Comment by TheMagicHorsey
2 years ago
I never understood how PE firms get blamed for rising costs in doctor's offices and vets. If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same? Where is the competition? Why is there a barrier to entry that prevents some new young doctor or vet from coming in and undercutting the PE business?
It's common for PE to buy many "mom n pop" practices with the goal of reducing competition (eg https://kgnu.org/investigation-finds-that-private-equity-was... )
Reducing the friction of starting new business is good. But I don't think it's sufficient to protect consumers. (If it was sufficient, we wouldn't need antitrust law at all, right?) For example, the rolled-up firms might have economies of scale that allow it to undercut new competitors.
They don't really prevent new competition, rather than target markets that specifically have a larger barrier to entry such that new competition is rare to form.
i.e. these vet clinics - a PE firm can buy up 40 disparate vet clinics in a large city then raise fees and cut staff. You may be lucky if a few new clinics appear over the next couple years once customers are fed up with the increased price and reduced quality.
It's still a win for the PE firm and a loss for most of the consumers.
Presumably because mom n pop businesses are not perfect optimizers and end up charging below the profit-maximizing price
This is exactly it - mom and pop businesses will charge enough for a comfortable lifestyle for themselves, but not really feel pressure to charge above that.
And if you have a vet, say, who is near the end of his career, he's already amortized all the training/educational expenses, and so can run out until retirement at relatively low rates compared to a brand new one.
The companies take advantage of this, but the customers also like it, too, because the offices will be fancy and feel new and they can schedule an appointment online.
Same thing that Great Clips et al did to barber shops.
The two groups have very different goals. One wants sustainable profit running a sustainable business, the other wants short-term profit by any legal means necessary.
> If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same?
Because they have a connection to their community, which means both (1) they're more vulnerable to backlash, and (2) they don't want to, because it would be taking directly from other members of their community.
Mom-and-pop shops tend to price based on what is fair. PE firms tend to price based on what is profit-maximizing.
The mom and pop, if they raise prices too high, punish themselves when they lose business. Perhaps even to the point of insolvency and folding.
If the PE firm raises prices too high, they don't punish themselves at all, because those customers go elsewhere. "Elsewhere" being just another office/practice which they also own. Mom and pop couldn't do that themselves. They didn't have monopoly-like powers to ensure their success.
> Why is there a barrier to entry that prevents some new young doctor or vet
Because the young ones are getting started, and do not have the capital to start a practice (or to buy an existing one). How much does a dental x-ray machine cost? How much do the dental chairs cost? How much does the lawyer that fills out the paperwork to get the permits for that retail space to be a dental office cost, per hour, and how many hours of paperwork?