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An Analysis Of Competition In The Title Insurance Industry
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An Analysis Of Competition In The Title Insurance Industry
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This dissertation has been 64—13,488 microfilmed exactly as received BROWN, Jr., Joseph Real, 1926- AN ANALYSIS OF COMPETITION IN THE TITLE INSURANCE INDUSTRY. University of Southern California, Ph.D., 1964 Economics, general University Microfilms, Inc., A nn Arbor, M ichigan Copyright by Joseph Real Brown, 1964 AN ANALYSIS OF COMPETITION IN THE TITLE INSURANCE INDUSTRY by Joseph Real Brown, Jr. A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (Economics) June 1964 U N IV ERSITY O F S O U T H E R N C A L IF O R N IA T H E G R A D U A TE S C H O O L U N IV ER SIT Y PARK L O S A N G ELES, C A L IF O R N IA 9 0 0 0 7 This dissertation, written by JOSEPH R E AL BR OWN, Jr* under the direction of h..^..Dissertation Com mittee, and approved by all its members, has been presented to and accepted by the Graduate School, in partial fulfillment of requirements for the degree of D O C T O R OF P H I L O S O P H Y DISSERTATION C O M M IT T E E PLEASE NOTE: Tables are not original copy. Blurred and faint type on several pages. Filmed as received. UNIVERSITY MICROFILMS," INC TABLE OF CONTENTS CHAPTER PAGE I. INTRODUCTION................................... 1 The Problem . 1 History of the Problem..................... 8 Method of Research and Analysis ...... 9 Definitions of Terms and Concepts........ 10 Overview of the Dissertation ........ 17 II. THE EFFECTS OF COMPETITION AND MARKET RELATIONSHIPS............................. 22 Classes of Market Relationships and their Generally Accepted Effects................ 23 Arguments Over Effects of Competition . . . 32 Summary.................................... 39 III. CRITERIA FOR JUDGING EFFECTIVENESS OF COMPETITION................................ 40 Principal Set of Criteria................. 42 Can Government Regulation Improve Competition?........................... . . 53 CHAPTER PAGE Competition and Public Goals ............. 54 Summary................... 62 IV- PERTINENT CHARACTERISTICS OF THE INDUSTRY . . 63 Historical Rise in Demand................. 63 Current Demand Characteristics ............. 70 Current Supply Characteristics . . . ........ 75 Summary . ................................ 77 V. GOVERNMENT, LAWS, AND COMPETITION........... 78 Federal Laws and Our National Policy on Competition....................... 78 A Short History of State Versus Federal Regulation......................... 82 The Importance and the Classification of State L a w s ............................ 88 General State Laws Designed to Maintain Competition.............................. 89 State Laws Directly Concerned with the Title Insurance Industry................. 91 Summary.................................... 99 VI. ANALYSIS OF MARKET "AM ........................ 100 Setting for Market ■ "A” ..................... 100 iii CHAPTER PAGE State Laws Affecting Competition in Market "A” .................. 103 General Characteristics of Market "AM . . . 106 Structure of Market " A " ............ Ill Behavior of Participants in Market MAM . . . . 124 Performance in Market " A " .......... 132 Summary.............................. . . 137 VII. ANALYSIS OF MARKET "B".............. . 140 Setting for Market "BM .................... 140 State Laws Affecting Competition in Market "B"......................... 142 General Characteristics of Market "B" ... 144 Structure of Market " B " ............ 150 Behavior of Participants in Market "BM . . . 164 Performance in Market " B " .......... 171 Summary............................. 175 VIII. ANALYSIS OF MARKET "C"............ 178 Setting for Market "C".......... 178 State Laws Affecting Competition in Market "C"......................... 180 General Characteristics of Market "C" . . . 183 iv - CHAPTER PAGE Structure of Market " C " .................. 186 Behavior of Participants in Market "C" . . . 193 Performance in Market " C " ................ 201 Summary................................... 204 IX. ANALYSIS OF MARKET "D” .............. 205 Setting for Market "DM .................. . 205 State Laws Affecting Competition in Market ”DM ............................... 207 General Characteristics of Market "DM . . . 208 Structure of Market " D " .................. 213 Behavior of Participants in Market "D" . . . 219 Performance in Market ”DM 225 ; Summary................................... 227 X. COMPARATIVE SUMMARY......................... 229 j XI. CONCLUSIONS................................. 236 The Effectiveness of Competition as Measured by Chosen Criteria ............ 236 Competitive Structure, Behavior or Performance as a Function of Statistical Setting . . . .................... 250 v CHAPTER PAGE Competitive Behavior and Performance as Functions of Competitive Structure .... 250 Implications for Public Policy ............... 256 Summary................................. 260 XII. TRENDS AND IMPLICATIONS FOR THE FUTURE .... 262 Structure............. ................... 262 Behavior................................... 273 Performance........... ................... 279 Summary................................... 282 BIBLIOGRAPHY ....................................... 285 APPENDIX............................................. 289 LIST OF TABLES TABLE PAGE I. A Comparison of Market Relationships........ 30 II. Comparisons of Statistical Settings.......... 231 III. Comparisons of Statutory Settings............ 232 IV. Comparison of Market Structures.............. 233 V. Comparison of Market Behaviors.............. 234 VI. Comparison of Market Performances............ 235 LIST OF FIGURES FIGURE PAGE 1. Correlation Chart: Statutory Control vs. Competitive Performance.................... 245 2. Correlation Chart: Structure vs. Behavior . . . 252 3. Correlation Chart: Structure vs. Performance . . 254 viii CHAPTER I INTRODUCTION The title insurance industry is a growing, expanding field of business activity in this country. Yet, apart from articles in trade association periodicals, very little information about it has been reduced to writing. Printed material covering the subject has dealt principally with the legal and procedural aspects of the business; its eco nomic facets have remained relatively untouched. I. THE PROBLEM Statement of the Problem Very little has been written about the economic characteristics of the title insurance industry, and liter ally nothing has been assembled on competition in the in dustry. This condition exists because members of the industry, like most businessmen, are generally not conver sant with scholarly terminology and with formal economic 1 analysis of competition, and because economists have devoted practically no attention to the title insurance industry. This paper is an attempt to bring together the thinking of these two groups, the economists and the "title" men, and to focus their combined knowledge on com petition in the title insurance industry. Significance of the Problem Carefully examined, four reasons for investigating this dissertation subject appear to justify the effort in volved . First, for the last two centuries economists have devoted a great deal of attention to the subject of com petition in the market place. Generally, those espousing capitalism and even socialism have studied and recommended competition as the principal regulator in the market and as the most effective way of insuring--through the market mechanism--the optimum allocation of economic resources, the optimum degree of efficiency, and the optimum distribu tion of income. Because of the belief in the value of this regu lator, a great deal of interest has been shown in the impurities and imperfections which stand in the way of effective competition. In the eighteenth century Adam Smith was concerned over the government-granted monopolies in England. Alfred Marshall and his Neoclassical contempo raries feared the great combines and cartels of the latter nineteenth century. More recently the less obvious charac teristics of and obstacles to competition have been exam ined by Edward Chamberlin, William Fellner, J. M. Clark, Joe Bain and many others. In short the significance of competition in the discipline of economics is unquestioned. In the realm of government policy toward business, there are two items of significance, which, taken together, comprise the second reason for examining our over-all sub ject: First, we have adopted as one of our national eco nomic policies the goal and task of maintaining competi tion. The Sherman Act, Clayton Act, and Robinson-Patman Act comprise the three legs of the legal platform on which our anti-trust policy rests. Second, many American busi nessmen do not fully understand either the economic or legal justifications for competition and/or for opposing obstacles 'to competition. This lack of understanding can be blamed on existing legislation with its imprecise language, on jurisprudence with its conflicting decisions, and finally on the businessman himself, who has not made a sincere effort to understand our national policy on com petition. To the extent that businessmen should comprehend any national policy bearing significantly on their deci sions, they must recognize the importance of the subject of competition. Applying the ’ ’test” of competition constitutes the third reason for examining the dissertation subject. Since we have accepted a theory and a policy of competi tion in the United States, we should examine our economy industry by industry to determine whether or not competi tion in these industries meets certain criteria (which will be discussed in Chapter III). It is only through this industry-by-industry examination that we can find out if competition is performing its regulatory functions effectively. Finally, this inquiry is timely because the federal government is now challenging the role of state govern ments in the regulation of the insurance industry. This challenge has appeared in the form of the United States vs. Chicago Title Insurance and Trust Company, a civil anti-trust suit."*" The federal government in this case is attempting to (1) establish the jurisdiction of the federal anti-trust laws over the insurance field and to (2) force the Chicago Title firm to divest itself of the 100 per cent stock in terest it has acquired in the Kansas City Title Insurance Company. This inquiry is also timely because we appear to be on the threshold of new "break throughs" in competitive theory. A number of significant contributions to this field of knowledge have appeared in the last two years. The Vanderbilt University Press has published George Ward Stocking’s Workable Competition and Anti-Trust Policy while the Brookings Institute has sponsored Mark S. Massel's study entitled Competition and Monopoly, Legal and Economic Issues and J. M. Clark’s book on Competition As a Dynamic Process. Objectives in Relation to the Problem As indicated earlier, once having accepted the value and the criteria of competition one should move next to ^Los Angeles Times, November 11, 1962. the examination of an economy industry by industry, looking for the presence or absence of competition as indicated by these criteria. It is only by this careful process that one can establish the degree to which competition is work ing effectively in the regulative, allocational, and dis tributive sense. It is only in this way that either theory or policy conclusions can be drawn and that action can be taken to maintain competition or to discourage monopoly. Following a thorough and careful examination of the various criteria of competition we have selected the most practical and current ones as "yardsticks" in this study. These "yardsticks" will then be used to discuss and to measure the degree, the character, and the effectiveness of competition existing in the seven title insurance mar kets included in this study. Comparisons of markets will be made and some attempt will also be made to determine the relationship between competitive performance and a number of important variables such as statutory control, growth of the county, competitive structure, and behavior. Finally, any significant trends and any useful im plications for policy-~either government or private busi ness policy--will be identified. Rather than make a purely statistical study of "con centration, " as is often typical of other industry studies of competition, this paper will attempt to assess both objective and subjective competitive characteristics of our markets. To make this assessment a collection of opinions of sellers, buyers and agents from each of seven major metropolitan markets has been made. The result is an interpretation of a collection of some facts and many opinions. It is not and cannot be any more. Our seven markets are seven counties (the reason for this boundary is discussed later) each of which was chosen for certain relevant peculiarities. Some of the counties had rapidly expanding populations while some had a rela tively stable number of inhabitants; others had large num bers of sellers or very few sellers; still others faced rigid state government supervision or, on the other hand, practically no regulation. In order to collect these opinions of businessmen about the practices of other businessmen in their area it was essential that interviewees and markets remain anony mous. Consequently, none of the areas have been identified by name and considerable effort has been devoted to maintaining the confidence of those who participated in the study. II. HISTORY OF THE PROBLEM There is no written history of competition in the title insurance industry. Studies of competition in other industries or mar kets, however, have become quite conmon over the last half century. Some of the more recent studies have been Jesse W. Markham*s Competition in the Rayon Industry (1952), R. B. Tennant’s The American Cigarette Industry (1950), Melvin G. de Chazeau's and Alfred E. Kahn’s Integration and Competi tion in the Petroleum Industry (1959), Ralph Cassady’s Competition and Price Making in Food Retailing (1962), John N. Cosgrove’s Competition in Insurance Marketing (I960), and Roy J. Henskey’s Competition, Regulation and the Public Interest in Non-Life Insurance (1962). The findings of these and other studies of this kind have varied considerably but generally speaking the objec tives have been one or two of the following: (1) drawing general, theoretical conclusions via inductive economic or legal theory (2) determining the effectiveness of competi tion in the industry and (3) recommending corrective action. 9 III. METHOD OF RESEARCH AND ANALYSIS Research The first step in this study involved a careful review of existing literature on the theory of competition, industry studies of competition, and relevant aspects of the title insurance industry. Because this analysis deals with seven widely sepa rated markets and with markets about which little or no information has ever been assembled or published, mail questionnaires were directed to sellers and buyers of title insurance as well as to related governmental agencies (see sample questionnaires in Appendix). Anticipating the inadequacy of the questionnaire returns for various reasons, a personal visit was made to most of the sellers and a small but representative sample of the buyers in each of the seven market areas. Analysis To analyze the results of the information gathered responses to questions have been organized by the criteria discussed in Chapter III. Having classified the data in this way, conclusions were drawn more easily as to the 10 degree, characteristics, and effectiveness of competition in each of the markets. With this approach comparisons among the seven markets were also facilitated. In the main data gathered have been described and compared and conclusions drawn from the raw data in nar rative form. For the sake of simplicity and emphasis, however, tabular summaries, quantitative comparisons, and graphs have been used particularly in the "comparative sum mary" and "conclusion" chapters. It should be reasonably clear by now that emphasis will be on inductive reasoning. This study is based on an "at-the-source," fact-and-opinion-gathering project. From these facts and opinions certain conclusions have been drawn. Deductive analysis, of course, has played its part in the study but has taken a "back seat" to inductive logic. IV. DEFINITIONS OF TERMS AND CONCEPTS Definitions and concepts of major significance are treated in this section. Lesser definitions will be pro vided as the occasion requires it. All of the concepts and terms are defined in the context of this dissertation and 11 are not necessarily held forth as being either universally applicable or acceptable. The Definition of a Market To study competition we must answer the question, "what is a market?" One elementary textbook definition of a market runs as follows: A market for a particular item, is an area within which buyers and sellers can communicate and do busi ness . ^ J. M. Clark defines the market as follows: . . . the market for a product is the scene, or scope, of the operations and economic forces that determine the character and amount of the product and the terms on which it is disposed of including what ever structure of differentials may exist between ct variants, localities or sectors of the mar- A great deal has been written about the difficulties of defining a market. One of the common difficulties is that of identifying who the buyers and sellers are. Al though one might identify the site of competitive rivalry as the market, some competitive influences may arise 2 Melville J. Ulmer, Economics, Theory and Practice (Boston: Houghton Mifflin Company, 1959), p. 331. 3 John Maurice Clark, Competition as a Dynamic Pro cess (Washington, D.C.: Brookings Institution, 1961), pp. 104-105. 12 outside of this actual circumference. Mark Massel points out, for example, that: The nature of competition is influenced by many outside factors. A market rival who earns substan tial profits in other markets may use them to rein force his power in the market in question. In addition, Massel observes that there appear to be "no fixed boundaries for industries or markets." Whatever boundaries are selected must consider the "purpose of and the setting for the analysis." To emphasize this point he identifies specific markets of varying geographical dimen sions including some of national, regional and city scope.^ Commenting on the problems of market definition the recent Committee on Financial Institutions points out: Another feature is that the market in which finan cial institutions, especially banks, operate is dif ficult to define. In some of their loan and deposit operations banks serve a local market which may be sheltered from competition. In other transactions, they deal in national markets which are highly com petitive. The absence of a single, well-defined mar ket complicates the task of judging the impact on competition of mergers and other structural changes. 4 Mark S. Massel, Competition and Monopoly; Legal and Economic Issues (Washington, D.C.: The Brookings Institu tion, 1962), p. 278. 5Ibid., p. 279. Walter W. Heller, Chairman, Report of the Committee on Financial Institutions (Washington, D.C.: Government Printing Office, 1963), p. 46. 13 The Perimeter of the Title Insurance Market Recognizing the difficulties in circumscribing the market and remembering that this study cannot be infinite i we will identify our market as that operating within county boundaries. (Some have a combined city-county status.) This market perimeter, although not all“inclusive, "fits" the title insurance industry for a number of reasons. First, the county boundaries have traditionally constituted the recording district for documents affecting real estate and for those documents seeking a medium of constructive notice. As a result the files or ’ ’plant" of a title company is usually organized by and housed in a given county. Second, to provide title service the sellers or agents of sellers of this service are almost always located in the county in question because the commodity, land, and associated interests in this land, are to be found in the county. Third, traditionally, it appears that competitive strengths and weaknesses of sellers tend to vary materially from county to county even in those instances where title companies operate in many and even adjoining counties. County or regional influences on the side of both the buyers and the sellers dominate the county market in practically all metropolitan title insurance markets. National or sectional influence on the buyer’s side may be significant but not overriding. Even with the tendency toward holding companies, mergers, and branch operations in the lending industry, those who buy and those who in fluence buyers of title insurance are local in character. The Industry Having defined a market in general and having de scribed the physical perimeter of the markets for the purposes of this analysis, attention will be directed next toward the industry with which this paper is concerned, the title insurance industry. Here the study is interested in the selling and buying of title insurance policies and abstract services on real estate situated in the seven counties included in this survey. A Description of Title Insurance and of an Abstract ’ ’ The Villanova Report” is an effort recently spon sored by the American Land Title Association to investigate and document the Public Regulation of Title Insurance 15 Companies and Abstractors. One of the better attempts to describe the purpose of a title insurance policy appears in this report: The object of title insurance is to protect [the insured’s interest in real property] against the possibility of loss occurring by reason of defects [in this interest] existing at the time the policy was issued, but not excepted therein, which may cloud or invalidate the title to [or interest in] real property. The policy insures the owner or mortgagee against loss or damage not exceeding an amount stated on its face. ^ In the same report the abstract of the title in dustry is defined as: An abstract of title is an orderly compilation in abridged form of the recorded data affecting the title to a specific parcel of real estate. ’ 'It is not the complete evidence of title, but a synopsis of the [recorded] data as to the title."® Identification of Sellers Those firms that sell title insurance coverage or abstracts are the primary sellers in our study. In those counties where they constitute a significant competitive influence in the market this paper will also discuss Ernest F. Roberts, Jr., editor, Public Regulation of Title Insurance Companies and Abstractors (Philadelphia: Villanova University Press, 1961), p. 5. 8Ibid., p. 20. 16 non-title company attorneys, who offer opinions following their examination of the abstract of title, and will point out competing title guarantee practices such as Torrens systems. The term "underwriter" has been used to identify the title insuring function. The phrase "title office" denotes the entity which sells to the insured the actual policy and the services involved in its preparation. "A branch" is an intra-county branch of a title office. Finally, an "abstract office" sells abstract services to any kind or level of buyer. What is Competition? Surprisingly enough the term "competition"--a key word in this study--is not defined as a noun in the recog nized texts and writings on the subject. Various forms and degrees of competition comprise the substance of thousands of pages but nowhere except in Webster’s Collegiate Dic tionary can one be satisfied with a definition of the noun itself. This definition is worth quoting: The effort of two or more parties, acting inde pendently, to secure the custom of a third party by offering the most favorable terms.9 q Webster’s Collegiate Dictionary (Springfield, Massachusetts: Merriam Company, 1948), p. 205. 17 One should add that the motivation behind this effort in a private enterprise economy is the hope of gain, profit or satisfaction. V. OVERVIEW OF THE DISSERTATION In this section the contents of the chapters which follow will be described. The Effects of Competition and Market Relationships As an analytical foundation for later chapters Chapter II, ’ ’The Effects of Competition and Market Rela tionships,” will review the principal classes of market relationships and their generally accepted effects. Be cause there is no universal agreement as to the effects of competition and various market structures, opinions to the contrary will be treated along with the concept of "work able” competition. Criteria for Judging the Effectiveness of Competition To determine the effectiveness of competition in the seven title insurance markets, three categories of criteria have been chosen. In Chapter III, "Criteria for Judging 18 the Effectiveness of Competition,” these categories will be discussed in some detail as yardsticks for measuring the competition found in each market. These three categories are identified as (1) the principal set, (2) the test of government regulation, and (3) a set of national economic goals. Pertinent Characteristics of the Industry For the purpose of translating certain industry characteristics into the language of economists a number of pertinent demand and supply peculiarities of the industry are identified and explained. This translation found in Chapter IV, "Pertinent Characteristics of the Industry,” is not complete. More will take place as the paper progresses. Government, Laws, and Competition Because the degree and characteristics of competi tion depend to some extent on the legal and governmental environment in which it functions, Chapter V, "Government, Laws, and Competition," will treat what this environment has been for the title insurance industry. First, relevant federal laws and our national policy of competition are to be discussed. Next, the historical 19 struggle between State and Federal authorities for juris diction over the insurance industry will be examined. (This will include some of the more recent events of sig nificance in this struggle.) Two categories of state laws affecting the markets will be the subject of the final section of this chapter. The first category concerns state anti-trust statutes. It bears on all industries falling within state government jurisdiction. The second category relates to those types of state laws which affect the title insurance industry directly. County Studies Four of the seven counties studied will be treated in narrative form and will be discussed under five separate headings. First, the pertinent statistical characteristics of each county will be described. These characteristics will provide a useful foundation for the study of competition in each of the markets. Second, those specific state government statutes which have a direct bearing on competi tion in each of the markets will be reviewed. Third, an examination of the structure of each of the local title insurance markets will be made. Here, each of the "sub- item” criteria of effective competition to be identified in Chapter III will be compared with the local market. Fourth, as in the case of market structure, an attempt will be made to evaluate seller behavior in each of the counties in the light of the behavioral criteria to be described in Chapter III. Finally, performance characteristics will be studied in each of the four counties. Markets "A," "B," "C," and "D" will be analyzed in Chapters VI, VII, VIII and IX respectively. Comparisons Among Markets Having completed a detailed, narrative analysis of four markets, a comparison will be made on a "spread sheet" of statutory and statistical settings, along with the structure, behavior, and performance in each of the seven markets. These comparisons will be made in Chap ter X, "Comparative Summary." Conclusions Using the "spread-sheet" comparison Chapter XI, "Conclusions," will attempt to determine the most typical situation as to structure, behavior, performance, as well 21 as to statutory setting. With these most typical situ ations, conclusions will be drawn as to the effectiveness of competition in the markets using the criteria described in Chapter III. Next, the relationships between (1) structure and statistical setting and (2) structure, behavior and per formance will be analyzed. Finally, some implications for public policy will be discussed. Trends and Implications for the Future Chapter XII, "Trends and Implications for the Future," treats the probable changes in market structure, behavior, and performance in metropolitan title insurance markets during the next five to ten years. CHAPTER III THE EFFECTS OF COMPETITION AND MARKET RELATIONSHIPS In Chapter I competition was identified as the prin cipal regulator in the market and as the most effective way of insuring--through the market mechanism--the optimum allocation of economic resources, the optimum degree of efficiency, and the optimum distribution of income. As the chapter progressed it was pointed out that there were variations in the "degree, character, and effectiveness" of competition. During the last two centuries economists have relied heavily on different market relationships to explain these variations. As further background for the discussions to follow, the principal classes of market relationships will be treated in this chapter. Although these relationships are more typically studied in con nection with price and output determination than with 22 23 variations in the characteristics and degree of competi tion, this review still seems highly desirable. In the course of describing market structures and relationships we shall enumerate briefly in both narrative and tabular form (see Table I, page 30) the generally accepted effects of these relationships. Because these "generally accepted effects” have not been universally accepted during the twentieth century, opinions to the con trary will be reviewed quickly as a further foundation for the discussion of the title insurance industry. I. CLASSES OF MARKET RELATIONSHIPS AND THEIR GENERALLY ACCEPTED EFFECTS Since the number of market structures and market relationships is almost infinite, this chapter will iden tify only the major structural classifications (along with rather common assumptions as to the degree of perfection in the market) conceding from the start that our discussion will provide a very meager frame of reference. The traditional relationship classifications appear to be based on the degree of "market power” i.e., the ability of an individual buyer or seller by his separate 24 action to influence the price of goods or services. Degree of market power is thought to be a function of product differentiation and the number of buyers and sellers. A product is differentiated when it is different from com peting products to the extent that the buyer has a prefer ence for one product over another. The number of buyers and sellers determines the extent to which each buyer or seller is aware of the effect of his actions on his com petitors . Pure and Perfect Competition What has been identified as ’ ’pure and perfect competition” in Table I (page 30) concerns the first class of market relationship. Pure competition assumes that the number of buyers and sellers in a given market are sufficiently large and the volume of business handled by each of them small enough so that changes in sales or purchases by any one buyer or seller will not per ceptibly affect price. Pure competition assumes in addi tion that the product or service sold is homogeneous i.e., all products sold in this market are identical and buyers have no preference in dealing with one seller over 25 another.1 An example of this kind of structural relationship might be found in the wholesale markets for staple agri cultural commodities. There are thousands of wheat farmers for instance producing wheat of a small number of grades. In addition there are thousands of buyers who have no preference as to who grew the wheat. Actions of neither the individual buyer nor seller seem to have any per ceptible influence on price. Sometimes called institutional factors and at other times classified as structural characteristics, the degree of buyer and seller knowledge in a market and the degree of resource mobility into and out of the industry may bear strongly on price and output determination and on competi tive behavior. With (1) "the sufficient" number of buyers and sellers noted above, (2) a homogeneous product, (3) perfect mobility of resources, and (4) perfect buyer and seller knowledge we have the market relationship called pure and John F. Due and Robert W. Clower, Intermediate Economic Analysis; Resource Allocation. Factor Pricing and Welfare (Homewood, Illinois: R. D. Irwin, 1961), p. 47. 26 perfect competition. The effects of this relationship, as indicated in Table I (page 30), tend toward the lowest prices and the production of the largest quantity of a goods or service in the entire spectrum of market relation ships. Because these effects have usually seemed most consistent with consumer welfare (a condition or situation difficult to define precisely), competition in an approxi mation of this kind of environment has been looked upon as a legitimate objective by the policy makers of the United States. Nonpure and Imperfect Competition Nonpure and imperfect competition describes the market relationships outlined in Table I (page 30) under item II. Monopolistic competition. Monopolistic competition identifies a type of relationship commonly found in our business structure which is closest to pure competition. Under monopolistic competition "the number of sellers is sufficiently large that each acts independently, with no consideration of the effects of his policies upon those 27 of his competitors,and each of the products or services are differentiated from the others in the market but are also close substitutes for each other. In the assumed conditions of Table I, mobility of resources and buyer and seller knowledge is somewhat less than perfect. The effects of competition under these con ditions are shown in Table I and indicate a tendency toward a higher price and a smaller quantity than under pure and perfect competition. However, by virtue of product dif ferentiation consumers appear to have a wider range of choice than under pure and perfect competition. Consumer welfare, then, in this environment seems to approach the degree of consumer welfare found under conditions of pure and perfect competition. Competition, however, seems to express itself more in efforts to differentiate the product or service under monopolistic competition than in price moves as is the case under pure and perfect competition. Although there are many instances of monopolistic competition, a service industry like barbershops provides an acceptable example, assuming no barbers’ trade associ ation or labor union. The number of sellers in a given ^Ibid., p. 49• 28 community is usually sufficiently large so that each acts independently with little consideration as to the effects of his policies on his competitors. However, each shop attempts to differentiate his service by giving better quality hair cuts, by providing bubble gum to the children, or by choosing a more convenient shop location for his present and prospective clientele but, agairv, most shops sell their service at the same price. Oligopoly. John F. Due observes that oligopoly . . . is of greatest use for studying the function ing of the present-day economy . . . , [it is] a situation in which the number of sellers in a par ticular market is sufficiently small that their actions are interdependent. Each seller shapes his policy in terms of the policies of the other firms in the in dustry, and takes into consideration the effects which his own policies may have upon the policies of com petitors . ^ Other conditions of oligopoly can vary significantly. There may be a homogeneous or a differentiated product, and the degree of buyer knowledge can range from high to low. Typically, resource mobility is somewhat limited, a situ ation which often constitutes one of the reasons for a small number of sellers. 