggy daycare market a bit higher. Who better to manage the licensing regime than the SPCA? Then, the requirements for getting a licence can be gradually raised, in order to "put animal welfare first". Again, the barrier to entry gets a bit higher.
Will we end up with high barriers to entry into the doggy daycare sector? If it was up to the SPCA and the already-certified operators, then yes. Watch this space.
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