jameshans92: Why Price Caps Are The Best Way of Cutting Costs in MotoGP and WSBK

Tuesday, January 8, 2013

Why Price Caps Are The Best Way of Cutting Costs in MotoGP and WSBK

With the announcement of the introduction of price caps for brakes and suspension in MotoGP from 2015, the Grand Prix Commission, MotoGP's rule-making body, appears to have finally found an effective way of controlling costs in the series. Instead of trying to control costs indirectly and seeing their efforts kicked into touch by the law of unintended consequences, the rule-makers have decided to attempt to go straight to the heart of the problem.

Will capping prices unleash a whole set of unintended consequences of its own? Will, as some fear, the move to cap prices lead to a drop in quality and therefore a reduction in R&D in the areas which are price-capped? And will the price cap act as a barrier to new entrants, or stimulate them? These are hard questions with no easy answers, yet there are reasons to believe that price caps are the most effective way of controlling costs, while the risks normally associated with a price cap, such as a reduction in quality, are lower in a racing paddock than they are in other environments.

Classical economic theory proposes that under normal conditions, high-value markets such as the one for brakes and suspension in MotoGP encourage both innovation and new entrants into the market. High prices offer relatively high margins of return, and should make it a highly competitive market. This, in turn, should also stimulate research and development, as companies look for technological advantages over their competitors which they can use to increase sales. The race track would appear to offer a perfect benchmark, pitting one brand of equipment against another, and the stopwatch and results sheet providing an objective comparison between products.

Unfortunately, however, racing paddocks are a long way from being perfect markets. There are many, many distortions which mean that any attempt to manage costs via traditional economic methods will fail. The usual law of supply and demand requires the existence of two parties making rational decisions on whether to do business together. If the prices of a seller are too high, then a buyer will go elsewhere, looking for a similar alternative available at a lower price.