3Ibid., p. 50. 29 Behavioral variations are also numerous. There is the comparison of collusion versus spontaneous coordination among sellers to maximize their collective profits. Then there is the contrast of complete versus partial oligopoly, a comparison of effect. Complete oligopoly obtains when the feeling of mutual interdependence among sellers is so strong that maximum profits for the group as a whole may be achieved and the effects become similar to that of pure monopoly. Partial oligopoly, the more likely situation, occurs when the sellers are conscious of the effects of their policies on others, but this consciousness is not strong enough to maximize the profits of the group. Although we have tread on the thin ice of general izations in describing the welfare impact of (1) pure and perfect competition and (2) monopolistic competition, the dangers of sweeping statements on the effects of oligopoly are even-greater. Because of the many possible variations in the structural and behavioral conditions found in oli gopoly, price and quantity levels are difficult, if not impossible, to determine. However, we have noted in Table I that price tends to be higher and quantity, lower than under pure and perfect competition unless major tmi i * oa r mBm or none m m aunn Major Claise* of Mufcet Belatlonahlp General Characteristic* Ooodltlon* Htikat Price quantity Produced Degree of Productive gfiiclency Product or B ntlct Differentiated Salas Promotion Rrpecs* I. Pure and perfect competition. Relther buyer nor n llo r he* control o n r price. Each li a "price taker". Fur* eametltlon 1. Rather of bay*re end eeller* large euouA •o that neither headle* a (nfflclent volum e of twine** to perceptibly affect price. 2. Product or eerrlo* offered by all eeller* 1* hcaopuow. Perfect ttw tltlo n 1. ibere u perfect knowledge on the part of buyer* and teller*. 2. lhere 1* perfect nobility of re*ourc*« (lend, labor, capital. •ad enterprise) In aad out of the Industry In question. tadency toward lowet price* taong a ll wrket structural. tadsoqr toward large(t quantity provided by •ellere eaong a ll uartst structure*. Maglm* efficiency poitlble with teller* of a glean ill* or rith a glean iqput- output ratio. A long no equUlbrlue sellers tend to produce quantity associated with the lowest point of their average oott curve. B one R one R o (1 vh *b tb ■t n . ncuro m l imerfect coupetitloo! A . Monopolistic ca^etltlon Seller* hare a differentiated product and time a m onopoly with reepect to their product bet are subject to com petition fron eeller* of oloee substitutes. Degree of impurity 1. Rudber of buyer* tad (alien tuffl- ceutly large that each act* Independ ently with no con*ldaratIce of the effect* of hi* policies upon thote of hi* coogxtltore. 2. High degree of product or service differentiation. Degree of taerfectlon 1. Rear perfect knowledge ■mg buyer* *ad seller*. 2. Rear perfect resource aoblllty. Higher than under pure end perfect competition. Sealler quantity produced than under pure end perfect com petition. Possibly least effi cient aaong aarfcet structure* because eeller* (l) will produce at a point abort of low point on their long rtsi avenge cost curve and (2) the large smfttr of fine* a*y preclude acononlei of icale. Dffferentlated product* or services. Sale* prom o tion expense* typically Incurred. * D C B. Oligopoly Each eeller ehape* hi* policy in teren of the pollcle* of the other fin e aad conelder* effect* hi* ow n pollcle* cay bare on pollcle* of competitor*. B eicree of taurlty 1 . RHber of aeller* sufficiently w ill that their notion* ar* lnterlependnt. 2. Product or eerrice ■ay be either hom o- geneow or differen tiated. Degree of lmxrfectlcn 1. Degree of knowledge can vary fron low to high aaong buyer* and Mllete. 2. Beeouroe eoblllty sewvhat United. This le one of the prlaoipal reaeone for the *n*ll softer of eeller*. Uiually higher then under pur* and perfect oompetltlon. Tends to be higher than under altber pure md per fect or aonop- ollitlc oomwtltloo. ta lle r quantity produced then under pur* and perfect com petition. Rconoaiee of scale are com m a. M ay or my not be differentiated. SUe* prom o tion expense usually vary- lag directly with the degree of differentia tion. V : o : m l i tl 1 1 n C. Com plete m onopoly Seller hu coetflet# control over price. Seller le a "price anker*. Degree of impurity 1. Only c m eeller. 2. Completely dif ferentiated product or eerrice. Degree of Umerfectloc 1. Degree of knowledge 1* Indeterminate. 2. R o reeourc* mabll- lty into the on* teller Industry. Almost alwey* hlgdw er then under pure tnd perfect com petition. Tendency toward hltfieet price eaong a ll market ttruotur**. tadency to -■ uardm nHnt quantity am ong market (true- turwi. 8m m mdtr Oligopoly, n . B Usually ooigletely differentiated. 8*1 m prom o tional and "institutional" effort. f h a ■ ton X * o o M B M g B a i or iw m m p iw ™ 30 ------------------------------- ; ------ : -------i m u w ----------------------------------------- — — ons Herket Price Quantity Produced Degree of Productive Kflialeocy Product or OtPiloi Differentiated Bales Promotion txftam M a r t of Profits ' Degree of Isoass Opacity on buyers aad irge enougi ilther sufficient business ;lbly .ce. • eerrice - ell i is. ; It Ion lerttsct on tbs qrers rs. lerfect )f (land, ?ltal. ?rlae) ; of ;ry In Pmdency toward lowest prices earing all aarket structures. Tendency toward largest Quantity provided ty sellera snmig all aaikst structures. tenylmai efficiency possible with sellers of a given else or with a given Ixput- output ratio. £a long rat equlllbrluB aellsre tend to produce quantity associated' with the lowest point of their average oost curvee Bone Bone Boxnsl profits only (le that profit which is just abougi to Induce tbe entrepreneur to stay In business). ■one arlty buyers ra suffi- rge that ladepend- ll BO tloo of ts of Ua spon those ^stltors. ee of r eerrice let loo. erfoctloo hot knowledge era aad. 'ect reeource Hlgear than under pure aad perfect competition. aaaller quantity produced than under pure and. perfect com petition. Possibly least effi cient among market structures because sellers (1) will produce at a point Short of low point an their long rai average cost curve and (2) the large Makar of firms aay preclude economies of scale. Differentiated products or services. Sales proao- tlon expenses typically Incurred. Pendency toward noiaal profits. Pendency toward assess capacity because ps'Qdnn— tlon at mini— point of average oost earvs weald result In a net loss to aeller. nrlty 1 eeller* itly aoell Lr act Iona 'dependant, ir aerrlce Ithar hoao- >r diffsren- Mrfectlon 1 knowledge ltea lov wong buyers ire. nobility Halted, me of the ■all maker rs. nsually higher than under pure aad perfect omvetltlcu. lend* to he hither than under either pure and per fect or aooop- ollatlc (xnqwtltloo. aaaller quantity produced than under pure and perfect com petition. Economies of scale H»y or may not to differentiated. Bales promo tion expense usually vary ing directly with tbe degree of differentia tion. With restrictions or limitations on entry ty sellera Into the Industry there Is a tendency toward acre than noiaal profits. Mndsney toward eacesa capacity la a fwnctlon m m e n s a J h m ^ w k o r jb o b b b s differentiation. purity seller, ly lif ted or service, perfection FWCedge endnote, roe nobil- tha cna oduatry. Almost always hltfiar than under pure aad perfect oam- petltlon. TUodsnay toward hltfwst price among all aarket structures. Tndency to- • eard~— Heat quantity earwig aarket struc tures. 8m y Wdftl* Oligopoly- n. B Osually ooonietely differentiated. Bales promo- tionl n& "Institutional" effort. Tendency toward hltfiest profits aaong aarket - structures. Bams as «dar monopolistic cKavetltlaa - XX. A 31 economies of scale are realized under oligopoly. As will be noted as we progress in this paper, oli gopoly is the typical market relationship found in the title insurance industry, and competition seems to express itself in price moves, differentiation, and/or productive efficiency all depending on a myriad of conditions and forces. Pure monopoly. Where there is only one seller in a market pure monopoly exists. The product or service is completely differentiated, and there is no resource mo bility into this one seller industry. Knowledge becomes an insignificant condition because there are no choices for the buyer and no competing sellers for the monopolist to observe. Because of our national policy of competition there are few examples of this market relationship except public utilities or other government granted monopolies. In a pure monopoly situation there simply is no competition. Public agencies typically supervise monopolies because of the unusual market power they possess--power to determine the quantity produced and thus the price charged. Without such regulation the consumer can be at the mercy of the 32 monopolist whose objective has been traditionally stated as the maximization of his profits. II. ARGUMENTS OVER THE EFFECTS OF COMPETITION Earlier in this chapter we pointed out that the generally accepted effects (including the consumer welfare implications) of the various market relationships have not been universally accepted. In this section we shall iden tify briefly a number of arguments suggesting that monopoly offers a considerable number of benefits to the consumer and that competition as it exists today in the United States is not as favorable to the consumer as we tradi tionally thought. We shall conclude the section with the reassurances of J. M. Clark as to the merits of what he terms "workable" competition. The Benefits of Monopoly Economic theorists of the last two centuries have not given competition their unqualified support. Monopoly characteristics were also said to have a rightful place in our economic system. In the "trust era" of the latter nineteenth cen tury proponents of the trusts saw wastes in atomistic 33 competition and saw higher productivity and lower prices with large firms that could take advantage of economies of scale. They also felt that greater economic stability would develop as a by-product of mergers and trusts because the larger firms could plan more effectively and would be less susceptible to the over and under production of the smaller firms.^ Further support for the trust came from a 1920 article entitled "Is Competition in Industry Ruinous?" by Eliot Jones.^ Here it was felt that the modem, large, business enterprises with high fixed costs of operation did as an "observed fact" through cutthroat behavior force prices below the level of a normal return. Joseph Schumpeter’s theory of growth supports at least a temporary condition of monopoly as a prerequisite to irmovational activities by the entrepreneur. This par ticular argument for monopoly has had fairly wide accept ance. 4 William Lee Baldwin, Antitrust and the Changing Corporation (Durham, North Carolina: Duke University Press, 1961), p. 280. 5 Eliot Jones, "Is Competition in Industry Ruinous?" Quarterly Journal of Economics, 34:473-519, May, 1920. 34 Further Doubts as to the Value of Competition Doubts as to the value of competition as a regulator began to appear in the 1930’s. A. A. Berle and G. C. Means in their well known The Modern Corporation and Private Property pointed out that in many cases the American cor poration was operated by professional managers with little control exercised by the stockholder-owners. These ob servations raised fundamental questions as to the regula tive character of competition. The motivations of the professional managers and the corporate entity they managed came under question: The explosion of the atom of property destroys the basis of the old assumption that the quest for profits will spur the owner of industrial property to its effective use. It consequently challenges the funda mental economic principle of individual initiative in industrial enterprise. It raises for re-examination the question of the motive force back of industry, and ends for which the modern corporation can be or will be run.^ This question of sufficient managerial motivation ade quately to spur competition continues to be raised even in the present decade. £ A. A. Berle and G. C. Means, The Modern Corporation and Private Property (New York: Macmillan Company, 1932), p. 9. 35 In The Decline of Competition, published in 1936 Arthur Robert Bums stated flatly that since the end of the Civil War in this country capitalism had failed to preserve its competitive character.^ Reasons for this failure were (1) separation of owner from manager (like Berle and Means), (2} because price elasticity of demand was much greater in the long run than in the short run there was a tendency toward price rigidity, and (3) because of high overhead costs, there was a tendency toward such ruinous price cutting that producers were forced to discourage active price competition. New Guide Lines and Reassurance Strong reassurances that competition was the best regulator in a market economy came from John Maurice Clark in his 1940 article, "Toward a Concept of Workable Competi- g tion." According to Clark competition had not failed, and what was needed was a new series of concepts of just how competition did operate. With these new concepts ^Arthur R. Burns, The Decline of Competition (New York: McGraw-Hill Book Company, 1936). O John Maurice Clark, "Toward a Concept of Workable Competition," American Economic Review, 30:241, May, 1940. 36 new norms of performance should be established for purposes of public policy. Potential competition and the competition of substi tutes tend to limit restrictive practices by business firms. These two threats bolstered by technological prog ress provide a large measure of the competitive discipline required in a particular market. "Workable competition" was ClarkTs theoretical and policy objective in the market place. The workable com petition criterion "considers actual markets to see if they are reasonably competitive in the light of the limits set by inherent conditions." If competition cannot be im proved by regulation, then it is workable. Clark stressed particularly the point that the public interest may best be promoted by accepting some departures from pure competition "that might be corrected by regulation, because some other departures are ineradi cable and to achieve some of the characteristics of pure competition without achieving all may do more harm than 9 Mark S. Massel, Competition and Monopoly; Legal and Economic Issues (Washington, D.C.: The Brookings Institu tion, 1962), p. 190. good.”^ He illustrated this thought by pointing out that if you take away two-way resource mobility (one of the pre requisites of pure and perfect competition) and leave the other conditions (the ’ ’sufficiently” large number of buyers and sellers, the perfect knowledge and the homogeneous product), and if you let demand decline and competition becomes too strong, then you have a sick industry on your hands. ^ From the standpoint of policy he used what amounted to market structure and performance as tests of workable competition. These particular criteria will be used along with others in our examination of the title insurance in dustry. Clark's principal observation on policy--and one worth heavy emphasis--was ’ ’that government need not assume the burden of doing something about every departure from 12 the model of perfect competition.” ■^George W. Stocking, Workable Competition and Anti- Trust Policy (Nashville, Tennessee: Vanderbilt University Press, 1961), p. 244. ^Hlassel, op. cit. , p. 242. •^Ibid. , p. 256. 38 In his recent book Competition as a Dynamic Process Clark’s impressions of competitive theory and policy seem fundamentally the same as his earlier concepts. He does, however, identify additional changes which seem to be taking place in the market and notes that the only per fectly constant thing is change itself, . .it [competi- I O tive theory] is always evolving. Even in this latest book competition as it exists in this country elicits considerable respect from Clark: . . . it does perform the dynamic function of mobil izing resources and allocating them, as is essential in providing for new products and for expanded produc tion of familiar ones. Where it [competition] does not work satisfactorily, preference is regularly given to attempting to improve the conditions of its operation, as against abandoning it and resorting to direct controls. The areas in which free and competitive market adjustments have been displaced by direct controls of one sort or another do not offer such conspicuous examples of success as to make us eager to increase their number unneces sarily. ^ 13 John Maurice Clark, Competition as a Dynamic Pro cess (Washington, D.C.: Brookings Institution, 1961), p. 31. 14Ibid., p. 487. 39 III. SUMMARY At the beginning of this chapter the need for a cursory review of the effects of competition and market relationships was suggested. By describing the major classifications of market relationships and the effects usually associated with these relationships a brief, simple frame of reference has been established for our discussions of seven title insurance markets. By pointing out certain arguments questioning the effects and value of competition this chapter has further broadened the foundation for later discussions and has introduced the concept of workable or effective competition, which constitutes the major cri terion of competition to be used in this paper. CHAPTER III CRITERIA FOR JUDGING EFFECTIVENESS OF COMPETITION Determining the effectiveness of competition is one of the objectives of this paper. Needless to say, this requires an identification of criteria of effectiveness. We have chosen three types of criteria. The first . category, which we have labelled ’ ’the principal set,’ ’ is our primary reference for establishing workable or effec- - tive competition. ’ ’ Workable" competition describes a mar ket structure and a business behavior somewhere between pure competition and pure monopoly. It recognizes the rarity of either of these two extremes in the real world. i I It accepts the market imperfections of the twentieth cen tury as unavoidable and admits the fact that not all de partures from pure competition are economically unsound. George Stocking in his Workable Competition and Anti-Trust Policy describes J. M. Clark1s "workable 41 competition" concept in this way: A workably competitive market is the best market situation attainable under private enterprise, and it is good enough. To determine whether any par ticular industry is workably competitive necessitates careful economic analysis of its structure, the be havior of the firms that comprise it, and its per formance. ^ More recently Clark has changed his modifier from "workable" to "effective" because: "Workable" stresses mere feasibility and it is consistent with the verdict that feasible forms of competition, while tolerable, are still inferior substitutes for that "pure and perfect" competition which has been so widely accepted as a normative ideal. And I have become increasingly impressed that the kind of competition we have, with all its de fects --and these are serious--is better than the "pure and perfect" norm, because it makes for prog ress. Some departures from "pure and perfect" com petition are not only inseparable from progress, but necessary to it. The theory of effective competition is dynamic theory.^ The second category of criteria is another of Clark's tests, whether government regulation can improve competition. Finally, competition in the title insurance George W. Stocking, Workable Competition and Anti Trust Policy (Nashville, Tennessee: Vanderbilt University Press, 1961), p. 20. 2 John Maurice Clark, Competition as a Dynamic Pro cess (Washington, D.C.: Brookings Institution, 1961), p. ix. 42 markets will be related to a set of national economic goals. I. PRINCIPAL SET OF CRITERIA Our principal set of criteria for evaluating the existence of effective competition also fall into three categories: (1) structure of the market, (2) behavior in the market, and (3) performance in the market. In turn each of these three categories breaks down into a number of sub-items. Neither the categories nor the sub-items are necessarily distinct and separate. One sub-item under "structure" may influence or bear on a sub-item under "behavior" and vice versa. Here are (1) a description of each of the sub-items that is relevant to our study and (2) observations as to the significance of each of the sub-items in identifying the presence or the absence of competition or the accept ability or unacceptability of competition. A. Structure of the Market 1. Concentration. This item is concerned with the number of buyers and sellers along with the rela tive market share that each of them enjoys. Heavy concentration is often thought of as an indication of the absence of competitive influences. Needless to say, this is not always true since many market situations have become highly competitive with few buyers or sellers or both. Entry. Ease of entry of new firms into a market is considered a prime contributor toward the main tenance of competition. Not only will high profits and ease of entry attract new firms into the market but a condition of easy entry will tend to disci pline the existing firms in the market by dis couraging them from seeking to establish either monopoly prices or output. Independence of rivals. The degree to which rivals are independently owned and managed has a signifi cant bearing on the presence and the degree of competition. By contrast those firms jointly or partly owned by competitors do not, as a general rule, enjoy the independence of thought and action exhibited by those unhampered by rival control. Integration. Here we are concerned with the economist's phrase, ’ ’ vertical integration.” If a particular firm owns its own suppliers or the purchasers of its products, then the discipline of competition is practically nonexistent. Product differentiation. One of the four condi tions of pure competition is product homogeneity. Once a product is differentiated, even if only slightly, then the seller has a degree of monopoly power and the traditional sloping demand curve. Product similarity, on the other hand, along with the other conditions of pure and perfect competi tion tends to bring price down to the low point of the industry average cost curve. Market information. The greater the buyer and seller knowledge of prices, costs, qualities, supply, demand and behavior, the more effective competition becomes in a market. The less the knowledge of these items among the parties to the market, the greater the tendency for pockets of monopoly to develop. Potential competition. One of the more effective deterrents to monopolistic behavior is the potenti ality of new competition. Potential, new competi tion can come from the entry of new firms into 45 the industry or from the manufacture by a large buyer of a product he formerly bought from an existing firm. Ease of entry, of course, is one condition which makes more effective the threat of new competition. Mark Massel has described this competitive influence very well. Because of the dynamic trends in tech nology, coupled with a growing industrial in terest in diversification, many companies do not know when and how new competitors may enter their market. . . . in some markets, the danger of this unknown competition "around the corner" may constitute a major competitive spur. B. Behavior of Participants in a Market 1. Collusion. One of the better known behavioral criteria of the presence of monopoly practices is collusion. The more familiar types of sollusion include price agreements among competitors, agree ments to limit production, and to allocate cus tomers . o Mark S. Massel, Competition and Monopoly; Legal and Economic Issues (Washington, D.C.: The Brookings Institu tion, 1962), p. 15. Response time. If competitors meet quickly the price moves or the attempts to differentiate a product by one firm in an industry, the latter firm may be less willing to make such moves than it would if the response time by competitors was longer. Thus, short response times often dis courage competitor moves because there appears to be no net gain for the aggressor. Conscious parallelism. When each competitor regu larly copies the price moves of other sellers, conscious parallelism exists. Although this type of behavior has not been used as primary evidence in the legal arena, it is a relevant criterion in the field of economics and may be an indication of the presence of monopoly characteristics. Price leadership. When one or more firms typically lead price movements either upward or downward, and these movements are followed by the other firms in a market or an industry price leadership exists. Such sheep-like behavior may be traced to (1) spe cific or tacit agreements, (2) the belief that the leader knows more about the demand and cost schedules, or (3) fear of punishment by a large firm for small firm aberrations. Price leadership, then, though not proof of collusion is a frequent characteristic of oligopoly and may signal a condition short of effective com petition. Price flexibility and frequency of price changes. Price flexibility and the frequency of price changes have been held up as indicators of the presence of competition by Gardner Means in par ticular. Means takes the position that in a com petitive market, prices will change frequently because they are sensitive to changes in demand. On the other hand inflexible, administered prices may indicate a lack of adequate competitive forces. Price and service discrimination. Because of the question as to whether price or service discrimina tion is associated with competitive forces or anti competitive forces, and because discrimination is quite difficult to discover, this criterion, though frequently relied on in the legal field, will not be depended upon heavily in this examination of the title industry. 48 7• Predatory practices. Among other things predatory practices include (1) cutting prices in local mar kets to harm individual competitors and (2) spread ing disparaging rumors about competitors or their products. The capacity to execute price cutting successfully in local markets is a reasonably use ful guide to monopoly-breeding activity. This is particularly true if the price cutter gains sig nificantly in his share of the local market or in the discipline he can exercise over his competi tors. 8. Merger history. Some mergers may tend to lessen competition by eliminating bothersome competitors while other mergers may assist in maintaining competition because smaller companies through mergers may be able to survive and become stronger competitors. 9. Product standardization. Standardizing a product or a service may result in increased price com petition (because of the disappearance of the com petitive advantages of differentiation) or may reinforce price collusion and price leadership. Each instance of standardization must be examined separately to determine its impact on competition. 10. Attempts to differentiate. The number of and the ingenuity shown in attempts to differentiate one’s product or service in the title insurance industry is clearly a behavioral criterion of competition. Where few attempts are made to differentiate or where little ingenuity is shown in these attempts, then one might conclude that competitive stimuli are weak. 11. Miscellaneous competitive tactics. Certain miscel laneous, competitive tactics somewhat peculiar to the title evidencing industry and not falling com fortably into any of the behavioral criteria above have been included here as a gauge of the degree of competition existing in a given market. Performance in the Market Mark Massel's orderly and perceptive discussion of performance in the market should be referred to briefly. He points out that performance criteria are "instruments of diagnosis, not prognosis." They may indicate an opportunity for improvement in competition 50 but do not prescribe the steps to be taken for improve ment . In addition he admits that "there are no satisfac tory yardsticks to gauge the adequacy of performance" and that an analysis of performance "provides many temptations to evaluate the total social contribution of an industry rather than to evaluate its competitive ness." In summary, however, Massel observes that even with these deficiencies, performance criteria are frequently required in determining whether a market is "tolerably" competitive.4 Here are the performance criteria we shall call upon: 1. Profit levels. Although the theory that monopoly breeds high profits forms the basis of profit levels as an indicator of competition, such an indicator is by no means a reliable sign of mono poly. On the contrary high profits may have been achieved because strong competition encouraged 4Ibid., p. 222. the reduction of costs through better controls and methods. On the other hand extremely high profits over a prolonged period may be significant as one of a number of indicators pointing toward mono polistic performance and behavior. There is also a practical limitation to the use of this criterion--the inability to determine profits that come out of a given market. Multi product companies and companies operating in many geographic areas most often consolidate profit and loss figures with the result that profit figures for a given product or a given area are not avail able. Because consolidation of profits from a number of counties is the rule rather than the exception in the title industry, this criterion will be of no practical value in our study. Price relative to costs. Because actual prices and reasonable estimates of unit costs are more accessible than actual profit levels of title offices in our markets, this criterion will be relied upon in preference to the profit level performance criterion. Quality of service provided. A rather significant measure of the effectiveness of competition is the degree to which the service offered by title offices meets the customer’s needs. To the extent that various service elements can be quantified, they will be discussed as criteria of competitive performance. Innovations and progressiveness. The presence of innovational activity can be taken as an indication of monopoly advantages because sufficient profits are needed to underwrite innovational activity. By contrast, however, competition may be the very force that motivates the innovational activity of a firm or industry. In our study we will place more emphasis on the latter position because even the research and de velopment of firms with monopolistic advantages are frequently motivated by the fear of potential com petition. Diversification. The attempts of firms in in dustry "A" to diversify their activities into industries MB,” MC" and "D" may indicate that 53 industry "A” is now and in the future subject to such severe competition that profit potential will be more limited. In addition geographical diversi fication may reflect a highly competitive condition in markets presently served by a firm. 6. Rate of growth. In some industries growth can reflect competitive influences which force down costs and broaden the market. It would be impor tant to study the cause of an industry's growth before applying this criterion. II. CAN GOVERNMENT REGULATION IMPROVE COMPETITION? As was discussed in Chapter II, J. M. Clark has identified one rather simple criterion of "workable” com petition. He has said that if competition can not be im proved by regulation then it is "workable." He has also pointed out that "the areas in which free and competitive market adjustments have been displaced by direct controls do not offer examples of conspicuous success as to make us eager to increase their number unnecessarily."'* 5 John Maurice Clark, "Toward a Concept of Workable Competition," American Economic Review. 30:241-256, June, 1940. 54 Because environmental variables were one of the criteria used in selecting our seven title insurance mar kets, and since one of the variables was the degree of government regulation, it is possible to analyze with reference to the seven counties whether or not regulation has improved, hampered, or had no effect on competition. If regulation has improved competitive performance, then perhaps competition in these markets is not "workable.” On the other hand if performance has not been improved by regulation, then competition in metropolitan title insur ance markets may be as effective as practicable. III. COMPETITION AND PUBLIC GOALS Because this study is more interested in evaluating the effectiveness of competition in the title insurance industry than in the existence of certain characteristics used to determine the presence of competition, it will be helpful to identify a set of public, economic goals which must be kept in mind as the effectiveness of competition in this industry is analysed. In addition one must understand how competition is supposed to facilitate the achievement of these goals. 55 It would be foolish to hold up any set of economic goals as universally acceptable in our country. With the thousands of shades of opinions existing within our national borders, a set which is probably acceptable to a majority is the best that can be offered. Fortunately, for the purposes of this paper, how ever, there appears to be a greater divergence of opinions on the means of achieving the goals than in the description of the goals themselves. Drawing largely from a chapter in John F. Due's and Robert W. Clower's Intermediate Economic Analysis, primary economic goals will be divided into three categories. These categories are (1) the maximum freedom of individual choice of action consistent with the rights of others, (2) the attainment of optimum standards of living for the community as a whole, and (3) a distribution of income in conformity with the standards regarded by society as being most equitable. Freedom of Individual Choice This economic goal is simply that one possess a maximum freedom of choice consistent with the rights of others to choose what and how much he shall purchase as 56 a consumer and to choose the manner and the direction in which his own resources (his land, labor, capital and enterprise) shall be used. Optimum Standard of Living The four prerequisites of this goal category are elementary concepts in economics, and may be described briefly as follows: 1. The economy1s resources or factors of production must be used in such a way as to achieve the familiar conditions of ”least cost combination" and "maximum returns due to scale" (size). 