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August 31, 2009

Regulation. It’s About Eliminating The Competition

by Brad Warbiany

This follows quite a few themes I’ve discussed at length here:

The Consumer Product Safety Improvement Act (CPSIA) requires third-party testing of nearly every object intended for a child’s use, and was passed in response to several toy recalls in 2007 for lead and other chemicals. Six of those recalls were on toys made by Mattel, or its subsidiary Fisher Price.

Small toymakers were blindsided by the expensive requirement, which made no exception for small domestic companies working with materials that posed no threat.

So while most small toymakers had no idea this law was coming down the pike until it was too late, Mattel spent $1 million lobbying for a little provision to be included in the CPSIA permitting companies to test their own toys in “firewalled” labs that have won Consumer Product Safety Commission approval.

The million bucks was well spent, as Mattel gained approval late last week to test its own toys in the sites listed above—just as the window for delayed enforcement closed.

Instead of winding up hurting, Mattel now has a cost advantage on mandatory testing, and a handy new government-sponsored barrier to entry for its competitors.

I’m of two minds on this. First of all, I find it revolting that, as the headline of the above-quoted post @ Reason points out, it was Mattel’s toys that got everyone riled up and now it’s Mattel getting the exemption. I know exactly how government regulation works, and it’s nearly universal that regulation protects incumbents by increasing the cost of doing business for small competitors.

At the same time, though, I understand a bit about the advantages of economies of scale. There are simply times where it makes more sense for large companies to have this testing in-house. They have enough products to be designed and tested that they’re going to save money by keeping it in-house.

Working in the electronics industry (and having worked for small startups as well as major corporations), I know that in some cases the burden of third-party testing is large enough that you can’t test products iteratively during the design process, when you’d like to. Every time you send the product for testing, you’re talking about thousands of dollars at a start, going up to very high numbers if you want to test to very stringent standards.

Large companies have the resources to test to a wide range of standards, because they sell enough product to amortize that cost. Small companies simply can’t do this, so they opt for the minimum required testing (by law or by their customer, depending on which is applicable), and often turn down business they can profitably produce to spec but can’t afford to profitably test to the requirements.

Mattel has both the economies of scale to afford outside testing, but further the economies of scale to bring that testing job in-house. In fact, they likely are using existing in-house labs for much of the new testing requirements. So yes, this requirement and exemption cost Mattel very little on an incremental basis, and costs their small competitors dearly.

This, however, is not an argument against Mattel — it’s an argument against unnecessary and expensive mandatory testing. It’s an argument against regulatory capture and for individual freedom. It’s an argument towards the inherent goodness of man (i.e. they don’t want to make products that’ll hurt their customers) rather than considering companies by nature wicked and more concerned with profit than customer needs.

Mattel, being the company that produced bad product and who is now benefiting from the regulation makes for a great whipping boy. They certainly deserve some scorn for both supporting this regulation with lobbying dollars and subsequently ensuring that it will affect their competitors more than themselves. But at the end of the day, Mattel has no more desire to poison your kids with lead than mom & pop toymakers — one might remember that THEY discovered their problems in-house and THEY issued the recall of their products rather than wait for someone to be hurt.

The CPSIA is bad law. Mattel, like most major corporations, uses the government to try to influence bad laws for their own benefit. For that, do we have Mattel to blame, or do we point the finger at Washington?

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3 Comments

  1. For that, do we have Mattel to blame, or do we point the finger at Washington?

    “I have two [fingers], one for each of ya.”

    Comment by Jeff Molby — August 31, 2009 @ 4:16 pm
  2. I wrote something similar.

    http://aynrkey.blogspot.com/2009/04/war-on-home-based-businesses.html

    More and more the government wants us to lockstep.

    Comment by Ayn R. Key — September 2, 2009 @ 2:39 pm
  3. [...] two big companies seem to be doing rather well under it. More: Timothy Carney, Washington Examiner; Brad Warbiany, Liberty Papers; Christopher Taylor, Word Around the Net. Other reactions to the exemption: Holly Jahangiri, Rick [...]

    Pingback by CPSIA chronicles, September 12 — September 12, 2009 @ 5:27 pm

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