A guest post by Brian Lee, undergraduate economics major at UC Davis:
Joe Breeze, the man responsible for bringing the world its first purpose built mountain bike with beautiful craftsmanship of fillet brazing and incredible selection of parts to make the Breezer #1, is a true innovator. Mr. Breeze is mostly known for building the first purpose built mountain bike, but is also credited for many other unconventional bikes with interesting ideas. Out of many experimental innovations he played with, here’s an example that makes your jaw drop in surprise, or at least it did for me.
1989 Breezer Kite
Yet I’m not here to talk about this rather unconventional bike, but what’s on the seat post of the bike. What appears to be a single metal with a quick release lever stemming from the middle of the seat post to where a top tube would normally be is what’s called a Hite Rite, another brilliant idea by Joe Breeze in collaboration with Josh Angell. The Hite Rite was made to give mountain bike riders a quick way to adjust their seat post to either quickly drop down the seat post for a decent or bring the seat post height back to normal after a fun decent has ended. The idea itself is simply brilliant and the implementation to bring the idea to life is simple and cost effective. No longer did you have to get off the bike repeatedly to adjust the seat post height every time trail condition changed. And this was all done by merging a single piece metal spring with a quick release mechanism. Despite how brilliant and simple the Hite Rite was it did have its inconvenience. You have to take your hand off the handlebar. If this was simply riding a road bike on a pavement, taking a hand off the handlebar is not much of a big deal, but for mountain biking it’s a different story. Because of irregular trail conditions and the required maneuverability of trying not to fly over the handle bar, taking a hand off the handlebar at times could be difficult. I would imagine Joe Breeze saw this inconvenience as well, but learned quickly to take his hand off the handlebar without much problem. This inconvenience must have been fine for the man that raced down Repack on a klunker wearing nothing but good old jeans and a denim jacket, but for someone like me, a below average down-hill attempter, this is a bit of problem. Now 30 years later, Hite Rite’s idea lives on. The way I imagine Josh Angell and Joe Breeze saw how it should work is now here. Handlebar switch operated dropper seat posts are available so I don’t have to let go of the handlebars I’m holding dearly for my life.
Handlebar switch operated dropper seat post or simply dropper seat post utilizes the same idea as Hite Rite, but you can adjust the seat post height from your handlebars. Though the technology embedded in both seat post mechanics is different, the idea is the same. Take away the fancy technology–metal cylinders inside a seat post, oil pressure triggered action, utilization of nitrogen into a single seat post—and the idea of lifting a seat post for a climb and dropping it for a descent is still the same. The problem is that it only took some 30 odd years for the technology and cost advantage to allow a bit of selection for consumers. Looking at MTBR’s listed selection of dropper seat posts and their listed prices, counting only the ones with prices listed we have a total of 26 different dropper seat posts with an average price of $278.15 and a median of $277. Would you be inclined to pay $280 for a seat post when you can get a quick release seat post clamp for about $20 with inconveniences? $280 for a seat post alone is pretty steep.
It took about 30 years for Hite Rite’s idea to be used by different manufacturers even including the 20 years it took for the patent by Josh Angell and Joe Breeze to expire. A simple idea to change seat post height without getting off a bike took 30 years because firstly consumers had to be willing to pay for the innovation cost associated with a dropper seat post, secondly manufacturers willing to implement the innovation had to find it cost effective in terms of technology available and associated costs for them to make a profit. This decision to utilize an innovation in hopes of successful market response with profits in an oligopoly market structure is what I like to call oligopoly of innovation.
Dropper seat post is an example of how complex technology utilized in a modern mountain bike comes at a cost. Manufacturers producing the technologies and consumers buying them bear these costs. In comparison to the $280 price tag of a dropper seat post, the intensive engineering of a full suspension mountain bike with suspension fork, rear shock, implementation of swing arm, and cutting-edge material science in frame material comes at a hefty cost. A few thousand dollars for a full suspension mountain bike is a norm, and it has its reasons. Production cost of mountain bikes is expensive from high R&D cost, high manufacturing facility set up cost for mass production, and high marginal cost of production. High R&D cost and manufacturing facility cost is what economics calls a fixed cost. This high fixed cost is the barrier that only allows capital intensive manufactures to produce mountain bikes. A high fixed cost is a barrier that only allows those with capital to enter into the production market. For example let’s assume, we have 1000 equally skilled potential mountain bike manufacturers, and it costs $20 to set up a factory. Out of our 1000 willing potential entrants only 5 have the $20 factory set up cost. Then there are only 5 entrants to the market despite how many are willing to enter the market. Only 5 have the needed fixed cost to set up factories. If all 1000 entrants were able to enter the market freely, then it would have been a perfectly competitive market, but we only have 5 entrants. Now the market is a monopolistic oligopoly, where 5 firms share the market with equalized monopolistic pricing and shared monopolistic quantity across 5 firms. This ensures the mountain bike production market is not a perfectly competitive market where all manufacturers are price takers of the market with easy entry. Otherwise we would see a mountain bike manufacturing market with hundreds if not thousands of manufacturers producing a good at the efficient market price P* with optimal quantity Q*. This is point a where the quantity and the price set in the market set optimally in a perfect competition. Instead we currently have an oligopoly. Only a handful of firms share the market according to their market share with monopolistic pricing; at point B instead of point A. Point B results in a higher monopolistic price and lower quantity overall in the market.
From the figure above we can see that price and quantity moves from point A to B as the market moves from a perfect competition to a monopoly.
So what is implied if the mountain bike production market is an oligopoly with high fixed cost? It implies that innovations can almost only come from a market player that is able to implement the technology or an outsider with brilliant innovation waiting to be bought out by someone already in the market. For a competitor in an oligopoly to gain an advantage against its competition is to innovate. Differentiation of its own product is the key in survival. So it is only natural that bike companies nowadays hold lots and lots and lots of patents or at least indicate patent is pending on targetable innovations by competitors to ward them off. Because of high cost of R&D associated with an innovation, a patent pending is a threat to other firms to declare that you are already invested in the technology, and it’s not cost effective for a competitor to enter at this stage. In a nutshell product differentiation through product innovation with patents is a way to increase market share. However, as I rambled about high costs associated with implementing innovations, companies are uncertain which of its gazillion innovations legally guarded by intellectual property rights is the one that will make them the winner of the market. For an innovation to hit the market and make profits to stomp on competitors, a firm is also risking further R&D cost for successful mass production market implementation, other fixed cost associated in producing the innovation incorporated mountain bike frame, and increase in marginal cost of production unless the innovation itself is that of a production process. As consumers we want to see brilliant ideas incorporated on our bikes, but simply from a firm’s perspective it’s an opportunity to increase market share with associated cost that a lot of times I assume stops an innovation from hitting the market.
So there you have it. There’s an oligopoly on which technological advancement gets utilized on a mountain bike. Innovation is controlled by few oligopoly market sharers in the mountain bike world. An abstract as free as an innovation is controlled by profit motivated firms to enhance their chance of increasing profits by product differentiation. This is an oligopoly on innovation.