2. The allocation of the economy*s resources must respond as quickly and as accurately as possible to consumer preferences. 3. An optimum degree of resource utilization must be realized. This degree of utilization en compasses roughly our generally accepted mean ings of "full employment" and "cyclical sta bility." 4. Finally we must achieve an optimum rate of economic growth. 57 Optimum Pattern of Income Distribution As indicated earlier this "optimum" distribution is that which is regarded as most equitable by the consensus in a particular society. Three points of general agreement seem to have evolved in our society. They are: 1. Excessive inequality of income is undesirable. 2. Attainment of large incomes by monopolistic practices is undesirable. 3. Complete equality of income is undesirable from the standpoint of its effect on incentive and production. Shortcoming of Goal Descriptions The general and "question-begging" way in which these goal categories are expressed certainly detracts from their value as measuring sticks. However, attempts at a precise definition have been the subject of thousands of scholarly pages, and this general description will have to satisfy our needs. Competition as a Means of Achieving Our Goals In the introductory chapter of this study we dis cussed competition as a regulating, as an allocational and 58 as a distributional mechanism. These expected results have provided the traditional support for competitive policy. Now we shall look first at our national goals and then analyze how competition helps us to achieve these goals. Freedom of Choice Generally speaking, freedom of choice in the sense described earlier has a political origin, and, of course, any society endowed with such freedom requires certain regulators. Competition, in the market which is an expres sion of the desires, interests and efforts of others, provides most of the discipline required appropriately to allocate resources, promote efficiency, and distribute income. Thus freedom of choice with its political roots is regulated and limited in our economic sphere by com petition, and consequently our public goals are by virtue of competition more accessible. Optimum Standard of Living Efficiency. Motivated by self gain, the business firm strives for efficiency in order to maximize profit. This striving for efficiency may be either an aggressive or a defensive move. An owner or manager of 59 a firm may make the first move to improve his efficiency and thereby lower his price to increase his share of the market. On the other hand, there may be vigorous attempts to improve productivity in order to meet the lower prices that a competitor has already announced. Hence it is the competitive behavior of both the aggressive and defensive firm that contributes to efficiency. Finally, competition in its rather ruthless sense eliminates the highly inefficient firms or the firms whose product is no longer in demand. In this final sense the total efficiency of the economy is maintained or improved. Rapid and accurate allocation. With mobility of resources and with accurate knowledge of buyer wants, sellers can move both rapidly and accurately to meet changes in wants and preferences. The degree of rapidity, in particular, depends on the force of competition. If a seller knows that a present or prospective competitor may offer a new product to meet an unsatisfied consumer desire, a move to fill a service or product gap will occur quickly. Competition also seems to have led to a more accu rate satisfaction of wants through a more precise allocation 60 of resources. Product differentiation through its attempts to satisfy wants more accurately is a cause of this greater precision. Although a great deal of discussion has arisen over the merits and effects of product differentiation, such differentiation with all its attendant hazards often achieves greater buyer satisfaction. Resource utilization. Earlier we observed that the sub-objective of full resource utilization meant both full employment and cyclical stability. Competition is perhaps not a primary force in achieving the latter but could be considered a secondary force. To the extent that recessions may be aggravated by mal-allocation of resources in dying industries, competi tion may effectively reallocate factors of production into growing industries so that both effective demand and profits are stimulated. Full employment, the other facet of resource utili zation, in view of our rapidly expanding labor force and productive capacity generally requires new stimuli to con sumer spending in order to call forth more of the con sumers* dollars as their income rises. Again competition among producers can play a significant but not necessarily 61 dominant role in this pursuit. Producers striving for a profit and competing with others in their efforts often continue to build new products and more satisfying services thus making old ones uninteresting or obsolete. This pro cess calls for fresh consumer outlays and perhaps ' ’fuller employment.” Here, again, competition contributes at least something toward our goals. Economic growth. Economic growth, it is generally agreed, is a function of improving technology, an expanding labor force and the level of investment. As in the case of the efficiency sub-item above, competition certainly stimulates technology and investment levels, two of the three requisites of growth. Optimum Pattern of Income Distribution At least two of the three areas of general agreement on optimum income distribution are helped by competition. The attainment of large incomes by monopolistic practices will certainly not occur in an environment of effective competition. Nor will complete equality of income be a result of competition. Because of the innovational pro cess, incomes and profits will diverge as one firm develops 62 a procedural, marketing or financial advantage over another. IV. SUMMARY Having described our three sets of criteria for judging the effectiveness of competition, how will they be used? Each will be utilized in Chapter XI, ”Conelusions," as an aid in determining the effectiveness of competition in the seven metropolitan title insurance markets. Graphic and narrative means will both be used in comparing the mar ket characteristics with our "yardsticks.” In addition the principal set of criteria constitutes the major ana lytical tool of this paper and will serve as the outline for the chapters on "Government, Laws, and Competition," on markets "A," "B," "C," and "D," and on "Trends and Implications for the Future." CHAPTER IV PERTINENT CHARACTERISTICS OF THE INDUSTRY Pertinent characteristics of the title insurance industry, which will not be covered elsewhere in this paper, will be discussed here. These characteristics fall into the following categories: (1) the historical rise in demand for title insurance policies, (2) current demand character istics, and (3) current supply characteristics. Detailed descriptions of buyers and sellers, and thei services provided by the sellers will be discussed in the ’ ’ General Characteristics” section of the chapters on Markets ”A,” "B," ”C," and ”D.” I. HISTORICAL RISE IN DEMAND The Pre-Abstract Stage In the early days of the United States, land values were not great. Travel was light. Families located in one area tended to remain there. In a community where values 63 64 were not high, where everybody knew everybody else, where the salient points of title were a matter of common knowl edge, an attorney made a search of the public records. He reported his finding to his client frequently by word of mouth, and he handled the details of the sale of the prop erty.^" Certain events took place, however, which brought to light the inadequacy of this system. The Abstract and Opinion Stage The growth of abstracts. With the growth of our communities (a) land holdings were divided and sold, (b) strangers with no background of long and continuous occupancy became owners, and (c) population growth and more intensive improvements pressed the value of property up- 2 ward. All of this activity led to more recordings in the county recorder's office and more government offices with pertinent information on real estate interests. Thus, the task of searching the public records for title matters ■\james E. Sheridan, "Titles to Real Property,” Title News, 26:4, September, 1947. 2 Lawrence L. Otis, "Title Insurance," Ogden's Cali fornia Real Property Law (Los Angeles: Parker and Son, 1956), p. 921. 65 became more difficult and more important dollar-wise. Out of these rising difficulties and the increasing importance of accurately searching the public records rose an occupational specialty, title searching and abstracting. Men familiar with the location and organization of relevant public records were in greater demand. Particularly be cause of absentee interests, these specialists were asked more and more not only to identify the instruments affect ing a particular parcel of land but to extract or abstract from the instruments the important points from the stand point of title. Hence, the term ’ ’abstractor” evolved to describe this specialty. The growth of opinions. The abstract, of course, related only to the ’ ’chain of title." It did not involve the construction, interpretation or legal significance of the various items or instruments comprising the chain. This was the work of the lawyer who, versed in the intrica cies of land law and of corporation, probate, bankruptcy, and divorce law, could authoritatively construe the instru ments in the chain and reach a conclusion or an "opinion” 3 as to the current condition of title. 3Ibid., p. 923. 66 The system of the abstract and the attorney’s opinion has developed to a high point of perfection over the past one hundred years and is still common in many areas of the nation, particularly the rural areas which enjoy relatively infrequent turnover of property. Weaknesses of abstract-opinion process. Before the turn of the century, however, experience showed that the abstract-opinion system of establishing title failed, in many instances, to meet the ever-increasing demand for a ready and reliable evidence of title. There were four major limitations to this system: 1. The abstract-opinion process was too slow in a time of rapid real estate turnover. 2. Costs were too high particularly with property of low value when the number of the instruments in the chain of title was large. This was true because abstracts were priced on the basis of the number of instruments in the chain, and opinions, on the basis of time required for an examination. 3. If there were mistakes in either the abstract or opinion, as a practical matter, this was 67 ’ ’too bad.” Recovery of damages by the person whose property was covered by the abstract and opinion was characteristically only obtained through court action. 4. The abstract "package” was too bulky. Certificates of Title The demand by those requiring title evidence for increased speed in producing the evidence and for reduced bulk in the evidence package led to the certificate of title. Developed by companies specializing in abstract preparation and in the examination by "in house" attorneys, the certificate contained only the conclusions of title without the supporting abstract material or the reasoning behind the conclusions. The certificate reduced bulk significantly and ex pedited the preparation of title evidence by virtue of the "one roof" concept i.e., housing the examiner (who spe cialized in title examining and who spent little or no time in other types of legal practice) and the abstract process ing under a single roof. So the result was greater speed and less bulk. 68 Still the recovery of damages by reason of certifi- cate omissions or errors was accomplished only through lawsuits alleging negligence on the part of the company issuing the certificate and by proving damages on the part of the party in whose favor the certificate was issued. In short the liability under the certificate was the same as under the abstract and opinion. Guarantee of Title The next big step in the evolution of title evidence was the guarantee. In this case the abstract or title company decided to "stand behind" its conclusions of title by undertaking to pay any loss the guaranteed party should sustain in the event the record title should be other than that shown in the guarantee.^ The great advance of the guarantee over the certifi cate was--and is--that it substituted a certain for an uncertain yardstick of liability. On its face the guaran tee carried a stated liability. To recover a loss under the certificate it was first necessary to prove negligence on the part of the issuing company whereas under the ^Ibid., p. 926. 69 guarantee a loss to the party guarantied, a loss traceable to mere omissions— like the omission of liens for taxes or bonds--was recoverable without proof of negligence or lack of skill. The Policy of Title Insurance Even with the guarantee, protection was limited to matters appearing in the public records. Such an examina tion would not reveal such hidden defects as fraud, for gery, identity, competency, status, limitation of power, lack of delivery or failure to comply with the law. It remained for the policy of title insurance to extne pro- 5 tection against such off-record risks. Although title policies have been in use for some eighty years, the last forty years have seen their most rapid rise in popularity. This acceleration of popularity occurred principally in the large centers of population where the intensive improvement of land and the use of real estate as security for the investment of insurance company reserves necessitated greater concern for and protection of underlying title. 5lbid. The search for even further protection for the lender in particular has led to the appearance of the additional-coverage policy. In addition to the off-record risks referred to above (and which are covered in the in dustry^ standard policies) certain other off-record matters such as possible rights of parties in possession or possible rights apparent from an inspection or survey of the land can also be covered under additional-coverage policies. Thus, the title insurance policy has evolved out of growing demands for the protection of interests in real property. The continued growth of our urban areas and the trend toward higher population density in these areas may portend even greater title complexities and further demands for coverage. II. CURRENT DEMAND CHARACTERISTICS A Derived Demand The demand for policies of title insurance is a derived demand. The primary demand is for an interest in land--a leasehold interest, a fee interest, a beneficial interest of some kind, etc. As part of the process of 71 acquiring an interest in land, the party acquiring the interest typically demands insured evidence that his inter est is as represented by the seller. Highly Inelastic Demand Curve This derived demand for policies of title insurance appears to be both highly price and income inelastic. That is, within reasonable limits the number of policies de manded in a market will not change significantly with changes in policy prices or with changes in the incomes of buyers (the primary demand for interests in land may change in quantity with changes in income but the quantity of policies demanded does not change as a direct result of changes in income). Title evidence in most of our markets is simply part of the procedure for transferring interests in land. Substitutes With the exception of certain types of title evi dence found in markets "B" and ”DM in this study there are no very acceptable substitutes for policies of title insur ance in the other five markets. The only important sub stitutes are (1) the abstract-opinion package and (2) the Torrens Title certificate. Both of these substitutes 72 seem to be losing ground in their popularity. To the ex tent that they might tend to make the demand curve for title insurance policies more elastic, the influence of the substitutes seems to be waning. Influencing the Demand Curve As is true with any other alert industry in this country, some effort is devoted to influencing the demand curves of the industry, of groups of sellers, and of indi vidual sellers. Let us examine the prevailing thinking on this subj ect. Influencing the primary demand. Most title in surers have taken the position that there is little they can do to affect favorably the demand for interests in real property. The demand for interests in land in a given county is a function of (1) the outlook for prosperity, (2) business and consumer purchasing power, (3) the mobility of the business and consumer population, (4) family forma tions, (5) prevailing interest rates, (6) population growth and many other variables, which are generally beyond the influence of any single firm or small group of firms. Thus, short of working with the local Chamber of Commerce or similar kinds of government and private 73 agencies to stimulate local prosperity, title insurance sellers generally do not attempt to influence the primary . demand. Influencing the derived demand. Two significant approaches to influencing the derived demand for policies of title insurance were observed in the seven markets of our study. First, where substitutes for title insurance policies were still in vogue, advertising and promotional efforts directed toward real estate lenders and owners were made to gain increasing acceptance of title policies over abstracts and opinions, guarantees, and Torrens Title certificates. There were instances of both individual and group promotional efforts of this type on the part of title insurance sellers. Second, regular and enthusiastic efforts were made by individual sellers to differentiate their own speed, accuracy, and other variables of "service" in providing title policies. In economic terms they were attempting to make their own demand curve more inelastic. Buyers In the section headed "General Characteristics of Market A" we point out that the party that pays for 74 a policy of title insurance frequently exerts little or no influence on the selection of sellers. Although the party that pays for the policy usually could determine the seller, he usually does not because of either lack of in terest or lack of understanding. This situation is analo gous in some respects to the purchase of life or fire insurance. The purchaser relies on his friend or consul tant, the insurance broker or agent, who presumably directs the business to the most suitable insurer or carrier. The significance of this title insurance industry characteristic is, of course, that sellers direct most of their promotional efforts toward influencing the real estate broker, lawyer, lender, builder or escrow agent all of whom are the effective decision makers, and not to the seller, buyer, or borrower, who will actually pay for the policy. The ’ ’general characteristics” section of each of our ’ ’ market’ ’ chapters will describe buyer characteristics in more detail. 75 III. CURRENT SUPPLY CHARACTERISTICS Shape of Industry Supply Curve It would be dangerous to generalize on the typical shape of an industry supply curve in a given county. There is one characteristic of supply, however, that is worth nothing. There seem to be few resources used in the produc tion of title insurance policies that face immediate prospects of diminishing returns. As a result, the in dustry cost curves with a given number of firms tend to be either flat or sloping downward and to the right. This tendency is reinforced by the substantial fixed cost of building and maintaining a title plant--the large set of land records typically maintained by a seller of title insurance policies--which, when converted to a cost per policy, declines steadily as quantity increases. This declining cost characteristic with a fixed num ber of firms raises the question as to whether or not this industry should not be made a public utility. In Chap ter XI, ’ ’Conclusions,” we deal briefly with this question. Sellers The variety of forms which the suppliers of title policies or components of title policies take was covered briefly in Chapter I under the heading of "Definitions- identification of suppliers” and will be treated more spe cifically in the "General Characteristics” section of each of our "market” chapters. Preparing the Product One rather universal characteristic of the product or service rendered by title insurance offices should be mentioned. Although the title insurance policy does in sure against loss from off-record matters which are not always ascertained by the title office (including those mentioned earlier such as "delivery," "competency," etc.), by and large the insurance is against loss by reason of mistakes the title office has made in its searching and examining process. Thus, title insurance has less "casualty” exposure in its policy than life and fire in surance. Most of the operating costs of a title office are personnel costs for searching and examining the title, and not for losses paid and anticipated from actuarial calculations. IV. SUMMARY Although there have been neither surprises nor revelations in this chapter, hopefully some of the demand and supply characteristics of the industry have been trans lated into terms understandable to both the student of economics and of title insurance. This translation will be helpful in the discussions which follow. CHAPTER V GOVERNMENT, LAWS, AND COMPETITION Competition, its characteristics and the degree of its presence, depend in some measure on legal environment. Although we are observing competition in the title insur ance industry through the eyes of an economist rather than those of a lawyer and even with the rather limited impact of laws on competition in the industry, this chapter will (1) review briefly our national policy on competition as reflected by federal laws dealing with this subject and (2) classify roughly the types of state laws affecting directly the seven title insurance markets. I. FEDERAL LAWS AND OUR NATIONAL POLICY ON COMPETITION The Laws and Their Objectives In the seventy-three years since the Sherman Act became law, both Congress and the courts have pursued 78 the Act's central objective— the preservation bf a com petitive economy.^ For our purposes this particular law \ has two significant provisions. Section 1 forbids re straints of trade by agreements, combinations and conspira cies in interstate and foreign commerce. Attempts or conspiracies to monopolize in such commerce are made illegal by Section 2. Incipient monopoly and eminent restraints of trade were the targets of the Clayton Act which was passed by Congress in 1914 in response to claims that the broad pro visions of the Sherman Act did not adequately deal with these problems. Section 3 of the Clayton Act makes illegal exclusive dealing contracts or tying arrangements (in which a cus tomer agrees not to purchase goods or services from the seller's competitors) if these arrangements lessen competi tion substantially or tend to create a monopoly. Certain specific practices made unlawful in the Clayton Act are stressed in its 1936 Robinson-Patman amend ment. These practices include price discrimination that George W. Stocking, Workable Competition and Anti- Trust Policy (Nashville, Tennessee: Vanderbilt University Press, 1961), p. 185. 80 may (1) lessen competition substantially, (2) injure com- \ petition, or (3) tend to create a monopoly. In addition X payments of brokerage fees to buyers and furnishing services to customers or making payments to them except on "proportionally equal terms" were forbidden. The Celler-Kefauver Act of 1950, which amended the Federal Trade Commission Act of 1914 (which broadly pro hibited "unfair methods of competition in commerce"), identifies as unlawful unfair methods of competition and unfair or deceptive acts. In addition to these broad, well-known federal statutes there is a host of laws relating to specific in dustries, to the enforcement and broadening of these major 2 acts, and to patents. In general state governments have not been active in enforcing their anti-trust laws. Mark Massel in his Competition and Monopoly has noted that state and local governments appear to have been mpre interested in 3 restricting rather than maintaining competition. 2 Mark S. Massel, Competition and Monopoly; Legal and Economic Issues (Washington, D.C.: The Brookings Institu tion, 1962), p. 46. ^Ibid., p. 64. Results Few would disagree that our present complex of legal efforts to maintain competition is a "hodge-podge of legis- lation and administrative agencies." As a result it is difficult in many instances for either the businessman or government to determine whether or not certain practices are in violation of the anti-trust laws. Furthermore "the statute books contain a confusing array of legislation which, in part, promotes competition and, in part, promotes monopoly."^ On the other hand J. M. Clark in his Competition as a Dynamic Process feels that our concept of competition as it has grown out of our anti-trust laws is not just one of price competition but is one that allows a place for com petition in productive techniques, in quality and in design of products. He notes that this is a more "balanced con ception of competition" than mere price competition."* ^Ibid.. p. 42. ^John Maurice Clark, Competition as a Dynamic Pro1 cess (Washington, D.C.: Brookings Institution, 1961), p. 244. 82 II. A SHORT HISTORY OF STATE VERSUS FEDERAL REGULATION In our federal system of government the regulation of intrastate or local commerce has on the whole been left to the states. Although the Supreme Court has gradually broadened its concept of interstate commerce and narrowed its definition of intrastate business, there are many com mercial activities still included in the latter category. At least at this moment the title insurance industry falls into the intrastate classification. There is, however, a history behind this classification. South-Eastern Underwriters Case From the first appearance of insurance companies in this country they considered themselves local businesses subject to control by the states only. Early Supreme Court decisions supported this position by holding that insurance was not "commerce" and as a consequence was not subject to federal regulation. As a result of a Department of Justice action to test the validity of rate making activity in the fire in surance field, the Supreme Court found in U.S. v. South- 83 Eastern Underwriters Association in 1944 that the "busi- ness of insurance” was commerce and that federal anti-trust laws were applicable to insurance companies conducting their businesses across state lines. McCarran Act ■ ■ ■ ' I — -' — , i. - By March of 1945 with the passage of the McCarran Act the principle of state rather than federal responsi bility for insurance companies was reaffirmed. However, the Act provided that (1) after June 30, 1948, the Sherman, Clayton, and Federal Trade Commission Acts ’ ’shall be appli cable to the business of insurance to the extent that such business is not regulated by state law” and (2) the Sherman Act will continue to be applicable ”to any agreement to boycott, coerce, or intimate, or act of boycott, coercion, or intimidation."7 Referring to the McCarran Act Franklin Roosevelt observed "Congress did not intend to permit private rate- fixing, which the anti-trust Act forbids, but was willing (L U. S. v. South-Eastern Underwriters Assn., 322 U.S. 533 (1944). 7Ibid. 84 to permit actual regulation of rates by affirmative action of the states."® At a joint meeting of the Federal Legislation Com mittee of the National Association of Insurance Commis sioners an all-industry committee was organized to formu late a Fair Trade Practices Act which was to be recommended to the various state legislatures and which was designed primarily to exclude the operation of the Federal Trade g Commission Act. This Fair Trade Practices Act prohibited any unfair or deceptive act or practice in the business of insurance in about the same language used in the Federal Trade Com mission Act. A number of unfair practices are enumerated and defined as follows: . . . misrepresentation and false advertising; defamation, publication of false and misleading financial statements; boycotting, coercion or in timidation; rebating or discrimination. ^ Q Vernon A. Mund, Government and Business (New York: Harper and Brothers, 1955), p. 291. ^Ernest F. Roberts, Jr., editor, Public Regulation of Title Insurance Companies and Abstracters (Philadelphia: Villanova University Press, 1961), p. 66. 10Ibid. 85 In general the provisions of this Fair Trade Prac tices Act became law in the seven states whose jurisdiction includes the metropolitan title markets of this study. Two Supreme Court decisions of 1958 seem to have confirmed the jurisdiction of the states and the effectiveness of the Fair Trade Practices Acts.*^ Recent Developments At least two recent developments have indicated that the federal government is still interested in supervising the insurance companies. U.S. v. Chicago Title and Trust Company. In Novem ber of 1962 the Justice Department filed a civil anti-trust suit against Chicago Title and Trust Company contending that the company’s acquisition of the Kansas City Title Insurance Company tended to lessen competition and to cre ate a monopoly in violation of the Clayton Act. The government has asked that Chicago Title divest itself of Kansas City Title and that Chicago Title also 11 Federal Trade Commission v. National Casualty Com pany; Federal Trade Commission v. American Hospital and Life Insurance Company. 357 U.S. 560 (1958). 86 be enjoined from acquiring any other firms without court approval.^ Here, then, was a fairly obvious attempt to bring insurance company mergers under federal control. Committee on Financial Institutions. Largely as a result of the well-known report of the Commission on Money and Credit, President Kennedy appointed on March 28, 1962, a committee Mto review legislation and administrative practices relating to the operation of financial inter mediaries" and "to consider what changes, if any, in government policy toward private financial institutions could contribute to economic stability, growth, and effi- ,,13 ciency. This Committee on Financial Institutions concurred with the Commission on Money and Credit’s recommendation that "overriding Federal Charters be available to life in surance companies" in order "to avoid increasing complica- 14 tions of multiple state jurisdictions. ..." However, 12 Los Angeles Times, November 11, 1962. 13 Walter W. Heller, Chairman, Report of the Com mittee on Financial Institutions (Washington, D.C.: Government Printing Office, 1963), p. vii. ^Ibid., p. 35. 87 the Committee went further by suggesting that the Congress might want to study "life insurance practices and regula tion so as to determine whether federal legislation is desirable. "^3 This suggestion sprang from alleged (1) lax supervision of insurance company practices in some States, (2) difficulties in state regulation of companies operating across state lines, and (3) limited applicability of the anti-trust laws to insurance operations. Senate study of state regulation. Support for the above trilogy of allegations is to be found in a 1960 Senate Committee Report entitled The Insurance Industry: Aviation, Ocean Marine, and State Regulation. This report was described by its chairman, Joseph C. O'Mahoney, Senator from Wyoming, as "the first comprehensive effort by Con gress to re-examine the insurance industry in the light of the McCarran-Ferguson Act and to measure the effectiveness 1 fi of the resulting State regulation." Study conclusions 13Ibid., p. 36. 1 fi U.S. Senate, Committee on the Judiciary, 86th Congress, 2nd Session, 1960, The Insurance Industry: Aviation, Ocean and Marine, and State Regulation (Washing ton, D.C.: Government Printing Office, 1960), p. iii. 88 emphasized the particularly lax supervision by States in the maintenance of competition even though potentially effective state legislation did exist in this sphere. The blunt conclusion on this subject ran as follows: Failure on the part of the States to enforce their statutes will inevitably lead to Federal juris diction in this area.17 III. THE IMPORTANCE AND THE CLASSIFICATION OF STATE LAWS State laws have been singled out for discussion be cause they have usually governed the insurance industry. One must say "usually" because of the "running” jurisdic tional struggle between the State and Federal Governments, which has just been discussed. Two categories of state laws are important to this subject. First, there is the group of laws which has as its alleged objective the maintenance of competition. This group most often applies to all types of businesses and reflects general governmental support of competitive policy. Because of the similarity of these types of laws 17Ibid., p. 246. S . 89 from state to state they will be discussed in a very cur sory manner. Second, there is the category of laws relating directly to the title insurance industry. This group to the extent that it bears on competition will be analyzed in reasonable detail using the "Villanova Report” as the prin cipal guide. IV. GENERAL STATE LAWS DESIGNED TO MAINTAIN COMPETITION By 1955 twenty-seven states had constitutional pro visions which condemned "monopoly, restraint of trade, restraint of competition, price fixing and, in some cases, concerted action to limit output." Forty-one states had by that time enacted statutory provisions against these kinds of offenses.'*'® Market "A’s" (to be discussed in the next chapter) state constitution declares that monopolies "are odious, contrary to the spirit of a free government and the prin ciples of commerce, and ought not to be suffered."^ 18 Mund, op. cit., p. 446. 90 Three of the seven markets, "A, ” "B," and "F," fall within the jurisdiction of states having the following type of "Little Sherman Act." A trust is a combination of capital, skill, or acts by two or more persons, firms, partnerships, corporations, or associations--for either or any of the following purposes: (1) To create or carry out restrictions in trade or commerce. (2) To limit or reduce the production, or increase or reduce the price, of any commodity or mer chandise. (3) To prevent competition in manufacturing, making, transportation, sale, or purchase of merchandise, product, or commodity. (4) To fix at any . . . standard . . . figure . . . its price to the public or consumer. . . . (5) To make or enter into . . . any contracts, obligations, or agreements . . . not to sell, dispose of, or transport any article . . . below a contnon standard figure or fixed value ... or settle the price of any article . . . between themselves and others, so as to directly or indirectly preclude a free and unrestricted competition among themselves . . . every such trust as is defined herein is declared to be unlawful, against public policy, and void.20 In the main both the constitutional and the statu tory provisions of state anti-trust laws are quite general, 2QIbid., p. 447. 91 and their influence on the maintenance of competition is more a function of the aggressiveness of the Attorneys General than of the provisions themselves. Although the states in which we find markets "A" and ”F" are reputed to enjoy active programs of enforcement, it would be very difficult to ascribe any degree or character of competition 21 in the title insurance industry to these programs. V. STATE LAWS DIRECTLY CONCERNED WITH THE TITLE INSURANCE INDUSTRY After describing first the significance of the policy of an acceptable balance between competition and financial responsibility we will classify state laws con cerned with the title insurance industry according to those affecting market structure and those affecting market be havior. Specific laws and their impact on effective com petition in our seven markets will be treated as we review each county and will not be evaluated in this chapter. Balancing Competition and Responsibility By reviewing the need for financial responsibility in the insurance industry we will better understand the 21Ibid., p. 452. 92 thinking behind the laws to which the industry is subject. The individual views of Senators Everett Dirksen and Roman Hruska in the United States Senate Report on the in surance industry treats this subject of balance so well that it is quoted here in full: The American economy is based on free enterprise, and competition is the normal means of securing the maximum efficiency from our resources of manpower and capital. In financial institutions unrestricted and unfettered rate cutting and unsound practices relating to reserves have been prevented by appro priate regulation without deterring normal commercial rivalry for new business and growth. There has long been a realization that the safety of bank depositors and of those who look to insurance companies to meet the terms of their contracts when a loss occurs, necessitates a different approach on the part of the States than would normally be appropriate to other forms of business activity. Prior to the 20th Century there were many disas trous bank and insurance company failures, which led to an acceptance on the part of the financial com munity, the insurance industry, and State and Federal Government officials that in these areas financial prudence and caution must become one of the prime factors in the management of any insurance or banking institution. This philosophy is predicated on the fact that before 1909 six of the leading fire insur ance companies either failed or had to be reorganized. During the century ending in 1950, more than 4,500 fire and casualty insurance companies failed, quit, or merged. If a firm engaged in the production or sale of commodities or services, other than banking and in surance, fails in the competitive race, its stock holders have lost their investment. A free private 93 enterprise economy is necessarily based on risk, and those who supply venture capital expect a commensurate reward if the business is successful and are prepared to lose their investment if it does not succeed. These postulates do not apply to those who have de posited their savings in a banking institution or have purchased an insurance policy. They do not ex pect to make profits through the assumption of a risk. The Congress while fostering competition must not encourage methods or practices which might weaken the ability of insurance companies to meet their contin gent claims. If it did so, this would be a great disservice to the citizens of the United S t a t e s .^2 Laws Affecting Structure Entry. As might be expected, most states impose license and financial requirements on firms entering the title insurance market as sellers. The requirements in a literal sense limit competition because they limit the number of sellers. Obviously, however, both the intent and the effect of these limitations are in the interest of the consumer’s well being. These requirements result in at least a minimum degree of financial responsibility as a protection to buyers and beneficiaries of title insurance. The Villanova Report emphasizes the need for this financial responsibility by saying: 22 U.S. Senate, Committee on the Judiciary, op. cit.. p. 246. 94 Apart from the regulation of rates charged the public, the most significant standards fixed by the insurance codes are those dealing with the financial structure of insurance companies. This is so be cause the protection of policyholders is the very purpose of insurance regulation while, at the same time, the guarantee of financial stability of all insurers is the heart of any rational system of policy holder protection.^3 The types of title insurer financial responsibility requirements include: (1) a minimum paid-in capital re quirement ranging from $50,000 to $1,000,000, (2) a minimum paid-in surplus to finance a new venture through the period of initial operating losses, and this minimum usually amounts to about 50 per cent of the minimum capital re quirement, (3) deposit of securities with the Insurance Comnissioner or other appropriate state officer, (4) lia bility reserves for losses or an "unearned premium reserve" (frequently 10 per cent of the premium is attributable to insurance and recoverable at the rate of 5 per cent of the reserve per year), and (5) miscellaneous requirements such as investment limitations and title plant requirements. In addition to the financial limitations to new firm entry there are many states in which title insurers may not 23 Roberts, op. cit., p. 155. 95 engage in other forms of business. This situation, though ostensibly for the protection of policy holders, does restrict the entry into the title insurance market of those firms involved in the forbidden businesses. Examples of business which may not be conducted by a title insurer and vice versa include life insurance, fire and casualty in surance, and mortgage insurance. Vertical integration. Of particular interest in our study are those state laws which limit a user of title insurance or an "insured” in his freedom to serve as his own insurer. Clearly, where such a limitation does not exist there is a possibility that competition will not work effectively. The user in these instances may be willing to (1) pay unreasonably high premiums, (2) accept unusually poor service, or (3) accept faulty title examinations and policies from the "controlled" title insurance company. Market information. Certain state requirements such as posting of price or premium schedules provide another competitive ingredient; that of better knowledge or better market informat ion. 96 Product homogeneity. The current trend according to the "Villanova Report” is toward approval by the Com missioner of any title insurance contracts. Although this appears to constitute a product standardization influence within the various states it should be pointed out that the pressure for similar or identical insurance coverage is much stronger from national real estate lenders than from state governments. Traditionally, homogeneity or similarity of product in a market has been associated with the presence of com petition. This position still seems to be a sound one because with homogeneous products competitive behavior is forced into the area of pricing or quasi-pricing activi ties. Even with the standardization influence from state laws one should not conclude, however, that customer choices of coverage are in fact unreasonably limited. The spectrum of policy endorsements in some markets seems to give the user all the choice he wants. In short the cus tomer demand for variety.in some areas has outrun the state’s efforts toward product homogeneity. I 97 Laws Affecting Behavior State laws and regulations concerned with the title insurance market do affect competitive behavior through limitations on pricing. As with "structure," these laws can either encourage or discourage competition. With a few exceptions, however, the intent of this legislation was the protection of the public--protection from monopoly practices. Results have generally been consistent with intent. Filing requirements. In those states where rates are regulated "every authorized insurer must file with the commissioner every rate manual, schedule of rates, classi fication of risks, rating plan, rule, etc., and every O / modification of the same which it proposes to use." Generally, the commissioner in the same states has an opportunity to disapprove these rates. Without doubt rate regulation limits price competi tion. The regulation mechanism is too cumbersome to en courage quick or selective price changes. The same is true of rate deviation regulations. ^ Ibid., p. 249 • 98 Deviations permitted. In most cases deviations from the filed schedule of rates must be submitted to the com missioner. Here again these filing requirements signifi cantly hamper price competition if such forces do exist in the market. Rate making criteria. Certain rate making criteria are employed where rate regulation exists. Most frequently used criteria are: "(a) past and prospective loss experi ence, (b) past and prospective expenses, (c) a reasonable margin for profit and contingencies, (d) percentage to be allocated for reserves, (e) costs of participating insur ance, and (f) ’all factors reasonably attributable to the class of risks.’"25 In Chapter XI, we will pay particular attention to the level of prices that have evolved from regulation as opposed to the level resulting from purely market forces. Such a comparison should shed some light on the effective ness of competition in the markets we will study. Rating organizations. Quite common in other types of insurance markets rating organizations are also ^ Ibid., p. 255. 99 permissible in some states for title insurers. These rating organizations are organized for the purpose of making rates to be used by either members or subscribers. The impact of the rate making groups will also be noted as we review each county. VI. SUMMARY With this chapter the general statutory environment in which the title insurance industry operates has been summarized. As of 1963 the statutory environment was a creation of state governments rather than the federal government. At the beginning of this chapter it was noted that statutory environment as a whole seemed to have a rather minimum impact of competition in most metropolitan title insurance markets. This feeling still persists and will be supported further by appropriate sections in most of the remaining chapters. Final conclusions as to the effect of government and laws on competition in the title industry will be drawn in Chapter XI. CHAPTER VI ANALYSIS OF MARKET "A” I. SETTING FOR MARKET "A" In order to minimize the number of variables in this study of competition counties all with a large, urban title insurance market have been chosen. The purpose of this section is to verify the size and urban character of mar- ket "A." Because it was suspected that growth rate might have some bearing on the presence of effective competition, an attempt has also been made to determine the rate of growth of the market for title insurance policies. Size of the Market Three items have been chosen as measures of market size. First, population for 1963 stood at 1,350,000. In 1960 market "A” was ranked among the fifty largest county populations in the United States and ranked fourth largest among our seven markets. Second, the number of deeds 100 101 recorded for the year 1962 was estimated at 90,000. This figure was the highest among the seven markets. Third, mortgages amounted to approximately 63,000 for 1962, the second largest figure among our markets, but just over $300,000,000 in mortgage dollar amounts, a very low figure in the spectrum of markets. Thus, market "A" would rank quite large in market size of the number of deeds and mortgages is used as an indication of the number of title orders, but rather low in the value of transactions and title premiums if mortgage values are used as a yardstick. This condition of a large number of recordings and relatively low values seems to be characteristic of rapidly growing counties with plenty of undeveloped land and with a relatively low density popula tion. Urban Character of Market So that the number of variables in this study of competition could be minimized counties with a large, urban population have been chosen. In each of the counties at least 94 per cent of the population is classified as urban and only one of the counties has less than 900,000 popula tion. Consequently, the character of these markets is 102 "large and urban.”^ Growth of the Market With a 50 per cent increase of deeds recorded in the thirteen year period from 1950 through 1962 and with almost a similar rate of growth for mortgages it is likely that market "A" has seen the highest rate of growth in terms of the number of title orders among the seven markets. The change in dollar value of these transactions is not avail able for this period. Population growth from 1950 through 1960, like deed recordings, has jumped upward by slightly over 50 per cent. Estimates of 1970 population are 50 per cent above the 1960 level. In summary market "A” meets the tests of a large urban title insurance market and is a rapidly growing mar ket for title services. i U.S. Bureau of the Census, County and City Data Book. 1962, A Statistical Abstract Supplement (Washington, D.C.: Government Printing Office, 1962), pp. 52, 92, 162, 202, 282, 312, 342. 103 II. STATE LAWS AFFECTING COMPETITION IN MARKET "A” Although earlier the general types of state laws which might affect competition in the title insurance in dustry were discussed, this section will note briefly the specific and relevant statutes affecting market "A." Laws Affecting Structure Entry♦ Paid-in capital must equal at least $100,000 in market "A" and in addition the insurer must deposit $100,000 in approved securities with the Board of Insurance ? Commissioners. One unusual provision states that no corporation operating as a title insurer in the state may own or acquire more than one abstract plant in any one county. An unearned premium reserve of 5 per cent of premiums is required until the reserve reaches $100,000 3 at which time the rate drops to 3 per cent of premiums. 2 Ernest F. Roberts, Jr., editor, Public Regulation of Title Insurance Companies and Abstractors (Philadelphia: Villanova University Press, 1961), p. 161. ^Ibid., p. 195. 104 Although the provision could not be located in the Insurance Code, interviewees in market "A" claimed that a title index covering twenty-five years of recorded instru ments was required by law of an insurer or title firm as a condition to operation in any county. Vertical integration. Although mortgage insurance cannot be provided by a title insurer, there appears to be no other limitation as to the type of business in which the 4 insurer may engage. Product homogeneity. For all practical purposes the insurance coverages offered by title offices in market "A" are identical. Every company doing business under this chapter shall file with the Board the form of guarantee certificate, mortgage policy, or any other policy of title insurance before the same shall be issued, and the form must be approved by the Board, and be uni form as to all companies. As mentioned earlier in the general section on state laws directly concerned with the title insurance industry, standardization of the product or service has been recog nized traditionally as a condition of pure competition. ^~Ibid., p. 109 • ^Ibid., p. 65. 105 Homogeneity, it was thought, encouraged price competition and gave no seller a monopolistic "edge" because of a dif ferentiated product. In market "A" two observations are in order as a result of homogeneous insurance coverage. First, competi tion cannot occur in pricing because prices are also set by the state. Second, competition, as will be indicated later, must take place principally among the various com ponents of "service." In market "A” prices are actually set by the Board of Insurance Commissioners after a prescribed public hear ing. These insurance rates must be "reasonable to the public and non-confiscatory as to the company." To achieve this object the Board may require companies operating in the state to submit pertinent financial in formation. Conelus ion Taken as a whole state laws covering market "A" pre sent more limitations to competition in the pure and per fect sense than the laws of any other of the seven markets. 6Ibid., p. 255. 106 A conclusion as to the existence of competition in the J. M. Clark sense will be reserved for discussion in Chap ters X and XI. III. GENERAL CHARACTERISTICS OF MARKET "A” Principal Services Sold A typical ’ ’package” provided by title offices in market "A” includes the preparation of a title search, the examination of the search, the drawing of documents, the closing process, and the issuance of a title insurance policy. In the vast majority of transactions this entire package is sold rather than a part of it being sold sepa rately. The published, state approved title insurance rate schedule contemplates the performance of all of these services, and in those few instances where one of these services is performed by someone other than the title office, the package rate may be reduced proportionately. Estimates of the percentage of real property trans actions presently covered by abstracts and opinions only range from 5 to 10 per cent leaving the balance for the title insurance market. Typically it is the mineral inter ests and commercial and industrial developments involving 107 million dollar or more liabilities that by-pass title in surance. High premiums versus limited risks are given as the reasons by purchasers for avoiding the title policies with high value commercial and industrial property. By the same token title companies have resisted coverage of mineral interests because of the potential claims and risks inherent in this type of interest particularly at the time oil is discovered. Miscellaneous types of service such as judgment lien reports and simple chains of title are offered by all com panies but are not of much significance for our purposes. Trend in Popularity of Title Insurance As a form of title evidence, title insurance has continued to rise in popularity in market "A." Rough estimates as to the percentage of real estate transactions covered by title insurance over the last three decades have been made as follows: 1930, 20 per cent; 1940, 35 per cent; 1950, 75 per cent; 1960, over 90 per cent. Description of Sellers Sellers in market "A" are principally title offices as described in Chapter I under the heading, "definitions." 108 The sellers have their own title plants, examiners and closers all of which enable them to provide the "package" service just described. As is more typical than not, about half of the offices are owned and operated by the insurer while the other half are owned and operated by parties other than the insurer-underwriter. A number of the title offices represent more than one insurer. This arrangement enables the title office to reinsure the policies of one underwriter with another in case of excess liabilities. In addition, the title offices reap multiple benefits to the extent that the insurers do, wield any national or regional influence in business acquisition for insurance on local property. Of course, the title office has to keep his underwriters "happy" under these conditions and for that reason often attempts to issue at least what is considered to be a minimum number of policies each month for each qualified insurer. One underwriter is represented by two separately owned title offices in market "A," but none of the three parties involved seem to have any serious objection to this arrangement. 109 Selection of Seller As in many of the markets to be examined, the party that pays for a policy of title insurance frequently exerts little or no influence on the selection of sellers. This study of competition, then, is really more interested in those entities or influences which choose the title in surer or the title office. These decision-makers are in the market sense ' ’ buyers.” Who Are the Buyers? The real estate broker and the contractor-developer constitute the most significant force in choosing title offices for particular transactions in market "A." This influence is true in the case of the real estate broker because (1) in most residential property transactions the seller, who pays for the owner’s title policy, knows very little about title insurance and relies on the broker for a choice of a title company and (2) most frequently there is no escrow or lawyer intermediary between the broker and the title company whose influence might supersede that of the broker. That the contractor-developer makes the choice among title companies is quite apparent. He not only owns 110 the land, which upon sale must be insured, and procures the loan for construction purposes, but he is, of course, a dealer in land and buildings and, as such, is familiar with the characteristics and practices of the various title offices. On some occasions where large loans are involved, the lender may select a title office, a primary insurer, and a secondary insurer. In these instances national or regional lenders may usurp the selection prerogative from otherwise local influences. Who Pays for the Services? Normally the seller pays for the new owner's title insurance policy and for the required certificate showing the condition of real property taxes on the parcel in ques tion. The purchaser and borrower pays for the loan policy and for the typically required survey of the property. Where the abstract-opinion route is chosen the seller pays for the search and the buyer, for the opinion. Where more than a minimum number of dispersals are made by the title office or where there is large and com plex fund handling involved, a small escrow fee is now Ill charged and is paid by either the buyer, the seller or both. IV. STRUCTURE OF MARKET "A" Cone ent rat ion Number sellers. The major city in market "A" con tains twelve separately owned entities selling the complete title package just described. With one exception all of the entities do business from a single, office location. In addition there are two more firms separately owned and separately managed that provide abstract services only in certain non-metropolitan areas of the county. Standing behind these twelve separate title entities are fifteen underwriters. Some of the offices, then, represent more than one underwriter and in one case a single underwriter is represented by two offices. Eleven of the fifteen qualified title insurers are domestic companies and the balance foreign corporations. Market shares of sellers. Estimates as to each title office's share of the ’ ’county pie” were made as follows: 112 Per cent of Market Firm Number 1 15. 7 Firm Number 2 3.5 Firm Number 3 6.5 Firm Number 4 9.7 Firm Number 5 7.0 Firm Number 6 7.8 Firm Number 7 1.6 Firm Number 8 6.0 Firm Number 9 17.0 Firm Number 10 3.2 Firm Number 11 20.1 Firm Number 12 1.9 Number of buyers and buyer shares. Most interview ees indicated that no single buyer or decision-maker regularly ordered more than 3 per cent of either the number or dollar value of packages sold in the county. The number of entities placing orders were approximated as follows: Real Estate Brokers -- low thousands Builders and subdividers --^ low hundreds Lenders -- less than one hundred 113 Attorneys low thousands, many of whom placed orders very infrequently Large land owners insignificant Escrow companies none Conclusion. As indicated by the relative shares of business enjoyed by each office and by the number of offices there is no marked concentration in this market. Significantly, the newest office has been able to acquire 3 per cent of the market during its first six months of operation. No concentration of any major importance exists on the ’ ’ buyer" side either. Entry Here one is interested in the ease with which a new firm can enter the market. Traditionally, the ease of entry has been recognized as a force for maintaining com petition. Two items will be reviewed in each of our markets as indicators of entry ease or difficulty. The first item is the number of firms which have operated in the market during the last fifteen years, and the second item is 114 an estimate in index form of the cost of building a title plant, i.e. a set of records covering people and real estate which contains sufficient information to compile a reliable title search. Historical number of sellers. Remembering that there are now twelve offices offering the ’ ’package" service throughout the county, there were approximately nine offices five years ago; eight, ten years ago; and seven, fifteen years ago. Cost of entry. A title plant as defined by state law must include among other things twenty-five years of applicable real estate recordings. Here are two estimates in index form (costs in market "D" = 100) of the cost of building a title plant: Calculated minimum = 82. 8 Assumptions: A twenty-five year plant where only minimum plant standards are met, i.e., a simple punched card index is prepared for items relating to the property and persons* accounts. A 16mm microfilm of documents is made. No arbitrary property accounts are prepared. Calculated highly satisfactory = 39.4 Assumptions: A twenty-five year plant with a com plete set of arbitrary property accounts and with 115 the most complete, efficient manual, "hard-copy” system now in use.? Other costs of entry such as (1) acquiring an underwriter, (2) acquiring adequate personnel, (3) renting or buying office furniture, (4) leasing office space, (5) printing various internal and external forms, (6) in corporation costs (but not those of qualifying as an underwriter), (7) promotional expenses and or miscellaneous costs are important one-time costs but even when taken together do not usually equal the plant building costs (for a twenty-five year plant). For this reason attention has been directed toward the plant cost. Conclusion New, successful entries have been made in market "A” during each of the three five-year periods noted. Three new offices, the largest number in any of the five-year periods we have observed, have made their appearance during the last five-year period. The formulae for developing these estimates are proprietary in nature and can only be very rough approxima tions of the total cost but are based on extensive plant building experience. 116 It is interesting to note that the population of the county increased faster than did the number of title offices in the first two five-year periods. Whereas in the last five-year period the number of offices has in creased at a rate greater than the population growth. How ever, significant from the standpoint of concentration the number of offices per thousand of population is exactly equal to that of fifteen years ago. Plant building costs even with the rather stringent legal requirement have not presented an insurmountable barrier to entry, but, needless to say, have offered some problems to new entrants. Some interviewees indicated that one prospective entrant found himself in financial diffi culties before he could finish his new plant. In order to maintain solvency he reproduced his almost completed plant (the person’s and property indexes were on ’ ’tab” cards) and sold copies to a second and third entrant. The first prospective entrant has now contracted to maintain these two plants and functions in this capacity as a plant service bureau and as an underwriter rather than a direct title office. Because of the legal requirement of a twenty-five year plant none of the offices appear to be searching 117 without any plant i.e., from the public records. Neither have any of the companies decided to ’ ’ pool” their title plants and to operate from a single set of records other than the "service bureau" effort described above. Thus, although the opportunity to open new title offices has not been available to all with small amounts of capital neither has recent history indicated any insur mountable barriers to entry. Independence of Rivals In general none of the title office owners or managers in the county have any financial interest in any of the other offices. Financial and managerial indepen dence of rivals is the rule rather than the exception. There is, however, a regional title association which imposes a limited degree of discipline over most of the offices. This discipline, which involves questions of acceptable title insurance practices and risks as well as a rather tenuous understanding that branch offices will not be opened by existing offices, does not seem to have sig nificantly dulled competition. 118 Vertical Integration A brief explanation. Where a title office owns firms to which it sells services or from which it buys services a condition of vertical integration exists. The extent to which it owns its sources of supply and its customers, determines the degree of vertical integration. Vertical monopoly is significant in our study be cause where the buyers are owned by title companies or vice versa, competitive discipline is not imposed on the title office in acquiring or satisfying customers. The decision as to where title policies shall be purchased is decided by the common manager of the buyer and seller. There is less pressure (than in a non-integrated situation) to keep costs down and service up. The vertical integration situ ation in which the title office owns its own suppliers is hardly significant. There are so many suppliers of such diverse products and services (office equipment of many kinds, furniture, paper forms, office supplies, etc.) that j it is hardly practical or profitable for this kind of integration to occur. Degree of integration. Very little ownership of sellers by buyers or vice versa seems to exist in 119 market ”A." Attempts were made by one of the newer title offices to sell stock to real estate brokers. However, competing title offices do not feel that the effort has been at all successful in controlling sources of title orders. Another office has sold stock to builders in an attempt to capture this source of revenue but here again, the attempt to control the buyer is not looked upon as a particularly effective one. Product Differentiation Here the reader’s attention is directed toward what the economist calls "homogeneity." If the product or service offered by sellers in a market is identical, then competition often manifests itself in price moves. Sellers in market "A" offer homogeneous policy coverage as approved by the state insurance commissioner, but price is also set by the commissioner. As a conse quence, competition takes the form of attempted service differentiation. These attempts to differentiate a title office's services from those of the competitors will be discussed later under the section headed "Behavior in the Market." Suffice it to say here that there are constant attempts to differentiate various aspects of service, and 120 as a result we do not have "homogeneity" in the sense of pure competition. Market Information A traditional ingredient of perfect competition is "perfect knowledge" on the part of both buyer and seller, but perfect knowledge is probably never achieved in any market. Consequently this paper will be concerned with the position of each market in the knowledge spectrum or with the degree of useful knowledge possessed by the buyers and the sellers. Seller knowledge. Answers to the survey question naire indicated that most of the sellers felt they were reasonably well informed of the activities of their com petitors. This feeling encompassed everything from tempo rary and long term competitive tactics to keeping records on (1) the share of the market "pie" going to each title office and (2) the sources of title orders. "Pie" records came from at least two sources: (1) title company record ings and (2) the number of tax searches made per day for title orders. The source of other information on competi tive tactics seemed to come consistently from those who were the buyer-decision makers, the real estate brokers and contractor-builders. The information gathered came most often either directly to the title office management, through customer relations representatives, or through "closers." There were at least two notable title office excep tions to being well informed on competitor moves. These two title offices were quick to admit this situation by saying that they were not interested in what their com petitors did, and that they were satisfied to do their best as a title office in accordance with their own static, self-defined standards. Awareness of buyer desires was general among most title offices. Most of the offices were quite sensitive to and informed of buyer desires and interests. Knowledge of fixed and variable costs of operation and the use of this knowledge competitively was in evidence only to a very limited degree. Buyer knowledge. A number of the title offices felt that buyers were not well informed on the advantages and disadvantages of dealing with one title office over another. There is some support for this feeling because 122 the customers interviewed had considerable difficulty in rating sellers by various components of service. Attempts are made regularly by those sellers with the larger number of advantages (service, financial responsibility, etc.) to improve buyer knowledge largely through personal contacts. Conclusion. Buyer and seller knowledge when com pared to knowledge in other related markets such as the real estate loan market in the county or the residential real estate market in the same area might be considered better than either of these ’ ’sister” markets, better, only because in the title insurance market there are fewer sellers and more formal efforts to improve knowledge. Market "A” is far from the level of perfect knowledge, and as a result lack of knowledge is often used to advantage by various sellers. Potential Competition As described in Chapter III potential competition can be highly effective in protecting the consumers' inter ests in any given market. Fearing new entries into the market existing firms can be exceedingly solicitous with respect to customer needs and may keep prices down to make 123 the market less attractive to new entrants. A public title plant. One current threat to exist ing title offices is the interest on the part of the re corder in establishing a public title plant where both grantor-grantee and property indexes would be available to the public (at the moment only the former index is avail able). Although the recorder himself is not interested in providing title services to the public in competition with the existing title offices, obviously other groups inter ested in entering the market could do so more easily with a publicly provided title plant. A large self-insurer. Among the large, incipient real estate developments in market "A," one will take place on land presently owned by a large oil company. This com pany is considering the possibility of providing its own title insurance policies to purchasers, lessors and lenders. This possibility, of course, offers potential competition to the existing title offices and title in surers . Conclusion. There is a general feeling among the title offices in market MA” that the county is ’ ’saturated," 124 and although other firms could enter the market, there seems to be no particular competitive discipline emerging out of this possibility. There are so many firms already, it is alleged, that a new one or two would not make much difference. V. BEHAVIOR OF PARTICIPANTS IN MARKET "A" Less concrete information can be acquired about the behavioral criteria listed earlier than can be gathered on structural criteria. Consequently, although this section will name each behavioral criteria, one can only specu late— based on the interviews held--as to the existence or non-existence of certain types of behavior. Collusion The more familiar types of collusion include price agreements among competitors, agreements to limit produc tion and to allocate customers. Prices in market "A," of course, are set by government rather than in the market place and as a result are really not subject to collusion in the conventional sense. In general, market "A" appears to suffer from none of these collusive practices mentioned above. 125 Response Time Rapid response to a competitor’s move is often taken as an indication of competitive behavior. Because price competition does not exist in market "A," there is no opportunity to measure response time in this area. In the non-price area, however, response time appears to depend, as might be expected, on two things: (1) the ability of a competitor to respond and (2) whether or not it is thought that a competitor move will be effective enough with cus tomers to merit a response. Actively offering loans to builders and land de velopers in order to capture the "title business" is a tactic common to market ”A.M Apparently the response time of competitors to the first firm to offer these loan services was fairly rapid for those able--through lender "contact" or the title company’s own financial strength-- to respond. Those not able simply have not responded. Many non-price competitive moves such as under- ! ; writing mass cocktail parties for customers or sending flowers to customers "at the drop of a hat" have not been countered because of an impression by some firms that these activities are not overly effective. 126 Although there is no wealth of examples to support this conclusion, it appears that response time would tend to be relatively short in market MA.” With a few excep tions title offices are alert to competitor moves and respond quickly if they can and if the competitor move is thought to be an effective one. Price Moves Because prices are set by the insurance commissioner for market "A," these behavioral criteria cannot be used as indicators of competition: (1) conscious parallelism, (2) price leadership, (3) price flexibility and frequency of price changes, (4) price and service discrimination (there appears to be no service discrimination in this market), and (5) predatory practices (which usually take the form of cutting prices in local markets to harm indi vidual competitors). Merger History Interviewees indicated that there have been no mer gers in market "A" subsequent to World War II. One title office, which was apparently losing money, was acquired by a substantial owner of another office. The first one, 127 however, is no longer operating as a title office and functions only as an underwriter. As a result of this uncomplicated situation, it is apparent that mergers have contributed neither to the en hancement nor the reduction of competition. Product Standardization Market "A" finds itself with a set of standardized insurance coverages as approved by the insurance commis sioner. Often such a standardization of a product would encourage competition in the area of price. As mentioned a number of times earlier, however, price, too, is set by the insurance commissioner's office. Consequently, com petition is forced into the field of service and customer relations activities. The fact of policy coverage stan dardization seems to have had relatively little impact on competition ,rfor good or for bad.” Attempts to Differentiate Constant attempts are made on the part of title offices to make the service they provide distinct from and more desirable than that of their competitors. These attempts are classified below into three categories: 128 (1) speed and accuracy in processing orders, (2) free services designed to obligate prospective customers, and (3) building constructive personal relationships with buyer-decision makers. Speed and accuracy in processing orders. The speed and accuracy with which a title office processes and closes an order is considered most significant in acquiring and keeping customers. There appears to be continuous effort among most of the offices to improve the speed and accuracy of order processing. These offices strive to achieve these objectives not only with the more routine orders but with the more complicated, unusual ones as well. All of these objectives require regular attention to the selection, training and retention of competent personnel. In addition procedures in the offices come under frequent scrutiny. In spite of the local understanding among the com petitors in market "A" that branch offices will not be opened, some temporary branches have been opened at the site of new tracts, for example, to expedite order pro cessing and to satisfy the builder. Free services. From market to market where free services are used as customer inducements, the services 129 do vary and consequently seem to be worth identifying. In market "A” they include (1) printing of sales contracts for the builder-subdivider, (2) free parking at the title office for customers, (3) some efforts to assist customers in determining the name and address of record land owners, (4) a limited messenger service to pick up and deliver for customers in the "downtown" area, and (5) in the case of one title office taking loan applications from prospective borrowers for lenders. Most of the title offices appear to be very con scious of the law against rebates and as a result are careful about giving away services ’ ’ with abandon.” Building constructive, personal relationships. Con siderable time and money are devoted to winning the per sonal favor of the buyer decisionmaker. Here are some of the activities undertaken with these objectives in mind: (1) employing customer relations men to call regularly on the decisionmakers and to work with various customer groups such as mortgage banker and home builder associations; (2) arranging for the title office managers to perform these customer relations functions; (3) sending the title office ’ ’closers” to call on the customer in his office and 130 at various industry gatherings; (4) giving parties at Christmas time for large groups of buyer decisionmakers; (5) the previous practice of giving Christmas gifts to cus tomers was stopped and has been replaced by sending Christ mas cards; (6) at least one of the offices sends flowers to customers "at the drop of a hat"; and (7) serious and constant efforts to develop a courteous and interested attitude on the part of title office employees when dealing with customers. Recognizing that often customers choose a title com pany purely on the basis of personal relationships, the offices in market "A" have competed vigorously in develop ing constructive personal relationships with the decision makers . Conclusion. Because neither price nor policy coverage competition is available to title offices in mar ket "A," competitive behavior tends to burst out in non price competition of the type described above. There are constant and ingenious attempts to differentiate the services of one title office from the rest of them. 131 Miscellaneous Competitive Efforts A number of other, miscellaneous behavioral charac teristics are worth mentioning in order to complete the market "A" competitive scene. Loans to developers. Assisting land developers by making loans to them (1) with title office assets, (2) through lenders who are ’ ’close to" title offices, or (3) through entities controlled by title office managers is most common in this market. Where a title office is not able to make such arrangements for the builder, the title office finds itself at a severe competitive disadvan tage. The "tighter" money becomes, the more important these loans appear to become in acquiring title orders. Attempts to motivate employees. Many techniques are used in an attempt to "motivate” employees of the title offices. All of these attempts spring from the desire of management to compete effectively. Two such motivational plans were mentioned by interviewees in market "A." One plan pays closers on an incentive basis. In addition to a base salary the closers receive supplementary "piece rate" pay for every order they close. This arrange ment encourages the closer to seek out every order he 132 can handle. He pursues and, if successful, develops a "following” of customers who regularly direct orders to him. Another plan is a brand of the well-known profit sharing plans. Under these plans the manager and perhaps key office personnel share in some portion of the annual profits of the office. Community activities. Participating in community activities is common among some title office managers and key people but was not mentioned with any great frequency by interviewees as a long-run competitive measure. The effectiveness of participating in community activities as a "business getter" has apparently not been widely accepted.! VI. PERFORMANCE IN MARKET "A" Profit Levels Actual profit levels for title office operations in market "A" are not available and rough estimates of profit would contribute very little to this study. Prices Prices paid for policies of title insurance and associated services are a significant indicator of effective competition (i.e. the degree to which the con sumers' interests have been furthered) particularly where costs of providing this coverage are quite similar. In the metropolitan markets covered by our study an analysis of the principal cost variables including salaries paid, office rental charges, and costs of searching and maintain ing single set of land records (the title plant) has re vealed that the costs of operation (not the costs of entry) for each firm in the various counties are reasonably simi lar. These costs are comparable enough to permit prices of similar title insurance coverages to be used as a major indicator of the protection that competitive forces have afforded the consumer. The only major variations are in county "industry" costs (costs of all sellers in a given county), and these costs are occasioned by the number of competitors in the county. "Industry" costs vary for two reasons. First, the larger the number of competitors, the higher are the "selling costs," i.e. the larger the customer relations staff, the higher the customer entertainment expenses, and the more services provided at little or no extra charge. Second, the more county offices in existence, the more 134 I title plants must be maintained. Actual prices for the various markets and for the types of coverage in these markets will be treated in the final comparative summary of all markets studied. It is sufficient at this point to note that prices in market "A" rank third highest in the seven market spectrum. Quality of Service Provided Consumer satisfaction is clearly enhanced if title office services are of the character and quality that best meet the customer needs. At least one characteristic of service, the speed with which a preliminary title report was typically issued could be isolated and studied as a facet of competitive performance. As in the case of price, in the final comparative summary the standings of all the markets will be discussed. However, again, market MAM finds three days the more typical time-span between the opening of the order and the issuing of the report. Innovations and Progressiveness Innovations in business strategy, methods and pro cesses shall be considered generally as one indication of effective competitive performance. Under the behavioral criteria the title offices’ attempts to differentiate their services from those of competitors in order to lure cus tomers were enumerated. These efforts to differentiate are in fact innovational activities and would indicate a degree of progressiveness. Having covered these items before, however, they need not be examined again. Other innovational attempts have centered around the improvement of internal procedures. Tabulating card property and persons indexes have been developed by one of the offices to be used along with microfilm copies of the recorded documents. In addition, one of the larger offices has developed a "geographic” type title plant utilizing Kalvar film. Although none of these innovational attempts are revolutionary, the fact that they exist would indicate that conditions are present in market "A" which encourage inno vational activity. As one manager expressed it, "we're always working on improved methods and techniques." Divers ificat ion Very little diversification by title offices into activities other than title services has occurred^in market "A." To the extent that it has existed at all, diversification has been geographic and has been carried on largely by two local offices only. It is significant, however, that one of the principal reasons why these two offices did move into other markets can be traced to the obvious limitation of their share of market "A" business. This limitation, of course, reflects the presence of some degree of competition. Rate of Growth Both the dollar value and the number of title in surance policies sold in market "A" have grown signifi cantly since the end of World War II (the number of policies is estimated to have increased by more than 100 per cent). The principal reasons for this growth have been (1) the growth in real estate transfers and financing and (2) the increasing popularity of title insurance particu larly with real estate lenders. Secondary reasons for this growth may have been improved title office service and the willingness on the part of sellers to accede to lender demands for coverage. Although competition must have played a part in the de velopment of these secondary reasons, it cannot take any 137 significant share of the credit for the industry*s growth in market "A." For our purposes this growth is more significant in the sense that new title offices intrigued by this growth have entered market "A.” A growing market with the success firms enjoy and the optimism it inspires seems to spawn more competition. VII. SUMMARY Structurally market "A” provides a very adequate setting for effective competition in spite of the rigid state government control of the title insurance industry. As the tabular summary in Chapter X will indicate, this market is one of the most structurally competitive of the seven studied. There is a reasonably large number of sellers none of whom enjoys more than 20 per cent of the market. New firms have regularly and successfully entered the market during the last fifteen years, and practically all of these sellers operate quite independently. No vertical integration of any consequence exists. On the less positive side market informations seem to be just satisfactory, and potential competition, because there are 138 so many sellers already, provides very little discipline to existing firms. Largely due to restrictive state laws market "A" does not rank as high on the competitive scale behaviorally as it does structurally. Although there is no identifiable collusion among sellers and even with relatively quick response times, no price moves of any kind are permitted without insurance commissioner approval. Mergers of sellers over the last fifteen years appear to have neither enhanced nor reduced competition. Attempts to differenti ate the speed and accuracy of service and the personal relationships of buyer and sellers are most vigorous. There is more effort devoted to these latter two differ entiation activities than to any other behavioral activity. By contrast free services (the third category of differ entiating activities) are limited because of the state law against rebates. Of the miscellaneous competitive efforts only loans to developers is of enough significance to men tion in this summary. The behavioral ranking of market "A" stands at "fourth," roughly the middle of the market gamut. Prices in this market are fifth highest of the seven markets but quite close to those taking the third and 139 fourth positions. Based on this price ranking it is pos sible that competition or potential competition has been equally or perhaps more effective in keeping prices down than has government regulation. Speed in the issuance of the preliminary report was one of the best. There was some geographic diversification and some innovational activity. Market "A” ranked "fourth” in performance as it did in behavior. CHAPTER VII ANALYSIS OF MARKET "B" I. SETTING FOR MARKET "B" As in the case of market "A" this section will point out a number of pertinent statistical facts about mar ket ”B." Size of Market A reliable 1962 estimate for market "B” sets the population at just over 1,000,000. Ranking among the fifty most populated counties in the nation, market "B" was the fifth largest among the seven areas included in this study. Deeds recorded for 1962 amounted to almost 37,000, again, the fifth highest figure in the seven market spec trum. Mortgage amounts equalled more than $600,000,000 for 1962, which was double the dollar value for market "A" during the same year. The number of mortgages recorded 140 141 in market "B" was almost identical to the number of deeds recorded. Based on both the deed recordings and on mortgage recordings the estimated number of title orders ranks between fourth and fifth largest among our markets. The size of typical title premiums, if average dollar amounts of mortgages provide a guide to such a figure, ranks between third and fourth in our market gamut. Urban Character of Market Although 95.6 per cent of the county residents are classified as urban, the population density, approximately 430 inhabitants per square mile, is the lowest of the markets. However, this density is still well within the "large and urban" market specifications. Growth of the Market A rise of approximately 20 per cent in the number of deeds recorded from 1950 to 1955 was followed by a drop of almost 28 per cent from 1955 to 1962 leaving the 1962 figure below that of twelve years earlier. This particular pattern of a rise to 1955 and a decline from that year to 1962 is more typical than not of the seven counties. Population growth rate stood at 90 per cent in the period from 1950 through 1960.^ Estimates of the 1970 population level are not available. In conclusion although rapidly growing in terms of population, there is no indication that the number of title orders is growing. It is probable, however, that premiums are rising based on interviewee claims of rising property values and of more large building projects. II. STATE LAWS AFFECTING COMPETITION IN MARKET "B" Laws Affecting Structure Entry. The minimum paid-in capital requirement for market "B” is $100,000, an amount rather typical of most of the markets. Paid-in surplus must be 50 per cent of o capital or $200,000, whichever is larger. U.S. Bureau of the Census, County and City Data ; Book, 1962, A Statistical Abstract Supplement (Washington, D.C.: Government Printing Office, 1962), pp. 52, 92, 162, 202, 282, 312, 342. o Ernest F. Roberts, Jr., editor, Public Regulation ; of Title Insurance Companies and Abstractors (Philadelphia: ' Villanova University Press, 1961), p. 163. 143 A deposit of $100,000 with the insurance commis sioner is required of each insurer. In addition 10 per cent of "annual risk premiums" must be assigned to an un earned premium reserve.3 Foreign insurers are subjected to an additional 2 per cent premium tax. Where the foreign insurer main tains a regional home office in the state for three or more states, certain reductions in this tax are allowable. No title plant is legally required for searching and in suring titles in market ”B." Vertical integration. Rather than limiting the types of related businesses in which a title insurer may engage, the state laws of market "B" specifically permit these types of activities. Market informat ion. State laws require neither posting of new rates nor any other activity which would materially improve buyer or seller knowledge. Product homogeneity. Title insurance policy forms need not be approved by any state agency. i 3Ibid.. p. 188. 144 Laws Affecting Behavior No particular behavioral activities are regulated by the state. Conclusion There are only a few, very reasonable legal re straints on structure in market ”B." Specifically per mitted types of vertical integration constitute the only variation in this untainted statutory environment. From a behavioral standpoint, title insurance com panies and abstractors are subject to no control of any j competitive significance. i III. GENERAL CHARACTERISTICS , i OF MARKET "B" S I I i I Principal Services Offered In contrast to market "A" where a "package" of services (including the preparation of a title search, examining, document preparation, closings, and the issuance of title insurance policies) is usually sold for a single fee, market "B" finds that these individual services are being frequently sold separately by different entities. 145 Abstract companies sell the abstracts of the tradi tional sort. In these abstracts the chain of title is revealed and the essential elements of each document affecting a particular parcel ’ ’from the beginning” are set forth. Because these abstracts may become quite bulky and space-consuming, they are retained for future reference for the purchaser of the abstract. Most often these abstracts are stored in the abstract company offices as an accommodation to the purchaser and are used as a point from which to develop future abstracts. Needless to say the process of ’ ’ bringing the abstract to date” is much less costly than assembling it ’ ’from the beginning.” Because interviewees indicated that approximately 90 per cent of all title examinations in market ”B” are made by non-title office attorneys, the abstracts described above are usually ordered by attorneys for their examina tion. Following the examination the attorney draws the documents, holds funds from buyer and for seller, records the documents, and disperses the funds. Since only 50 per cent of real estate transactions are covered by policies of title insurance (and these transactions usually involve loans made by ’ ’ national lenders”) the activity 146 ends here with the attorney passing on the charge to the appropriate parties for the abstract and for all of his services. Where title insurance is also required, the attorney orders the policy from a title office or prepares the policy in his own office where he is "approved" by the insurer. It is clear that the non-title company attorney plays a major role in the title evidencing process in mar ket "B." Often these attorneys are on the staff of or on a retainer from the local real estate lender. Some sellers of title evidencing services also sell fire insurance and allied lines of insurance and in addi tion are in the mortgage lending business. Trend in Popularity of Title Insurance Title insurance as a form of title evidence has risen in popularity more slowly in market "B" than in any of the markets to be studied. Interviewees estimated that by 1930 between 30 and 40 per cent of the real estate transactions were covered by title policies but by 1963 this percentage had only risen to 50 per cent. It has been suggested that one major reason for this slow rise has been the resistance to title insurance by the legal profession. 147 Description of Sellers In order to understand the subsequent analysis of •market "B" with the aid of the structural, behavioral and performance criteria, this section will look more carefully at who sells what. Abstracts. Abstracts are sold by companies owning and operating title plants as well as by those who do not. In the latter case a firm is a retail abstractor buying the actual abstract at a wholesale rate from the title plant owner. Examinations and closings. All examinations appear to be made by attorneys. These attorneys may practice independently or they may examine for lenders or for title offices on a retainer basis. Title policies. The title insurance policies are issued either through an insurer-owned title office or through its agents. This arrangement is also character istic of the other markets to be studied. The interesting aspect of market MB" is, however, that agents are not just title offices in the usual sense but are attorneys and lenders as well. 148 For the first time in our analysis the lawyer- related title insurance operation appears where the inde pendent attorneys examining titles are also the owners of the insuring operation. The title insurers or their agents enjoying the larger shares of the market "B” pie also own one of the abstract companies and in some instances more than one ab s t rac t c ompany. Selection of Seller As with market "A" the selection of the seller is made by parties other than those who pay for title evi dencing and conveyancing services. This section’s inter ests, again, are in identifying those who make this selection. There was some difference of opinion among inter viewees as to what groups were most influential in the selection of sellers. The consensus, however, appeared to be as follows: the lender determines the abstract company, the attorney, and title office to be used in the case of sales or loans involving commercial, industrial, or multi ple residential properties; the real estate broker is the major influence followed closely by the lender (with the 149 latter retaining the right of refusal in all cases) where the sale of single family dwellings is concerned; attorneys are most frequently the decisionmakers if the parties to the transaction have approached him first, but as a whole attorneys would tend to run a strong third in the number of orders placed with abstract companies or title insurers. Builders and subdividers are influential where single family houses are being built. Who Pays for the Services? Where a sale is involved, the seller usually pays for the abstract and its examination and the buyer pays for the owner’s and lender’s policy of title insurance if either of the latter is required or desired. An interesting weakness in this system was observed by a number of interviewees. If no title policy is re quired in a sale, the seller who pays for the abstract and opinion is not interested in the letter’s accuracy and as a result is willing to accept a substandard abstract at a price below the going abstract rates. 150 IV. STRUCTURE OF MARKET "BM For the purposes of studying competition in market "B" we must look actually at two markets, the market in volving the buyers and sellers of abstract services and the market involving the buyers and sellers of the ultimate evidence of title whether this ultimate evidence is in the form of an opinion or of a title insurance policy. Under each of our criteria headings, then, we shall examine both markets. Concentration Number of abstract sellers■ Eleven title plants each covering a period of more than thirty years (with the exception of one plant which covers only thirteen years) are presently being maintained in market "B." As far as it could be determined from interviewees, these eleven plants are owned by nine separate entities. In addition to the eleven abstract offices selling services to attorneys, title insurers and their agents, there are ten more so-called abstract retailers who pur chase their abstracts at wholesale prices and then sell them at retail prices. 151 Number of title opinion sellers. Although there are more than two thousand attorneys practicing law in the country it is estimated that between five and seven hundred regularly examine abstracts and write opinions on these abstracts. Number of title insurance policy sellers. Answers to questionnaires indicated that at least twenty-one title insurers were issuing policies in market MB” but interviews revealed that more than one title office might issue poli cies for the same insurer. Furthermore in some instances the real estate lenders issued policies on their own loans as agents for the insurers, a situation which further in creased the number of issuing offices. Finally, if the number of attorneys serving as agents are included in our count, then the number of sellers rises by the hundreds. Market shares of abstract sellers. One abstract office was estimated by all to enjoy the largest share of the abstract market. This share was estimated at between 30 and 50 per cent. None of the other offices were esti mated to prepare as much as 20 per cent of the abstracts sold in the county annually. 152 Market shares of opinion sellers. No reliable esti mates of the market shares of the opinion sellers (the examining attorneys) were available. Market shares of title insurance policy sellers. From 10 to 15 per cent of the number of title insurance policies written was considered the highest share of market "B" enjoyed by any single seller. In 1963, although one abstract seller enjoyed a large share of the abstract market (largely because of financial interests which those who ordered abstracts had in this seller), no single title insurer had a clear lead. Probably one of the offices will become more dominant when and if title insurance covers more and more real estate transactions. Number of buyers and buyer shares. The number of buyer decisionmakers for all three of the title evidencing components (abstract preparation, opinion writing, and title policy issuance) taken together was estimated by interviewees without any attempt to set the numbers buying from each of these evidencing components individually. These estimates ran as follows: 153 Lenders less than fifty Attorneys low thousands prac ticing in the county but high hundreds involved in real property transactions Real estate brokers low thousands Builders and subdividers mid hundreds Large land owners low hundreds Escrow companies none Answers to questions about buyer shares of all com ponents of the title evidencing market did indicate that there were a number of large buyers who ordered more than 3 per cent of the number and the dollar value of title evidence services sold in market ”B." The existence of large buyers to the extent noted provides a significant contrast to the buyer shares in market "A" where sellers said that no buyer ordered as much as 3 per cent of the market during any single year. Conclusion. Only with one large seller of abstract services do we find a trace of market concentration, and this concentration springs from the financial relationship of the buyer decisionmaker and the seller. Aside from this one large seller the number of sellers and their market shares reveal no concentration. In the opinion market there are a relatively large number of sellers but no information was available as to their respective shares of the market. Sellers of title insurance were most numerous and their market shares apparently small. Some degree of buyer concentration in all phases of the title evidencing process has appeared for the first time in this study and may have resulted in some leverage on the part of the buyers as indicated by their ability to exact agencies (or franchises) from title insurers. In general, however, we still find a relatively large number of buyer decisionmakers in market MB.M Entry As with the other markets it is important to know the number of sellers that have operated during the last fifteen years in market "B" and in the relative cost of building a title plant. Although neither of these items are completely reliable indicators of entry ease or diffi culty, they give us some measure of the entry condition of the market, and they are applicable to each of our markets. 155 Historical number of abstract sellers. The simi larity of separate estimates of the historical number of sellers indicated a reasonable degree of reliability in the following approximations: fifteen years ago, 7 to 8 abstract sellers (including retailers with and without plants); ten years ago, 10 sellers; and five years ago, 15 sellers. Historical number of opinion sellers. No estimate was obtained of the historical number of attorneys who regularly examine abstracts. Historical number of title insurance policy sellers. During the last fifteen years title insurance policy sellers have increased at a much higher rate than have abstract sellers particularly when we consider the lender and lawyer agents, who now can write policies. Cost of entry. Plant building estimates (in index form: market "D" costs = 100) as defined in our market "A" discussion under this heading have been made as follows: Calculated minimum - 58.6 Assumptions: Estimate is for a ten year plant: there is no legal minimum. See page 114 for other assumptions as to quality of plant. 156 Calculated highly satisfactory =46.3 Assumptions: Estimate here is for a twenty-five year plant. See page 115 for other assumptions as to quality of plant. It should be pointed out that the county recorder does maintain tract indexes for the purpose of searching recorded documents covering particular parcels of real estate. However, without exception abstract companies indicated a high preference for their own plant because of immediate access to the latter and because of its greater accuracy. Conclusion. Of the successful abstract entrants during the last fifteen years only one was said to have built a plant. The opportunity to purchase abstracts on a wholesale basis has encouraged more retail entrants and has discouraged the building of title plants. Apparently entrance of opinion writers has been limited only by the lure of profit and by the State Bar examination. The rate at which title insurer agents have entered market "B” would indicate no significant barriers to entry. Independence of Rivals As we mentioned under the heading, ’ ’ Number of Abstract Sellers,” eleven of the abstract companies 157 (the number operating with their own plants) have nine separate owners. In addition, the nine non-plant abstrac tors are said to be independently owned. There is a local abstractors’ association whose pur pose is to maintain certain quality standards of abstract service. This association according to interviewees is rather loose and ineffective. The desire to compete for orders apparently far outweighs the desire for cooperation on any facet of their activity. Neither the State Association of Underwriters nor the State Land Title Association (composed principally of agents) seems to detract from the rather fierce indepen dence of title insurance sellers. Vertical Integration In discussing the presence of any degree of vertical integration in market "A" this type of monopoly was defined, and it was pointed out how it might occur in the title evidencing industry. Market "B” yields examples of two extremes: (1) a high degree of integration and (2) a high degree of dis integration. First, we find a high degree of integration where at least two of the title offices own abstract com panies, retain attorneys for examination, document prepara tion and closings, issue their own policies of title insurance, and are actively engaged in mortgage lending and the fire and casualty insurance business. In addition the retained law firms often handle probates, divorces, bankruptcies, etc. involving real property. Second, there are the examples of disintegration. As observed earlier, in none of the seven markets does one find examples of as much splintering in the title evi dencing industry. Although true in only one or two in stances, abstractors who do no examination and who issue no policies of title insurance are found. A title insur ance policy purchaser then could find himself dealing with three entities: the abstractor, the lawyer, and the title insurance agent. The separation of the lawyer from the title office payroll has resulted in vertical disintegra tion when contrasted to other markets in our study. This situation actively fostered more intense competition. However, when the lawyer associated title insurance company made its appearance, an even more complete integration occurred than is found in our other markets. 159 Now a lawyer-owned company prepares the abstract, the lawyer examines the abstract, and asks the lawyer-owned title insurer to issue the policy. In addition the lawyer may also be representing his client in non-title matters, possibly in connection with the land transaction in ques tion. No interviewees identified any abstract companies, insurers, or agents that were owned partly or substan tially by buyers, lenders or builders. On balance, although there are more examples of verti cal integration than in our other markets, there is still enough splintering in the market "B" title-evidencing pro cess to promote more rather than less intense competitive activity. Product Differentiation One of the principal reasons for our interest in product homogeneity and product differentiation concerns their impact on other competitive moves. In our discussion of product differentiation in market "A” we observed that homogeneity often led to competitive behavior in the price area. 160 In our study it must be remembered that the products with which we are dealing are really services. These services can be broken down into (1) the coverage or in formation offered by the physical evidence of title; the abstract, the opinion, and the title insurance policy and (2) the speed of providing these evidences, their accuracy, the personal impression conveyed to the customer by seller etc. Abstractors in market "B," ostensibly provide homo geneous abstracts in the physical evidence sense. Their general approach, the format of the abstract, and the types of instruments covered are the same. Interviewees pointed out, however, that because of the highly competitive nature of this market some abstractors in their haste are pro viding a substandard product in the sense that some rele vant instruments are left out of the abstract and that some of the instruments shown are inaccurately and inadequately described. Thus abstracts are not entirely homogeneous in market ”B" at least with respect to item number 2 above. Although opinion formats are generally the same and hence homogeneous in this sense, the speed or accuracy with which they are prepared are understandably said to vary 161 from one attorney to another. The same homogeneity of format and coverage obtains for the policies of title insurance issued by various sellers, and there is apparently little attempt to win business on the basis of eliminating exceptions in the policy. At the same time the speed with which the policy is issued, its accuracy, and the personal impression con veyed by the sellers * employees to their customers all seem to vary from office to office. Thus formats and coverages of abstracts, opinions, and title insurance policies all tend toward homogeneity in market "B," and attempts to differentiate, which will be discussed under Behavior in the Market, are made in many ways including the speed and accuracy of providing these components of the title evidencing process. Market Inf ormat ion Seller knowledge. Aside from opinion sellers (attor neys) on which very little information was obtained, the other sellers in the title evidencing processes (abstracts and title insurance policies) seemed quite well informed of competitor moves. One reason given by sellers for 162 the necessity of being well informed was the constantly changing tactics of practically all competitors. This dynamic condition required better intelligence systems than were needed in several other markets in our study. Sellers seemed to be constantly alert through various legitimate ’ ’pipe lines" to the competitive moves of abstract companies and title offices. There appeared to be little or no regular effort devoted to determining the share of business enjoyed by each abstractor and title office. Lack of interest in ”pie shares" seemed to stem from the presence of so many com petitors and from the feeling that knowing the shares would really not be of any competitive value. Buyer knowledge. There was considerable difference of opinion among interviewees as to whether or not buyers of the components of the title evidencing process were aware of the advantages and disadvantages of dealing with each seller. Some interviewees felt that buyers were well in formed and that nothing more would or should be done to improve this knowledge. Other interviewees not only thought that buyers were not adequately informed, but they were engaged in various efforts to improve this knowledge. 163 At least with respect to abstract buyers and title insurance policy buyers the difference of opinion among interviewees seemed to resolve itself in favor of a high degree of knowledge. Owing to periodic changes in the prices offered by the sellers (a phenomenon we shall examine later) it becomes extremely profitable for buyers to "shop." This regular shopping process leads to an unusually high level of buyer knowledge of the prices and quality of services offered. In addition, most of the sellers themselves make regular efforts to contact buyers personally to improve the latters* knowledge. Potential Competition Market discipline emanating from the threat of poten tial competition is non-existent in market MB." There are already so many sellers of title evidencing components that those presently operating felt that "a few new ones would not make any difference." Practically no competitive strategy or tactics were conceived with an eye toward the spectre of additional competitors. On the contrary there was a fairly general feeling that over the next few years there would be fewer rather than more competitors. 164 V. BEHAVIOR OF PARTICIPANTS IN MARKET "B" In the discussion of the behavioral characteristics of market "A" it was pointed out that less factual informa tion is available on behavior than on structure. As a result, much of what follows comes from the opinions of interviewees rather than from any verifiable facts. Collusion There was certainly no apparent, successful collusion of any kind in market "B." Agreements to limit production are hardly applicable to the title evidencing markets. The collusive allocation of customers has apparently not occurred at all. Price agreements may have been attempted in the abstract market, but they have been wholly ineffec tive. As shall be seen later, there is definitely price competition. Response Time Although responses to competitor moves are very much in evidence, these responses are rather sluggish. The spring-like response found in the environment of competi tive duopoly or oligopoly does not exist in market "B." There seem to be so many competitors that a move by 165 one office, particularly if it is a minor strategy move, often is countered only after a delay or not at all. Prices offered by sellers to various abstract pur chasers were at one time the same. Gradually, the identi cal price structure was eroded by the competitive moves of many sellers. Some of them, however, still quote and charge the prices that existed when all prices were sub stantially the same. Thus, responses have been both slow and incomplete in this instance. Price Moves Unlike the first county in this study, prices are set solely "by the market" in county "B." Although some of the price behavior criteria will be disposed of quickly, emphasis should be placed on the fact there are more com petitive price moves in market "B" than in any of the seven markets studied. There is very apparent competition in prices, and this situation seems to be well known by all sellers and all buyers who deal regularly with title evidence. Although a state anti-rebate law was passed recently, interviewees indicated that it was quite in effective. Conscious Parallelism Under the heading, ’ ’Response Time," it was pointed out that seller responses to competitive moves tended to be slow, and that often there was no response at all. This situation seems to rule out parallelism. Price Leadership Leadership in setting prices is doubtful and is difficult to determine in market ”B." Price leadership implies a price schedule--often published and available to the buyer--which is set by the leader and followed by other firms. Market "B," as shall be seen in just a moment, is characterized by extremely fluid prices and a noticeable lack of any effective, general price schedule. Price Flexibility and Frequency of Price Changes To emphasize the flexibility of prices in market "B" both with respect to abstracts and to policies of title insurance, here is a relatively mild, direct quotation from a letter responding to one of the questionnaires: ”. . . the users of title insurance have become educated to the fact that if they shop around they can receive bargains from many of the underwriters and I doubt very seriously if there are many of the agents that receive the card [published] rate." Most interviewees pointed out that buyers of both abstracts and title insurance policies constantly "shopped" for prices, and that sellers "played the game" by respond ing with quotations that would vary even from day to day depending on the existing work load of the seller and on other dynamic circumstances. Although a published price schedule called the "card rate" has existed, unchanged for fifteen years, it appar ently is only for the unwary. Price competition and price flexibility is clearly the rule rather than the exception. If price flexibility and frequency of price changes is in fact an indication of competition, then it certainly exists in market "B." Price and Service Discrimination One example of price discrimination in the title insurance market was alleged by interviewees, but this example indicated the presence rather than the absence of competitive behavior. The lawyer associated title oper ation at its birth had set title insurance rates for the 168 attorneys selling its policies at a level which corre- sponded but usually were below those charged by the many other underwriters to their agents. At least one of the underwriters has attempted to meet this competition by quoting to the attorneys a special price, applicable only to lawyers, which is below the price charged to the under writers agents. Predatory Practices No valid predatory practices were identifiable. Merger History Those mergers of abstractors and underwriters (no agents mergers were named although some may have taken place) which have occurred in market "B" have involved the larger offices and as a result could not be said to have enhanced competition by strengthening smaller competitors. On the other hand, neither do these mergers seem to have lessened competition to any significant degree. In at least one instance the abstractor acquired by another would have gone out of business if not so acquired. Numerically speaking, two abstractor mergers or acquisitions have occurred in the last three years. 169 Under the heading, "Concentration," it was noted that the eleven title plants are owned by nine entities. As for underwriters, of the twenty-one identified under "Concen tration," there are now nineteen ownerships occasioned by mergers or acquisitions by national companies domiciled outside of market "B." Product Standardization The degree to which product standardization in policy and abstract coverage and format--discussed under the heading, "Product Differentiation"--exists in market "B" has resulted in price competition as one might expect. This standardization has led, of course, to attempts to differentiate in the areas of service. Attempts to Differentiate Each seller in market "B" attempts to differentiate his service from that of the other sellers but not with as much energy and enthusiasm as sellers in market "A." The reason for the lesser energy being spent on differentiation is traceable to the greater attempts to differentiate in price. 170 Speed and accuracy in processing orders. Accuracy and speed of processing orders are definitely ways of differentiating the service of one abstractor or title office from the service of other sellers. Efforts, even if less than in market "A,M are made to accomplish this kind of differentiation among market "B" sellers. At least one seller attempted to differentiate his service speed by setting up offices in two locations so that each office would be closer to its own group of customers. Free service. Free services are also used to obli gate prospective customers and often to establish a dis tinctive character for a particular seller. These free services include (1) advancing the costs of revenue stamps and the cost of recording documents, (2) providing informa tion on property owners' names and mailing addresses from title plants, (3) free pick up and delivery of papers and documents for the customer, and (4) free storage of abstracts (many of which are quite bulky). Building constructive, personal relationships. As one interviewee put it, "our primary competitive tool is being with people personally." The emphasis on building 171 constructive, personal relationships with buyers is major. These efforts to build personal relationships include (1) the use of customer relations men who associate them selves closely with customers and customer groups, and (2) sponsoring certain customer activities such as cocktail parties at state conventions of customer associations. Again, however, competition in this kind of non-price activity seems to fall far short of that found in mar ket "A." Miscellaneous Competitive Efforts Other types of non-price competitive behavior in clude a limited amount of community activities on the part of the title office executives and the making by title offices of real estate loans to developers for land acqui sition, off-site improvements and on-site improvements. These loans are made from company funds directly and in one case by a majority-owned small business investment corpora- t ion. VI. PERFORMANCE IN MARKET "B” Profit Levels No reliable information on profit levels for any of the segments of the title evidencing process was available. Prices In discussing market "A” performance under the head ing, ’ ’Prices,” it was pointed out that prices paid for policies of title insurance and associated services are significant indicators of the effectiveness of competition particularly where costs of providing these services are similar. Actual prices in the seven markets will be shown in our final comparative summary. However, it is of major significance to our study that prices in market ”B" were the highest among the seven markets. Quality of Service Provided According to interviewees the degree of both speed and accuracy of providing title evidence has suffered in county "B.” The reasons given for this condition were as follows. First, the speed of providing title insurance policies, for example, has suffered because each of the steps in preparing the policies--searching, examining, and issuing the policy--may be taken in a different physical location--the abstractor’s office, the examining attorney’s office and the title agent's office respectively. 173 Even accuracy in abstract service has suffered according to questionnaire respondents because the fierce competition in abstract pricing has tempted sellers to reduce the time and effort involved in preparing the abstract. In addition the practice of property sellers paying for the abstract in market "B" has perhaps resulted in less pressure on abstract accuracy. The seller may look for the lowest price--“without regard for quality-“in order to discharge his obligation. Although an attempt shall be made to compare the speeds of providing title evidence in the seven markets in the final comparative summary, it should be pointed out now that market "BM offers the slowest service. Innovations and Progressiveness New approaches in market strategy can be taken as indicators of effective competition. These approaches are evidenced in the attempts by sellers to differentiate their services from those of their competitors. Clearly efforts are made in this direction in market "B." However, as a general rule the strategy emphasis has been in the area of prices to retailers and to other classes of consumers. Innovational energy devoted to the internal pro cedures of abstractors and of title offices is not impres sive. There is certainly less activity in this area in market MBM than in market "A," and as shall be seen in our comparative summary market "B" stands at the lower end of the seven market spectrum in innovational activity. Diversification Whether the objective has been to control sources title business, to hedge against the cyclical income from the title business, or seek sources of income outside of the increasingly competitive title evidencing market, there has been noticeable diversification by title firms. At least two of the major title offices have moved into the real estate lending field and the fire and casualty insur ance fields. Geographic diversification has been pursued by at least one firm based in market "B." This firm has moved into more than three-quarters of our states since World War II. It is a reasonable inference that this geographic diversification sprang from the recognition by this com pany that market "B" sellers of title evidence would not grow significantly if limited by the boundaries of 175 this country. Rate of Growth Interviewees estimated that the number of title evidences issued had not greatly increased over the last eighteen years and that the 1946 boom had merely continued on a plateau. The liability under title insurance policies had, however, increased significantly over the same period. The significance of this growth in total liability amounts and, thus, premiums, is not that competition con- tributed to growth with lower prices (and as a consequence larger sales) but, on the contrary, that as the ’ ’pie” grew, it looked good to potential sellers. Interestingly enough market ”BM seemed to draw more than its share and has become overrun with sellers of abstract and title insurance services. VII. SUMMARY Market MBM represents the county least affected by government control. In this kind of environment it is not surprising that structurally the market is the most com petitive among the seven counties studied. The only market suffering from substantial splintering in the title 176 evidencing process, there are comparatively speaking an unusual number of sellers at each level (the abstracting, opinion, and insuring processes). With one exception none of these sellers enjoyed more than 20 per cent of their markets. As would be expected with the large number of sellers, entry has not been too difficult. There is the unusual contrast of some, almost complete vertical inte gration and on the other hand substantial splintering of the title evidencing process. Without detailing the specific items market "B" is a jungle of competitive behavior with heavy emphasis on price moves. As indicated earlier in this chapter the published price schedules are only for the unwary and the uninitiated. Negotiating and trading for prices are most common. From the unsophisticated consumer’s standpoint per formance is poor. Prices are high and without "pull" service is slow and accuracy (of the abstract at least) often barely acceptable. In addition performance measured by all of the criteria is also poor with one noteworthy exception, diversification. Probably because of the strongly competitive structural and behavioral character istics, sellers have been forced to move into other fields 177 within the county and into title evidencing markets outside of "B." CHAPTER VIII ANALYSIS OF MARKET "C" I. SETTING FOR MARKET "C" Pertinent statistical facts as to market size and growth will be identified here. This identification will serve the dual purpose of (1) providing a statistical setting for the discussions of market "C" and (2) organ izing these kinds of data for use in the "conclusions” chapter. Size of Market Second largest among the seven markets, county "C" has a population of approximately two million. Even with this large population the number of deeds recorded in 1962 was not high. With 37,000 deeds last year market "C" was approximately equal in deed recordings to the same figure for market "B" and was less than half of that recorded 178 179 in market "A" for 1962. The dollar amount of mortgages for 1962 was not available, but the number of mortgages recorded for last year was approximately 27,000, one of the three smallest of seven markets for this particular figure. It is esti mated that the number of title insurance premiums ranks either fourth or fifth largest among the markets in this study, and the dollar amount of premiums assumes the same relative position. Urban Character of the Market Market "C" is one of two areas in this study which is classified by the Bureau of the Census as having a 100 per cent urban population. The market*s density is the highest of our counties with a population of approximately 15,000 per square mile.'** Hence, this area certainly quali fies as an urban market. Growth of Market * Market "C" has experienced a relative plateau in both deeds recorded and in population level over the past ^U.S. Bureau of the Census, County and City Data Book, 1962, A Statistical Abstract Supplement (Washington, D.C.: Government Printing Office, 1962), pp. 52, 92, 162, 202, 282, 312, 342. 180 twelve years. The number of deeds recorded dropped by 6 per cent from 1950 to 1955 while the number remained virtually the same from 1955 to 1962. During the period from 1950 to 1960 population actually decreased by 2 per cent while the number of mort gages recorded had dropped by 40 per cent during this period and thus was the most negative indicator in the market. Population estimates for 1970 were not available. Summary From these and other relevant facts one concludes that the number of orders for title insurance policies has "flattened out" during the last decade and perhaps even declined a bit. As in market "B, " but to a lesser degree, the average premium in market "C" has risen with the appearance of the large "project-type" real estate develop ments. In general, market "C" represents a relatively statis and somewhat declining market for title insurance. II. STATE LAWS AFFECTING COMPETITION IN MARKET "C" Laws Affecting Market Structure Entry. The minimum paid-in capital required for title insurers is $250,000. Paid-in surplus must equal 181 2 50 per cent of capital with a minimum of $125,000. No deposit of securities is required as a prerequisite to con ducting a title insurance business in market "B." An unearned premium reserve in the amount of one dollar for each policy issued plus ten cents for each thousand dollars of insurance is required and is recover- able at a rate of 5 per cent per year. No title plants were required as a prerequisite to conducting a title in surance business in market "C." Finally, the laws of market "C" specifically prohibit a title insurance company from engaging in any other kind of insurance business and 4 vice versa. Vertical integration. No new banks or trust com panies may engage in the title insurance business. How ever, those presently enjoying this privilege may continue to do so.3 Interestingly, interviewees reported that this 2 Ernest F. Roberts, Jr., editor, Public Regulation of Title Insurance Companies and Abstractors (Philadelphia: Villanova University Press, 1961), pp. 161, 165. 3Ibid., p. 183. ^Ibid., p. 103. 3Ibid., p. 105. 182 "grandfather clause" notwithstanding, the Controller of Currency has required that national banks give up their title departments. Market informat ion. All title insurers are required to file their rates with the insurance commissioner, and this filing is open to public inspection as soon as it is 6 filed. Product homogeneity. Although the title insurance contracts must be approved by the state insurance commis sioner, there is no requirement that the policies of all 7 sellers be the same- Laws Affecting Behavior Filing requirements. As mentioned above filing of rates with the commissioner is required, and he may within g thirty days after submission disapprove of these rates. These rates are justified and protested by interested 9 parties at hearings called for these purposes. Deviations 6Ibid., pp. 249, 2591. 8Ibid., p. 250. ^Ibid., p. 65. 9Ibid., p. 252. 183 i 1 from the scheduled rates are permissible with insurance commissioner approval. Rate-making criteria. The five, more common rate- making criteria described in the chapter on Government, Laws and Competition govern rate determination in mar- i ket I T C.” A rating organization is permissible and oper- j ative for the state in which market "C" is located. I Conclusion. Structurally speaking, competition seems to be en- ! couraged via the laws governing market "C." There are no ■ formidable barriers to entry. Some statutory attempts have j been made to discourage vertical integration, while more j market information and product homogeneity has been facili tated. Although the insurance commissioner does not actu ally set rates, the rating organization and approval procedure limits price competition and thus competitive ! i behavior. III. GENERAL CHARACTERISTICS OF MARKET "C" Principal Services Offered j Title offices in market ”C" tend to sell a rather i I I 184 complete "package” of services including the preparation of a title search, the examination of the search, the closing process, and the issuance of a title insurance policy. Noticeably absent from this package is the preparation of documents which is handled predominantly by real estate brokers (who charge the sellers for this service). Attor neys prepare the more complex documents and often those involving large real estate values. Title offices periodi cally lend "clerical assistance" in the preparation of documents such as entering the legal description but usually nothing more. As in market "A" the published insurance-commissioner- approved rates in market "C" contemplate the performance of all of the services described above. There are a few instances where the services are bought separately (searches, for example) in large quantities, and in these instances interviewees suggest that a taylored charge is made to the purchaser. All miscellaneous services sold by title offices are closely related to title evidencing. These services do not include fire insurance or real estate lending. 185 Trend in Popularity of Title Insurance Title insurance has been the rule rather than the exception since World War I. Interviewees estimate that 99 per cent of all real estate transactions (excepting exchanges among members of the family) are covered by title insurance policies. Description of Sellers By and large market "C" sellers are title offices as described in Chapter I under the heading, "definitions." Although some sellers do not have title plants, and conse quently search from the public records the principal sellers cto have their own plants. Sellers have many offices in the county (which take orders and which process the settlement and closing steps) for the convenience of the property buyers, sellers, and real estate brokers. However, title plants are maintained and searches made for each of the sellers in their own central office. Although some of the small and inconse quential sellers are agents only, the principal competitors are also insurers. Selection of Seller Seller selection is made primarily by the real estate broker. The broker's decisionmaking influence has long been recognized by the title offices in their payment of commissions to brokers for title orders they open. Interviewees estimated that as high as 80 per cent of all title company selections were made by brokers. Attorneys were identified as second in importance in making title office selections. Attorneys seem to be regu larly involved in selecting the title insurer where large dollar value transactions were involved. The lender was also thought to be a significant decision-maker where high value loans were involved. Who Pays for the Services? Market "C" is a ’ ’ buyer pay” county. The buyer of property pays for both his owner’s title insurance policy and for the policy insuring the lender’s interest. IV. STRUCTURE OF MARKET "C” Because market ”C” is principally one market for the ’ ’ package” of which a title insurance policy is a part (as opposed to the multiple market situation found in ”B”) 187 structure in this single market will be studied. Concentration Number of sellers. Seven separate entities offer the title ’ ’package" in market "C” although it is estimated that only four are actively soliciting business. The other three offices are maintained for the convenience of cus tomers served by these same three companies in other parts of the state. Market shares of sellers. Practically speaking market ”C" is a duopoly. Even though there are seven entities in the county only four are actively soliciting business, and of these four two of them enjoy over 97 per cent of the market "pie." Estimates were not available as to how the balance of the pie was shared. Number of buyers and buyer shares. Buyer shares of the total market are thought to be small enough to have very little significance for our purposes. A few large, local lending institutions make between 1 and 3 per cent of all loans recorded in the county over a twelve-month period, but it is thought that these lenders by no means 188 are always successful in directing the title business to one or another title office. Estimates of the number of buyers have been sum marized as follows: Real estate brokers -- high hundreds Builders and subdividers -- low hundreds Lenders **“ low hundreds Attorneys -- low thousands Large land owners -- inconsequential Escrow companies -- none Conclusion. On the buyer side there is no signifi cant concentration. No buyer or buyer’s agent controls any substantial share of the market. On the seller side, by contrast, there is a high degree of concentration. The reasons for this degree of concentration and its impact on competition will be developed later. Entry Ease of entry, as was mentioned earlier, is usually thought of as a force for maintaining competition. The historical number of firms in the county and the cost of building a title plant will be reviewed as indicators of 189 both successful passed entry and probably future entry. Historical number of sellers. Interviewees esti mated that fifteen years ago there were four title offices of any significance operating in the county. This number is said to have remained unchanged five years later and ten years later. Today, although seven firms were identi fied as apparently operating under the ’ ’concentration" heading above, only two of them could be said to have made a successful, sustainable entry. Cost of entry. The two estimates (in index form) for building title plants, which we have used previously, are as follows (market ”D” costs = 100): Calculated minimum = 28.1 Assumptions: Ten year plant. See page 114 for other assumptions as to quality of plant. Calculated highly satisfactory =33.5 Assumptions: Twenty-five year plant. See page 114 for other assumptions as to quality of plant. Among the other costs of entry which we have enumer ated before under "cost of entry" for market "A," there is one rather unusual item worth noting. Because package title insurance services are sold through many offices 190 scattered around the county, more capital would be required in the beginning to open a title operation with these many home office tenacles. Conelusion. In past years entry does not appear to have been easy nor do future opportunities for entry look any brighter. Title plant building costs are high, and there does not appear to be enough potential growth in the market to encourage the large outlay of capital that would be required for entry. Independence of Rivals Apparently none of the title offices have a finan cial interest in any of the other offices operating in the county. Nor does there appear to be any opportunity for cooperation among the offices. There is no county title association and no real interest on the part of the larger firms in having one. In general there seems to be a defi nite independence of rivals. Vertical Integration The definition and the effect of vertical integra tion both discussed under this heading for market "A,” of course, still apply for market "C." 191 There are two shades of vertical integration in this market. The first involves the many real estate brokers and attorneys who are both buyers (or agents for buyers) and at the same time stockholders of one of the two leading title firms in the county. In situations where these attorneys and brokers have the opportunity to direct title orders to "their" company they do so. It is said that in these instances their financial interest may over-shadow their demand for "good" service. Second among the shades or types of vertical inte gration is to be found where commercial banks or their officers, who can often influence the choice of title com panies in real estate transactions, own substantial shares of title company stock. As will be discovered later under the "merger" heading, this ownership was an accident grow ing out of governmental fiats. Stock ownership of title companies by those able to "direct the business" was a significant influence in market "C." Product Differentiation Attempts to differentiate services exist in mar ket "C" as in all the other markets of our study. These attempts are treated under behavioral criteria. Market Information Apparently because of the duopoly character of market "C," certain knowledge patterns have developed. Seller knowledge. The two major firms in the market are well informed about the behavior of each other. They do not appear to be well informed on the competitive strategy of their lesser competitors. So far this lack of knowledge has not been any serious disadvantage to the larger firms judging by the share of the market enjoyed by each of them. On the other hand, the larger firms are well informed statistically: that is, they keep tallies on which title offices are recording documents and how many they record. Those title offices with very small shares of the market tend to be quite current on the competitive be havior of both groups of firms, the large and the small. Seller sources of information include "feed back" from branch offices in the county, data gathered from recorded documents, customer comments, and insurance commissioner reports. Buyer knowledge. The ease with which buyers and representatives of buyers rated the components of service 193 provided by sellers in the county would indicate that there are knowledgeable buyers in market "C." Conclusion. A relatively static number and identity of significant sellers in market "C" over the past five years has made it easy for buyers to stay well informed. Seller knowledge of one another's activities appears to have been weak in some areas but at least sufficient to permit the dominant firms to retain their share of the market. Potential Competition Threats of potential competition are not great. The five smaller companies, which taken together now enjoy only 3 per cent of the available market, would indicate that success does not come easily in this county. Because this has been true, one must take the position that potential competition does not impose great discipline on the sellers in market "C." V. BEHAVIOR OF PARTICIPANTS IN MARKET "C" Collusion None of the familiar forms of collusion seem to exist in any form. Largely because of the wide variation 194 in market shares the larger sellers have shown no interest in "working with" the smaller sellers. Price agreements, agreements to limit production and to allocate customers appear to be unheard of as well as unthought of in mar ket "C." Response Time Response time, as pointed out earlier, usually depends on two things: (1) the capacity of a competitor to respond and (2) whether or not it is thought that a com petitor move will be effective enough to merit a response. An example of the former condition would be the comprehensive customer visitation program carried on by the largest companies. The smaller companies simply do not have the resources to carry on such a program, and there fore do not respond at all. Their inability to respond by no means indicates a lack of desire to compete. It re flects only a lack of capacity. An example of the latter condition is to be found in the unwillingness of the largest company to meet the amount of commission paid to real estate brokers for bringing in title orders. The second largest seller pays a 5 per cent larger commission to brokers than the largest company, 195 and the much smaller companies are said to be paying even larger commissions "as the only way they can get business." The largest company has refused to pay these larger com missions on the assumption that other broker advantages of dealing with it such as speed and accuracy of the service will not be sacrificed by the broker for a few extra dol lars. Thus, in this example response time has been slow and would indicate that some firms have at least differ entiated their product or service enough to offset small changes in price. For various reasons, then, response times on the above types of items tend to be slow. Price Moves Little significance can be attached to any of the price move criteria in analyzing market "C." This is true because practically all price changes seem to originate with the rating bureau of the State Title Association. Once the State Title Association initiates the price changes, the insurance commissioner must approve them after the customary hearings before they become final. Prices established through this rating bureau have been neither flexible nor subject to frequent change. Since World War II only two significant changes in the 196 rate structure were identified by interviewees. One price increase became effective in 1954 and another in 1960. A third revision is said to have been pending for the past eighteen months. Merger History Market MC" has experienced an eventful sequence of mergers and acquisitions. Without attempting to be abso lutely precise as to dates, the merger trend over the last thirty-five years has developed as follows. In the late 1920's and early 1930's many of the commercial banks had their own "title departments” where they examined titles and issued policies of title insurance. Interviewees pointed out that both the Federal Deposit Insurance Cor poration and the Federal Reserve Board objected to com mercial banks serving as insurance companies, and insisted that the banks divest themselves of their title depart ments. Many of these banks sold for stock their title departments to what is now the leading title office. As a result these same banks now have a financial interest in a separate title company. During World War II this title company acquired another leading title firm operating in market "C." With 197 this acquisition a significant number of the key employees of the acquired company left to form a new entity to be owned largely by real estate brokers and lawyers. This new firm today enjoys the second largest share of the market. In the early 'fifties another title firm was merged into the largest seller (the company of which the bank title departments became a part), and again in the last two years another significant seller has been merged into the largest seller. Clearly a number of mergers and acquisitions have occurred during the last thirty-five years in market "C." The periodic emergence of new sellers under the management of personnel, who left the merging companies, has con tributed toward the maintenance of competition. Product Standardization Types of insurance coverage and ’ 'title practices” generally seem to have been standardized. This has probably been accomplished through the State Title Associ ation. Peripheral services along with speed and accuracy in providing this coverage are by no means standardized as shall be seen in a moment. 198 Attempts to Differentiate More seller energy is spent in differentiating services in market "C" than we found in market "B," but probably fewer seller resources in market "C" are devoted to differentiating than in market "A." As indicated earlier the degree of differentiation effort in a market seems to be inversely proportional to the level of price competition. Attempts to differentiate fall into the usual three categories (1) speed and accuracy in processing orders, (2) free services designed to obligate prospective cus tomers, and (3) building constructive personal relation ships . Speed and accuracy in processing orders. Most interviewees felt that the greatest efforts to differenti ate among sellers were directed toward improving the speed and accuracy of the services provided. These services included specifically preparing preliminary reports of title, the settlement process, and the issuance of the title policy itself. Completed questionnaires indicated that a two-week lapse between the receipt of a title order and the delivery of the preliminary report was considered 199 "good" and that settlement processing was typically com pleted in two to three hours. Under emergency circum stances the report of title and the settlement procedure could be greatly expedited. All interviewees pointed out that the sellers were constantly making attempts to improve both accuracy and speed. Many common management tools and techniques were mentioned as means toward achieving improvements. Because of the many offices operated by the sellers, there is competition in the convenience of office locations for the real estate broker and the principals to the real estate transaction. Free services. Some of the free services offered to induce customer loyalty include (1) printing document forms for free distribution, (2) filling in the legal description (particularly the long legal descriptions) on documents to record, (3) free judgment lien reports to refinancing specialists, and (4) showing chattel mortgages against present or prospective vestees on preliminary reports of title. Building constructive, personal relationships. Typical of all the markets studied, a great deal of effort 200 is devoted to winning the personal favor of the buyer decisionmaker. Some of these efforts include the follow ing: (1) Gifts of various dimensions have been given to customers ranging from Caribbean cruises to ball point pens. One interviewee said that a competitor was giving away sachet bags and was considering dishes. Legislation in 1963 is said to have put a stop to the large gifts. (2) Title offices donate prices and advertisements to customer functions and publications respectively. (3) Cus tomer relations representatives call on customers during the day and attend customer group meetings during the evening. (4) Of course, entertaining the customer is undertaken with considerable vigor. Miscellaneous Competitive Efforts Loans by title companies to land developers are made with some regularity in market MC,M but it does not seem to attract as much comment from the sellers as it did in markets MA" and "B.M This lack of interest may stem from the fact that there is less competition for land developer business in a county with very little undeveloped land. Participation in community activities by title offices is common but far more effort seems to be devoted 201 to winning customer acceptance (through participation in customer groups) than general, community acceptance. VI. PERFORMANCE IN MARKET "C" Profit Levels Profit level information by county was not avail able. Prices Prices in market "C" were next to lowest among the range of markets, and pricing procedure tended to be quite simple. The scheduled price in market "C" was easy to determine and all-inclusive whereas pricing procedure in other markets tended to be more complex. This complexity exists because prices of each component of the title package had to be assembled and then totalled. It is conceivable that price simplicity may exist in markets of a lower degree of competition than in markets of a higher level of competition. This may be true because competition can encourage more pricing of each component of service separately rather than permitting "lumping and averaging." Competitive pressures may force the seller to offer the buyer only what he needs in the package and 202 also permits the seller to quote what appear to be lower prices for requested components. Quality of Service Provided It has been made clear earlier that service quality is difficult to measure in the title industry. One yard stick easily identified, however, was the period of time that elapsed between the opening of a title order and the issuance of a preliminary report. Two weeks was described as the typical elapsed time in market "C." The standings of each of the markets as to reporting time will be shown in our final comparative summary. Innovations and Progressiveness As in market "A” and market "B," attempts to dif ferentiate one's services in the title industry can also be interpreted as attempts to innovate. Such attempts for market "C" sellers have already been described. Efforts to improve title office internal procedures are rather significant in market "C." Both principal sellers appear to have a great deal of interest in im proving procedures and are constantly "examining and re examining” their methods. One of these sellers has a 203 formally constituted department whose principal function is to develop and install improved systems. This seller also has established a company committee to study and evaluate opportunities for automation. Diversification Functional diversification has not been attempted by any of the sellers in market "C." One of the two large sellers, however, has been extremely active in diversifying geographically. The reasons given for this geographic diversification were (1) the expectation of more competi tion in market ”C” and (2) the "only way to grow.” Rate of Growth The total dollar value of title insurance premiums collected in the county now is not much different from the total collected in 1947, 1948, and 1949. Although property values have risen and the number of large building projects has increased, the number of insurable transactions has dropped over this same period. Consequently, because there has been relatively little growth in total available title premiums, for whatever reasons more sellers have entered market "C," growth in total market revenue has not been among them. 204 VII. SUMMARY Faced with a relatively static revenue potential, rather high costs of entry, and a number of significant mergers during the past fifteen years, market "C” has evolved structurally into an oligopoly. Considerable vertical, integration exists and would indicate that if other structural and market conditions persist there will continue to be few sellers for some time in the future. Variations in commissions paid to real estate brokers constitute the only form of price move existing in market "C." Principal behavioral efforts are found in attempts to differentiate services. There are vigorous efforts to excel in order speed and accuracy as well as in attempts to build constructive, personal relationships. Behaviorally speaking, competition can be characterized as the reasonable orderly, non-price type. Conclusions as to performance can only be inconclu sive. Two criteria point toward competition. Two indicate lack of strength in competitive performance, and one appears to be of no significance one way or another. CHAPTER IX ANALYSIS OF MARKET "D" I. SETTING FOR MARKET "D” As with Chapters VI through VIII a description of the size and growth of the title insurance market in county "D" will provide a useful statistical setting for this chapter. The per cent of urban residents will also be identified. Size of Market Even though largest by far in population among the seven markets, market MDM probably ’ ’tied for first” in 1962 in the number of title orders opened annually if deed and mortgage recordings can be taken as an indicator of order volume. The dollar amount of mortgages was twice the amount of any other market in our study. This is a market of large building projects and large real estate develop ments of many varieties. 205 206 Because of (1) an extremely strong first position in the dollar value of mortgage recordings and (2) a tie posi- tion in the number of deeds and mortgage recordings in 1962, it is estimated that the dollar amount of title premiums clearly surpassed any of the other six markets. Urban Character of Market With a 99 per cent urban residence rating by the Bureau of Census, the third highest rating of our seven markets, and with a population density of 5,377 people per square mile, market ”D” is distinctly urban in character.^ Growth of Market Population growth has been persistent but not pheno menal. The 1960 population for the county was slightly more than 13 per cent above its 1950 level. Population for 1980 has been projected at 69 per cent above the I960 level. The number of deeds and mortgages recorded has de clined slightly in the last twelve years, but the consider ations paid and the value of mortgages are thought to have ■^U.S. Bureau of the Census, County and City Data Book, 1962, A Statistical Abstract Supplement (Washington, D.C.: Government Printing Office, 1962), pp. 52, 92, 162, 202, 282, 312, 342. 207 risen substantially. From the title insurer’s standpoint there has been, then, a healthy growth pattern in mar ket "D" over the past ten to twelve years and the next seventeen years would appear to present an almost equally healthy picture. II. STATE LAWS AFFECTING COMPETITION IN MARKET "D" Laws Affecting Market Structure ' Entry. There is neither a minimum capital require ment nor a paid-in surplus requirement for title insurers operating in market "D." No deposit of securities with the commissioner is required of the domestic insurer either. However, the commissioner may exact deposits from foreign insurers under retaliatory provisions of the code, or he may deny admission to the foreign insurer for non-compliance 2 with deposit requirements of the insurer's own state. There is no unearned premium reserve required in market "D" nor any restriction on the types of enterprises that may 2 Ernest F. Roberts, Jr., editor, Public Regulation of Title Insurance Companies and Abstractors (Philadelphia: Villanova University Press, 1961), p. 183. 208 engage in the title insurance business. Vertical integration. Title insurers by the same token are not prohibited from extending their activities into mortgage lending or the real estate brokerage in dustry. Market information and product homogeneity. Posting of rates is not mandatory nor is approval of title insur ance policies with the insurance commissioner required. Conclusions Among the seven markets in our study market "D" en joys the least state control of markets. Both structurally and behaviorally economic events are left almost entirely to market forces. III. GENERAL CHARACTERISTICS OF MARKET "D" Principal Services Offered Preparation of the title search, examination of the search, and issuance of the title insurance policy consti tute the title "package" for market "D." These services are generally not sold separately. In most cases the title 209 offices neither draw documents nor handle the closing pro cess. Attorneys, real estate brokers, and lenders usually prepare the documents while lenders and attorneys handle the closing process. Escrow services are also offered by title offices, but separate charges are made for these services. Miscellaneous services offered by sellers tend to remain within the title evidencing field, but do include construction loan services (paying out a loan to the builder according to the formula prescribed by lenders) and certain types of indemnity services related to the issuance of title policies. For the first time in this study another form of title evidence is encountered in the Torrens certificate of title. This form of evidence was first used in Bohemia in the thirteenth century. Its modern use dates from 1836 in Europe where since that date it has been used in Ger many, Austria, Hungary, Switzerland and France. In 1858 Australia adopted a compulsory system of registration through the concentrated efforts of Sir Robert Torrens from 3 whom the system gets its name. 3 James E. Sheridan, "Titles to Real Property," Title News, 26:4, September, 1947. 210 Here is a description of this evidencing system. An owner of property who wants his parcel under the Torrens System must first bring an action in the County Court in the nature of a quiet-title action. Following proper notice and hearings, a decree is issued settling all ques tions of ownership of the parcel in question. A certifi cate is then issued by the Registrar of Titles in the name of the owner showing the interests of other persons all as determined by the court decree. The certificate is in tended to be conclusive evidence of the state of title. Any subsequent transactions including those in volving transfers, voluntary and involuntary liens dealing with registered property has to be filed with the Registrar in order to be valid and effective. Allegedly standing behind the accuracy of these certificates are the "in demnity fund” and the assets of county "D." Trend in Popularity of Title Insurance Most real estate transactions are covered by poli cies of title insurance and have been for a number of years. One respondent described this situation as follows: Years ago titles in ”D” county were covered by abstracts of title, and it was the custom to have the abstract continued with each sale or mortgage and 211 an attorney's opinion written covering the condition of title. For the past generation or more the title opinion of the attorney has been supplanted by pre liminary title opinion rendered by a title company followed by the issuance of a guarantee policy pro tecting the owner and mortgagee against any defects in the title except those which might be specifically excepted from the guarantee. Interviewees typically estimated that 80 per cent of all real estate transactions were covered by a title policy. Of the remaining 20 per cent practically all were covered by certificates of title. As in all areas, of course, there are some transactions--typically from one member of a family to another--where no evidence of title is provided at all. Description of Sellers Like markets "A" and "C, ” market "D's” sellers of title insurance are offices as described in Chapter I under the heading, "definitions.” One of the sellers is blessed with a most complete title plant while the other has a very limited one and searches largely from the public records. Only single office locations are maintained by the sellers. There are no branch order taking or closing offices. All sellers in market "D" are also qualified title insurers. 212 The lone seller of Torrens title certificates is the county government. The "title plant” in this case is the Torrens record system maintained and housed in the Regis trar’s office. There is only one office in the county operated by the Registrar. Selection of Seller Where title insurance is to be ordered, the real estate broker, the lender, and the attorney--in that order of frequency--select the seller. In those cases where property is under the Torrens system, the title evidence seller automatically becomes the Registrar. Once property is under this system, it can not be taken out. A number of attempts to revise the state law to permit the removal of properties from the system have met with defeat. Where a real estate loan exceeds a certain dollar amount, the lender will often insist on a title insurance policy in addition to the certificate because of the limits of the coverage provided by the Torrens system. Who Pays for the Services? Title premiums are paid by the seller in the case of the owner’s policy and by the buyer-borrower in the case 213 of the mortgagee's policy. As would be expected, any charges for property inspections for a lender's extended coverage policy would be borne by the borrower. Attorneys and brokers are offered 10 per cent of the premium as a commission when they place the order with the title office. IV. STRUCTURE OF MARKET "D" Concentration Number of sellers. Only two separate offices offer the title "package" we have described. Although there are a handful of organizations searching the public records for various reasons (for credit "checks," refinance special ists, etc.), none of these firms sell title insurance and none profess to sell true title reports. As indicated earlier there is only one agency, the Registrar, selling certificates of title. Market shares of sellers. Interviewees estimated that the largest seller issued a very large share of the number of title evidences issued in the county. The second seller appears to have only a very small percentage of this market and responded as follows to the questionnaire: 214 We are such a minority factor in the title insur ance business in this area that we have not undertaken to develop the information you have requested. Taken together both sellers were thought to have 80 per cent of the market and the remaining 20 per cent of the evidences were said to be issued by the Registrar. decisionmaker) shares of the market equal as much as 3 per cent of all title orders placed during the course of a year. There are a number of large real estate broker firms and of large lenders who may periodically place between 1 and 3 per cent of the total orders, but again, none that consistently exceed the 3 per cent level. Estimates of the number of buyers have been made as follows: Number of buyers and buyer shares. No buyer (or Real estate brokers low thousands Builders and subdividers low hundreds Lenders middle hundreds Attorneys low thousands Large land owners no reliable estimate but thought to be inconsequential Escrow companies none 215 Conclusion. There is heavy concentration on the seller side in market "D," but no opinion should be formed as yet as to the effectiveness of competition in this county. For all intents and purposes there is no buyer concentration of any significance. Entry With ease of entry by sellers considered a force for maintaining competition this analysis must look next at the two criteria for ease of entry, the historical number of sellers and the cost of entry. Historical number of sellers. Completed question naires indicated that fifteen years ago there was only one seller of title insurance in market "DM and that at some point between five and ten years ago a new seller made its entry. This new seller, however, has not made what could be termed a successful entry. The Torrens system has been in operation for longer than fifteen years. Cost of entry. There are the two estimates in index form (market "D" = 100) for building a title plant, which we have used previously, to determine the ease or diffi culty of entry: 216 Calculated minimum = 100.0 Assumptions: A ten year plant - See page 114 for other assumptions as to quality of plant. Calculated highly satisfactory = 100.0 Assumptions: Twenty-five year plant. See page 114 for other assumptions as to quality of plant. None of the non-plant costs of entry described under "cost of entry" for market "A" deserve any special mention. Conclusion. Costs of entry in terms of plant build ing costs are relatively high and no successful entries have been made at least during the post Iforld War II period. Neither of these items would indicate that entry would be unprofitable for a new seller. The lack of success of the smaller seller presently operating in the county is traceable largely to his own mistakes--a poor initial impression on buyers at the time of entry and a major loss sustained as a result of questionable insurance practices. Independence of Rivals There was no question among interviewees but that the two sellers and the Registrar of Titles are all quite independent both from a financial standpoint and from an operating practice standpoint. 217 Vertical Integration In market "D” there appears to be no vertical inte gration in the ownership sense. As is common in many title insurance markets some of the title company directors are either owners or senior officers in organizations that generate title orders. Unless there is substantial stock held by the directors, however, this condition has not been termed integration even though there may be a strong in fluence by the director-customer as to where orders are to be sent. Product Differentiation A Torrens certificate of title is clearly different from a title insurance policy. To the extent that these two forms of evidence are different, there is product dif ferentiation. In addition there are also attempts by the two title insurance sellers to distinguish their services from one another. These attempts will be discussed under behavioral criteria. Market Information Seller knowledge. At the time of the survey the largest seller appeared to be reasonably well informed 218 of the competitive moves of both the lone title insurance competitor and of the County Registrar. The title office with the small share of the market was said to be informed in a limited way but seemed to have lost interest to a certain degree in the competitive moves in the market. Customer coirments and data assembled from recorded and registered documents constituted the principal information conduits. Buyer knowledge. Those ordering title services were generally conversant with the character of service provided by the two sellers and the Registrar, but it did not seem that these order sources were particularly current on the quality of service offered by the sellers. This lack of currency was traceable to the fact that the vast majority of buyer-interviewees dealt only with the leading seller, and therefore were not able to assess the current service level provided by the other sellers. Conclusion. In summary buyer and seller knowledge is probably just adequate to provide a setting for effec tive competition, but is not current and as a result is not as strong an influence for competition as it might be. Potential Competition Most of the customers responding to the question naire did not expect any new sellers in the immediate future. They did feel, however, that the large seller had a record of ’ ’running scared" in its attempt to please the customer in both the price and the service area. Thus the large seller seems well disciplined by the threat of pos sible competition. V. BEHAVIOR OF PARTICIPANTS IN MARKET "D" Collusion There is no hint of collusion in market "D." There appears to be no desire on the part of title evidence sellers to cooperate on price (prices are substantially different for title insurance policies and Torrens title certificates), on production limitations (all buyers and orders seem welcome) or on allocation of customers (there is competition for customers between the two successful sellers of title evidence, and there is somewhat less com petition for the same customers between the two sellers of title insurance). Response Time Interviewees found difficulty in citing any signifi cant seller responses to competitor moves. With the Torrens system under County government jurisdiction com petitive moves and responses by the Registrar were said to be infrequent and sluggish. The smaller title insurance seller was said to be incapable of responding to all of the larger firm's competitive moves. As a consequence of these conditions, there were few responses or response times that could be identified. Price Moves Nothing of real significance as to price moves was noted by interviewees. They did admit that there was some willingness by the smaller seller to ’ ’ negotiate” prices, but this willingness had not brought the smaller seller much business. The last general price increase in market "D," which was a small percentage increase, occurred in i960. Conse quently, there have been few identifiable price moves, and little indication that there is any active price competi tion between the two title insurance sellers. 221 Torrens certificates are sold for a considerably lower price than policies of title’ insurance, and this differential would indicate a degree of price discipline in market "D." It is a differential, however, which appears to have existed for years with little or no change. Merger History Interviewees indicated that no mergers had occurred in market ”D” to their knowledge over the past thirty years. Product Standardization The two title insurance sellers offer essentially the same type of title insurance coverage. Attempts are made to differentiate related services as we shall see under the heading ’ ’attempts to differentiate.” Without going into great detail the coverage of the Torrens certificate is considerably less broad than that of the extended coverage title policy. The latter covers a number of ’ ’ off record” matters, whereas the Torrens certificate does not cover losses occasioned by these types of defects. Hence, as between the Torrens certificate and the title policy there are differences which do not seem 222 to be subject to any significant standardization pressures. Attempts to Differentiate Most completed questionnaires revealed that con siderable efforts were made by the largest seller to dif ferentiate its services from those provided by its competitors, the remaining title insurance seller and the Registrar. These efforts can be classified--as in the other markets--into (1) speed and accuracy in processing orders, (2) free services designed to obligate prospective customers, and (3) building constructive personal relation ships . Speed and accuracy in processing orders. The pro- cessing time for preparing a report on the condition of title was said to run only five to seven working days for the largest title insurance seller. This is the fastest time reported among the four markets that have been studied up to this point. The smaller seller was said to have a slower reporting schedule. There was a difference of opinion as to how quickly the Registrar's office could issue a Torrens certificate. Some said more quickly than the title offices while others 223 said not as quickly. In any event the speed of processing title work in market "DM is a significantly competitive subj ect. Accuracy in title work is also a strong, competitive weapon. Again the leading seller has devoted considerable effort toward differentiating his service with accuracy. Success in this effort is indicated by the following com ment of one of the respondents: . . . the service of the blank title company is excellent and always has been. In terms of accuracy, competency and personnel, the blank title company has always been excellent. Free services. Most of the free services offered by sellers in market "D" were found in the other markets studied, but if anything, are less numerous than those offered in other markets. Two somewhat unusual free services are: (1) The use by the public of the largest seller's title plant covering the latter part of the nine teenth century. Such public use was occasioned by this portion of the title plant being made the official, public record. (2) The use of signs on new construction showing the builder, lender, and title insurer. Building constructive personal relationships. Al though the types of things done in market "D" to build constructive personal relationships x-aith those who place or generate title orders do not differ significantly from the types of things done in other markets, interviewees felt that at least the largest seller had carried on a highly intensive program in this area and enjoyed, as a result, a fine reputation of constructive personal relationships with the buyer-decisionmaker. The size and intensity of these efforts do in fact seem to have been greater and more successful than similar efforts in other markets. Miscellaneous Competitive Efforts Apparently real estate loans are not made by the title offices to developers. This practice that has become fairly common in some of the other markets simply has not appeared in market "D." In the early days of the smaller title insurance office ’ ’ priority" insurance for a mortgage was provided periodically even after construction had commenced and in effect "completion bonds" x\rere offered. These kinds of guarantees resulted in serious losses which forced the underwriting company to take over the title operation in market- MD." Participation in community activities is most common with the largest seller as a means of acquiring public acceptance. Interviewees felt that this type of activity was carried on to an unusual degree and that it was reason ably effective, competitively speaking. VI. PERFORMANCE IN MARKET "D" Profit Levels Although profit levels could be estimated with a reasonable degree of accuracy, these estimates would be of little value in our analysis without the same kind of esti mates for other markets. Hence, no estimates have been made. Prices Buyers of title insurance policies enjoyed the lowest prices among all of the markets included in the study. In addition, the prices for Torrens certificates, as mentioned, earlier were even considerably below the title policy premiums, but also offered less coverage and other disadvantages. In general, however, market ”D" was one of low prices. 226 Quality of Service Provided It was pointed out in the discussion of behavioral criteria that both the speed and accuracy in reporting the condition of title and that the general competency of the personnel providing the service through the title offices appeared to be outstanding. Innovations and Progressiveness Interviewees believed that the larger title policy seller "made study after study" on internal procedures, marketing methods, and insurance risks. Members of the title industry throughout the country have recognized the innovational activities of the major seller in market "D" and have identified this seller as one of the two or three leaders in "procedural breakthroughs" in the nation. Few innovations were credited by respondents to the smaller title insurance seller or to the Registrar. Diversification Functional diversification has not been at all sig nificant in market "D." One of the sellers has operated as a trust company for many years but no other attempts to expand into other types of business activity are known. 227 Geographically, however, the major seller in the market has carried on a massive program of diversification. Most of this expansion has occurred within the last thir teen years and probably was undertaken in recognition of the limited growth opportunities for the large seller in market ”D" itself. Rate of Growth Growth of the title insurance market has been healthy but not phenomenal. It would seem that this healthy growth would have encouraged new entrants and would have helped existing sellers succeed. Neither has occurred, however, but it is difficult to identify the reasons. VII. SUMMARY Market "D" is a large and growing market for title insurance operating within a non-interfering state statu tory setting. With this environment the results are sur prising, a duopoly of one private and one public seller of title evidence. For the first time in this study the reader encounters not only a local government agency sell ing title evidence but a substantially differentiated form of evidence as well. Market shares are quite lopsided 228 and judging from the past entry appears to have been diffi cult. Structurally market "D" is the least competitive of the seven markets. No very definite conclusions can be drawn from a study of behavioral characteristics in market "D." How ever, attempts to differentiate service are almost as numerous and as energetic as in the other markets, and with the substantially differentiated forms of title evidence available there are also substantially differentiated prices but really no price "moves." Performance in market "D" provides the surprise. From the consumer’s point of view the results are excel lent, a high level of service, a low price, and extensive innovational efforts. CHAPTER X COMPARATIVE SUMMARY In earlier chapters the objectives of this paper were identified. The principal objectives were to describe the degree, characteristics, and the results of competition in the seven markets included in this study. The preceding four chapters were designed to accom plish these objectives by describing in detail and in narrative form four markets which represented the most sig nificant variations in setting, state laws, structure, behavior and/or performance. A similar treatment of the remaining three markets would have offered very little in accomplishing our purposes. However, findings have been summarized in tabular form for all seven markets in order to ’ ’ broaden the sample” and to contribute further to the objectives of this paper. The far right hand columns on the tabular summaries headed "most typical situation” identify the most common situation 229 found in the seven metropolitan markets. With these tabular comparisons and summaries con clusions will be drawn in Chapter XI on the effectiveness of competition, the function of key environmental factors on competitive behavior and performance, and implications for public policy. HEMS A B 1. Statistical a. Size of market 1.) population for i960 1,350,000 1,000,000 2.) . Dumber of deeds recorded for 1962 90,000 37,000 3-) Number of mortgages recorded for 1962 63,000 36,500 U.) Dollar amount of mortgages recorded for 1962 300,000,000 600,000,000 5.) Size ranking(a) Becond fifth b. Percent of urban population^ 9 1* 96 c. Growth of market 1.) Percent change in deeds recorded annually from 1950 through 1962 +Uo -13 2.) Percent change in population from 1950 to I960 +5U +90 3*) Estimated percentage change in population from i960 to 1970 + 52 not available 1 *.) Orowth ranking^*) first fourth • (a) "Pirst" refers to largest in size or growth of title premiums, which were estimated principally by using the size and gr Deeds, mortgage figures and the amount of the latter were given heaviest weights. (b) Percent of population classified as "urban" by the Bureau of Census. TABIE n COMPARISON OF STATISTICAL SETOBOS c D E F 2,000,000 5,000,000 1,000,000 i,6oo,< 37,000 1 ( 9,511 21, 2l»5 38,5 27,000 73,790 15,956 39,3 not available 1,600,000,000 not available 772, 065,2 third first sixth four 100 99 100 1 -12 -28 not available -2 +14 -1 +: not available +32 not available +; third sixth — fin the size and growth Items shown. £31 F G Most Typical Situation 1,600,000 600,000 from 1,000,000 to 2,000,000 38,510 20,033 from 35,000 to 50,000 39,130 17,916 from 15,000 to 1*0,000 772, 065, 2lU not available from 300,000,000 to 700,000,000 fourth seventh 100 9k from 9k to 100 -27 -5 a negative percent +19 +15 a positive percent *lk not available a positive percent fifth second ITEMS A B C 1. Statutory a. Laws affecting structure 1.) Entry a.) paid-in capital requirement $100,000 $100,000 $250,000 b.) paid-in surplus requirement $100,000 $200,000 $125,000 c.) security deposit requirement none $100,000 none d.) unearned premium reserve 5$ of premiums to $100,000, then 3$ 10$ of riBk premium: additional percent for foreign insurance $1.00/policy and 10//thou dollars of liability e.) title plant requirement a 25 year index required none • none 2.) Vertical integration mortgage insurance is the only prohibited field mortgage lending, life and cas ualty insurance specifically permitted all other types of lnsura prohibited 30 Market information filing of prices required no filing of prices required filing and public hearing M Product homogenity Insurance contract must be approved no approval of contracts re quired insurance contract must b proved 5.) Sumaary on setting for effective structure some limitations some limitations some limitations hi Laws affectinn behavior 1.) Filing requirements prices actually set by comaissioners none filing and public hearinf 2.) Deviations permitted none — yes, with commissioner a] 3.) Rate making criteria yes none the five more comaon cril M Rating organizations none none yes 5.) Summary on setting for effective behavior strict limitations particularly in price behavior no limitations same significant llmltat: price behavior c. Suimnary on setting for effective structure and behavior (a) noticeable limitations very fev limitations some limitations d. Ranking on structure and behavior (b) seventh third sixth (a) Sumaary identifiers are ranked as follows: "noticeable" (higiest), "some", "few", "very few", and "none". (b) "First" refers to the market whose statutory setting is most conducive to effective couqaetition as measured by the behavioral and structural tests outlined in our chapter on "criteria". Items l.a); 2.), and b, have been given most weight in this ranking. TABLE IH COMPARISON OF STATOTOFOf SETTINGS C D E 0 $250,000 none $ 100,000 $ 100, 0 $125,000 none $100,000 n 0 none none none $50, ium: additional ign Insurance $1.OO/policy and 10//thousand dollars of liability none 6$ of premium e - none none none n , life and cas- specifically all other types of Insurance prohibited no limitation no limitation ces required filing and public hearing required no filing of rates required filing required no ontracts re- insurance contract must be ap proved no approval of insurance contracts required insurance contract must be approved no approv contract some limitations practically no limitations some limitations s e filing and public hearing required none filing required 1 - yes, with commissioner approval — some deviation permitted i e the five more comaon criteria none the five more common criteria z t e yes none none z some significant limitations in price behavior no limitations some limitations in price behavior ;ions some limitations no limitations some limitations very 1 sixth first fifth t 1 "none". 9 measured by the i r e been given most weight In this ranking. zia P G Most Typical Situation $100,000 $100,000 $100,000 none none $100,000 $50,000 $50,000 none premium 10$ of premium a $50,000 Insurance reserve plus 10$ of risk premlus some kind of reserve plan none none none mitation no limitation engaging In other types of Insurance Is prohibited some limitation required no filing required no filing required no filing required ■act must no approval of Insurance contract required no approval of Insurance contract required no approval of Insurance contract required L B some limitations some limitations some limitations required none no filing required: commissioner may call hearings on schedule or deviations no filing required permitted — deviations permitted ic m o n criteria none the five more common criteria generally there are rate making criteria none none none Ltlons In price no limitations very feu limitations some limitations iltatlons very few limitations fev limitations few limitations rth second fourth • Strurtuml Criteria (*) * A Abstract Market Opinion Market Title Insurance Market :oncentration i. !Ju?.ter of rellerr 1? offices 11 plant sellers 10 non-plant sellers . 5CO-7CO ocllera 21 title insurern 7 offices: or Jng bucin^n? Mark** shares in percent largest share Is 20*: next, two larges shares are 17 and If*: refining shares range from to Sv largest seller had 30-5o$;none of others hod more than 225* no reliable eat invitee 1G-151& thought to be the largest share 97* of aartcet nnjor cullerc * . Ihnber of tuyer'- r.unlcr In thcusands: n: . p<fr.ificiin‘ly large buyers number In houoondfs: a few large buyers < number In the f'antly large Conclusion no concentration of any nnjor ! .*> . portance United concentration vli.h , no concentration of any anjor Importance largest seller nr buyer cone major import e seller concer 2. Entry ■ a. Historical nauter of flrns r yrs, ago, 9 offices; 10 yrs ago, 9 offices; 15 yre. ago, 7 offices 5 yrs. ago, 15 offices; 10 yrs. ago, 10 offices; 15 yrs. ago, 7-8 offices (includes plant and non- plant sellers) no reliable estimate only estimates Indicated that insurers hod increased at faster rate than abstract sellers over last 15 yrs. 5 yrs. ago, ago, h offlc offices b. Cost of entry (M ninimc highly satisfactory 3 9 .^ minimum 5^.6^: highly satis factory " -- nlnimun 20.1' factory 33.7 . e. Conclusion successful entries have been made regularly over the past 15 yrs. lntervieveea successful, 1 had been mad< 1 , Independence of rivals generally, quite independent L. Vertical Integration no vertical integration of any significance Halted rertla il Integration and substantiad sepmtatlon considerable 5. Product differentiation homogeneous policy: differentiated service end some differentiated risk taking In policy exceptions considerable variation In com pleteness of abstract: differ entiated service homogeneous format: differentiated service homogeneous policy: differentiated service homogeneous ] service Market information satisfactory but far from perfect buyers and sellers except opinion writers better infonaed than in almost all other markets satisfactory 7. Potential condition because there are already so many sellers, potential competition offers little, If any, discipline because there are already so many sellers, potential competition offers little, if any, discipline because of a potential ca stltute a st existing sel B. Swauy on structure a reasonably appropriate setting for effective eospetltioo aside froa the few examples of vertical integration, a reasonably appropriate setting for effective competition # substantial! standpoint 0 9. Structure ranking ( 0 third first i! i tbe criteria ban been defined s I For explanations of these estla l "First" being the *o*t conducive nd their significances Identified in Cbspts tes see entry sections of maxist chapters, to competition as Manured by tech of the f l£se figures are expressed as a percent of entry cost for Maxtet *Jf. structural tests described in our chapter on "Criteria". Seven being l*Mt conducive. Beeriest vaigbs were giv ( t mx ir oow A inao w m m ? m h ii'iuhm irkct Title Irmimnce Market 0 D ' E F Dors 21 title insurers 7 offices: only t actually seek ing bucin^no 2 private enterprise offices: 1 public enterprise office 6 offices furnishing oosplete pack age of services. In addition as neay as 25 agents of the title offices 13 office estIraatce 10-15^ thought to be t he largest el tore 97^' of market shared by tvo najor cullers 1 private office enjoys nost of the 8o£ private share: 1 public office serves renoinlninc no reliable estimates largest caller process* Uo< of all orders: next enjoys approximately * enters. !t**ailninr : mall chares of oarke*. arce buyers number in thousands: no signifi cantly large buyers * number in thousands: no sifAtfl- cantly large buyers number in thousands: some larpe influential buyers nunV'r l r . t l - . usnnia: rv hr.''4 tvyerr- >ncentration or any major importance no buyer concentration of any major importance: very substantial seller concentration no buyers concentration of any major Importance: very substantial seller concentration soroe buyer and soae seller con centration very Ufle wirfflim:1 t'Uyer or oilier side estimate only estimates Indicated that insurers had increased at faster rate than abstract sellers over last 15 yrs. 5 yrs. ago, h offices; 10 yrs. ego, I t offices; 15 yrs. ago, k offices 5 yr». .go, ? rrlvmte and 1 public office; 10 yre. ago, 1 prlvete and 1 public office; 15 jrra. ago, i print, and 1 public office 5 yrs. ago, 7; 1' yrs. vo, f > ; 15 yrs. *,*o, 3 off!c«*« offer ing cosiplctc package 5 yrr.. n,;v, IT offices offlcea; yrs. n«:c( - minimum bB.l£: highly Satis factory 31-5^ ^*•100.05: n«a, muftctov limited plant required since county maintains very work able plant minimum 2U.r ‘ i; hl-frly .5 yrs. lntervieweeo felt that only tvo successful, sustainable entries had been node over the last 15 yrs. Interviewees felt that no success ful entries had been made over last 15 yrs. a fhv, reasonably successful entries have been made successful entries havi regularly over the las' aerally, quit© independent ■any of the agents vho ca^ete are undervrltten by the same ocagMBxy 9 substantial segmentation considerable vertical Integration •one business acquired because of ccx— on directors and corron owner ship of stock rather Gipiiflcant financial tieo between title offices, attorneys and lenders very little vertical 1 m ti service homogeneous policy: differentiated service booogeneous policy: differentiated service title policy and registrar's , certificate differentiated: eervloe also differentiated homogeneous policy: differ entiated service and some differentiated risk taking In policy exceptions bom oraed than 1n almost all other markets satisfactory but far froo perfect satisfactory but far from perfect layers and sellers bet fbraed than in aost ns conpetltlon offers little. If any. because of so few successful entries potential coepetltloo does not con stitute a strong discipline on existing sellers intend wees felt that potential cxxvct.lt ion provided a very significant discipline to present sellers lntervievees felt that potent ial coopetltlon had provided a very significant discipline in the past but now there was less discipline Isposed from fear of potential competition because there are so n potential competition little, if any, dlacij a reasonably appropriate setting for 4 substantially a duopoly fro* the standpoint of structure substantially a duopoly of one private and ooe public seller a reasonably appropriate sett!lag fbr effective oanpet' fifth seventh ■fourth second t toe H u k a t "Tf. S m a being eo&fcsclve. wtlgb* « n given to ltema #1 and #2. ■ ■ ' 213 D ' t ? G M eet typical 31tuatlon •prise offices: 1 public Ice 6 offices furnishing coeplete pack age of services. la addition as aany as 25 agents of the ti t l e offices 13 office* no typical titaatloc * enjoys nost of the \rt: 1 public office \lnc Wf no reliable estimates Inrgee*. o*ll«?r processes approximately lO< of all orders: next largest seller enjoys approximately 20# of ill cnlcrs. H-antninr: sellers enjoy very ran 11 chares of aarfce*. Interviewees estimated that the larger seller enjoy# 75# of a ll orders available and the n a ile r pcllcr enjoys ' of all ciders nvnllnl]e ■ariat — a m t— A— to ta (1) «ult« lojnldod there there were 2-* a c tlr. ..Uor. — 1 (2) B n m i .tare, nlwre there were 5-21 actlr* Mll.r. sands: no Bl&itfl- jy^rs nunber in thousands: some large Influential buyer* nunber In t l . . ueonta: a* strjilflcontly lar.'o luj'err. number in thousands: saae rather large btgrcrc mttber In tta— — di: no .lfltlfican tly Urge buy*x* entrntlon of any anjor ry substantial seller son* buyer and sooe seller con centration vcly llt'le ronier.tmtioh on either l-yyer or oilier side sooe buyer ccneentVation: very substantial se lle r concentra tion ecm e teller cone— tratlon: rery little buyer ocne—tratloo « rrlntc and 1 public »• ago, 1 private and eej 15 yrs. ago, 1 public office 5 yrs. ago, 7; 1' yrs. vo, 15 yrs. 3 office offer ing complete package 5 yrr.. a*?, IT offices; 10 yrs. ago, offices; I * ? yrs. a,?:, 7 offices 5 yrs. o**o, 3 offices; 10 yrs. ago, 5 offices; If yrs. ofo, ? officer : higOy satisfactory United plant required since county maintains very work able plant sinister. hljfcly satisfactory r ? . 9 < ainlmra 10.3#: highly satis factory 11.M — b it that no success* A been n&dc over last a ftv, reasonably successful entries have been oade successful entries have been oade regularly over the last 15 yrs. Interviewees ft It that no successful entries had been aade over the last 15 yr*. •om succassfal entries have bee® aade over last 15 yrs. ■any of the agents w ho coyote a rt w dsnrrltten by the seas cosgaay generally quite Independent • — «Uy ipdt* acquired because of ire and comon owner- rather sl&ilflcant financial ties between title offices, attorneys and lenders very little vertical integration soar business acquired because of cccaon directors M id ooHon ownership of. stock « iom ta.l— acquired b u m at eomtoa director., .took o—ar—lp , and actual ow nnhlp of aatonnr and registrar's Uffe rant 1st ed: differentiated homogeneous policy: differ entiated service and some differentiated risk taking in policy exceptions hoaogeneous policy: i i i s bonoa— policy: lifte r—tlatod n r r l o . satisfactory but ftr from perfect buyers and sellers better In formed than In aost markets l a t u factory t a t ter from per fect —tlatectory ta t far tern p arftet felt that potential •ovided & very lBclpline-ta present interviewees felt that potent ial competition had provided a very significant discipline in the post but now there was leso discipline Isposed from fear of potential coopetltlon because there are so nany sellers, potential competition offers little, if any, discipline lntervinv— • te tt tta t pot—t la l competition tad prorld— Mb- ctontial dl—lp lin . to pr— t aellera In 3 out of 7 aoikett pot—tla l c o ^ e tl- tlon provided a »,ior dliKlpllne: In k out of 7 it provided l l t t l . o r no dliclpllne a duopoly of one m public seller a reasonably appropriate settiL ag for effective ooqpetltloa a duopoly nr— aonaMy appropriate — I t in f te r •ftectlv* doepMition leventh ■fourth second ilzth - — ISiavioral Criteria A r(«) C 1. Collusion Ho identifiable collusion No identifiable collusion No identifiable collusion p. Response time Relatively quick Rather sluggish responses Rather slurfirh responses 3. Price moveG a. Conscious parallelism Prices net by insurance ernissioner No identifiable conscious parallelism. Approval of prices required by insurance commissioner, little evidence of price competition Some interviewer felt that broker commissions varied in some of the sellers attempts to acquire orders. b. Price leadership Interviewees did not feel there were any clear cut, repetitive instances of price leadership. e. Price flexibility & frequency Of price changes Highiy flexible prices. d. Price and service discrimination Interviewees claimed that in some instances price discrimination might exist. e. Predatory' practices Ho identifiable predatory practices k . Merger hiBtory Mergers have contributed to neither to the enhancement or reduction of competition. Some mergers have occurred recently but the effect on competition has been negligible. A considerable mergers hnve taken place and have resulted in 6onc con centration and perhaps some change in competitive behavior. 5. Product standardisation Not of much significance. Not of much significance. Not of much slpiificnnce. 6. Attempts to differentiate a. Speed and accuracy in processing ordero. Strong competition in this area Strong competition in this area b. Free services Law againGt rebates appears to severely limit free services. Considerable competition In this area C. Building constructive personal relationships. Vigorous competition In this area Because a moot lb ion occurs princi pally in the area of price, attempts to differentiate certainly occur but to a‘lesser degree generally than in the other markets. Vigorous competition in this area 7. Miscellaneous competitive efforts a. Loans to developers Considerable competition in tills area Some competition in this area b. Attempts to motivate employees Some effort here Some effort here e. (ionmunity aetiviUon Very limited effort here Limited effort here 6. Summary on behavior Indications of strong competitive behavior in non-price areas only. High incidence of price competition Evidences points toward reasonable, orderly, non-price competitive behavior 9. Behavior ranking^) Fourth First ' Fifth (a) The throe markets (abstract, opinion and title Insurance market) although discussed separately under "structure" are similar enough In behavioral characteristics (b) Price competition has bem g'vcn the heaviest veigh In behavior ranking. Items 6 and 7 were ranked next In Importance. The remaining items vere given equal weig competitive In Its behavior; the market ranking "seventh" Is the least competitive as measured by the behavioral tests In our chapter on "criteria". TABLE V CCMPARISON OP MAKKET BEHAVIORS C D E on No identifiable collusion No identifiable collusion No identifiable collusion Ro Identity es Rather slurftsh responses Rather sluggish responses Relatively quick Relativi •allclism. Approval of prices required by insurance commissioner. Tittle evidence of price competition. Some intervieweer felt that broker commissions varied in some of the sellers attempts to acquire orders. Little indication of "price"competition • exoept between Torrens prices and private enterprise title insurance rates. Here there is a significant but static differential. Prices must be approved by insurance :onmIssIoner. However, there is no anti rebate lav, and as a result there is some irice competition where "bulk deals" are Involved. Ro conscious pa Sow sellers ha' schedules. :re were uices of Interviewees fe evidences of prio i . Largely stable Changes fairly some might Isolated instan crimination mentl ictices No identifiable :cently las been A considerable mergers have taken place end have resulted in some con centration and perhaps some chance in competitive behavior. No mergers have occurred in the last thirty-five years. A number of mergers have taken place but apparently no change in competitive behavior Ho mergers were occurred in last :e. Not of much significance. Not of much significance. Not of much significance. Hot of sue Strong competition in this area Major efforts continually made to maintain and improve speed and accuracy. Strong competition in this area. Strong competi Considerable competition in this area Some competition in this area Some competition in this area. Some corapetit rinci- tcnpts ar but lan in Vigorous competition in this area , Vigorous competition In this area Vigorous competition in this area. Vigorous compet Some competition in this area No competition in this area Some competition in this area. Ro coqtetlt! Some effort here Some effort here Some effort here. Some el Limited effort here Major effort here Major elffbrt here. Some e: petition Evidences points toward reasonable, orderly, non-price competitive behavior. Some instances of competitive behavior Indications of reasonable,etrong non price (and some price) ccmpetltlve behavior. Indications of price (and some ] behavior. Fifth Seventh Second re" are similar enough in hehavioral characteristics that they nay be discussed together. portance. The remaining items vere given equal weigh. The market ranking "first" is the most • ral tests in our chapter on "criteria". 23* F G Most Typical Situation us Ion Ho ldentlf^ble collusion Ho identifiable collusion Ho identifiable collusion Relatively quick • Relatively quick Relative quick responses-to com petitor moves. Insurance Is no antl- here la some deals" are Ho conscious parallelism at present. 3ocse sellers have different price schedules. HO identifiable evidence of conscious parallelism. Some sellers have different price schedules. Vigorous, open price competition Is the exception rather than the rule, Pi mast markets, however, there la sooe rood fbr negotiation of prices par*' tlcularly vttt reference to "bulk" or large transactions. interviewees felt there were limited evidences of price leadership. largely stable or rising prices. Changes fairly Infrequent. infrequent price changes and relative Inflexibility. Isolated Instances of price dis crimination mentioned by Interviewees. Isolated Instances of price dis crimination mentioned by Interviewees. Ho Identifiable predatory practices. Ho Identifiable predatory practices. iken place conpe tltive Ho mergers were known to have occurred In last thirty years. A number of mergers have taken place over last twenty-five years and have resulted In some concentration and perhaps some change In competitive behavior. Mergers have occurcd In mast markets over the last thirty years. But In general competitive behavior has not been adversely affected. cance. Hot of much significance. Hot of much significance. Of veiy little significance. this area. Strong competition In this area. Strong competition In this area. Items 6a and 6c constitute the prlncl- - pal behavioral areas of r-onpetititlcn. his area. Some competition In this area. Some competition In this area. Some competition In this area as a means of acquiring title premiums. this area. Vigorous competition In this area. Vigorous competition In this area. Items 6a and 6c constitute the princi pal behavioral areas of competition. - his area. Ho coopetition In this area. Sams competition In this area. The majority of the markets cccpete in this area. e. Some effort here. Some effort here. All offices devote some effort to this activity In recognition of Its competitive value. re. Rome effort here. Sane effort here. Host offices devote some energy to coonunlty activities. strong non tit lve Indications of reasonable, strong non- price (and sane price) competitive behavior. Indications of fairly vigorous non-price competition. Host markets enjoy strong, non-pries competitive behavior. Third Sixth Performance Criteria A B C 1. Prices^) a. ALTA standard ovner's policy. $2C,?CO.C? liability.(2) 1-37 1 5 6 171 b. ALTA mortgagee's additional coverage policy. $15,000.00 liatility.(3) 226 256 156 c. ALTA standard coverage ovner's and ALTA mortgagees additional coverage issued Jointly for $20,000.70 and $15,OOC.CO respectively^ 0 152 17A lM d. Weighted average^ 176 200 155 2. Speed of report preparation 2 - 3 days frou receipt of order 7 - 10 days if processed entirely through title office: much longer if processed through non-title company attorney's office 10 - lh days 3- Innovations and progreosiveness some innovational activity outside of marketing and pricing tactics very little innovational activities considerable innovation efforts de voted to internal procedures 1 *. Diversification some geographic diversification some diversification into fire and casualty insurance field; some geographic diversification considerable geographic diversi fication ct Sate of grovth considerable grovth in total title premiums available resulting in more sellers and more competition. Competition itself can take little credit for the grovth. relatively little grovth in total title premiums 6. Summary on perfomance satisfactory performance marginal perfomance rather inconclusive: tvo criteria point tovard competitive per formance, tvo indicate lack of strength in competitive per formance and one offers no information one vay or another 7. Perforaance ranking^ fourth seventh third (1 lit art C t l £ art chf Rel as Jtt eli iyj«s of coverage, levels of ibility and relevant circumstances described. Escrov or settlement irgcs have been eliminated. Prices those paid by purchaser or pur sers of title insurance policies, .evant inspection, abstract, ex- .natien, tax certificate, and igenent search charges arc in- ided. (2) Reissue rate used, if offered by sellers, and previous issue date is longer than 5 years ago and liability at that time vas for $15,000 (3) Involves nev loan from new lender. Same owner. Ho nev ovner's policy. Betveen 5 and 6 years ago present owner received ovner's policy and at that time a mortgagee's policy vas issued for $15,000.00. (A) Involves nev loan from nev lender. Same ovner. No nev ovner's policy. Betveen 5 and 6 years ago present ovner received ovner's policy vas issued for $20,000.00. TABLE VI COMPARISON OF MARKET PERFORMANCES C D 1 171 IOO 121 156 100 235 lM 1(X~ l W 155 100 173 •ely igcr if j.ip&ny 10 - it days h - 5 duys 10 - lk days 5 - 6 d; Lng lal considerable innovation efforts de voted to internal procedures extensive innovation efforts de voted to internal procedures and to marketing methods some innovational activity particu larly in marketing methods some Innovational ef to internal procedure : and considerable geographic diversi fication extensive geographic livers'"ieat!on a-me geographic diversification very little diversif: any kind sre Jdit relatively little growth in total title premiums considerable grovth in total title premiums traceable to accelerated real estate activity and not to competitive behavior relatively little grovth in total title premiums some grovth In tit activity and not t< rather inconclusive: two criteria point toward competitive per formance, two indicate lack of strength in competitive per formance and one offers no information one way or another highly satisfactory barely satisfactory barely satiafactor third first fifth sixth ! W L 6 ■ed te id (4) Involves new loan from nev lender. Same owner. No new owner's policy. Between 5 awl 6 years ago present owner received owner's policy was issued for $ 2 0 , 0 0 0 . 0 0 . (5) Based on estimated frequency of policy issuance: a = 2 ; b * 3 ; c = 3 (6) The market ranking "first" is the one with the most effective performance as measured by the per formance tests in our chapter on "Criteria". Heaviest weighs were given to Items 1, 2, and 3* Most Typical Situation 198 127 193 201 152 197 175 5 - 6 days 2 days some innovational efforts devoted to internal procedures considerable innovational efforts devoted to internal procedures and to marketing methods some innovational activity in internal procedures and in marketing methods very little diversification of any kind considerable geographic diversi fication some to considerable geographic di versification: practically no functional diversification some grovth in title premiums traceable to accelerated real' estate activity and not to competitive behavior some grovth in title premiums traceable to accelerated real estate activity and not to competitive behavior barely satisfactory quite satisfactory Just satisfactory sixth Becond CHAPTER XI CONCLUSIONS Based on the findings of the previous five chapters conclusions will be drawn here as to (1) the effectiveness of competition in the markets studied, (2) competitive structure, behavior or performance as a function of sta tistical setting, (3) competitive behavior and performance as functions of competitive structure, and (4) implications for public policy. I. THE EFFECTIVENESS OF COMPETITION AS MEASURED BY CHOSEN CRITERIA In drawing a final conclusion on the effectiveness of competition in the seven title insurance markets this section will (1) expand on the very terse, Chapter X sum maries of the "most typical situation" for structural, behavioral, and performance criteria (this added discussion is desirable because these groups of yardsticks are those 236 237 that have been relied on most heavily), (2) analyze the most typical statutory setting and apply J. M. Clark's regulation criterion, and (3) briefly determine whether some of the basic economic goals have been furthered by competition in the markets studied. Most Typical Situation: Structure, Behavior, and Performance Structure. Structurally there do not seem to be any serious anti-competitive conditions in existence in the markets studied. In four out of the seven markets there are six or more sellers operating with a high degree of independence in each market. In these same four markets there is no firm that enjoyed more than 40 per cent of the market. In the three markets where there is noticeable concentration, behavioral and performance characteristics seem to have offset this structural deficiency. In all but two markets successful entries of new title offices had been made during the last fifteen years. Vertical inte gration certainly exists in some of the markets but is the exception rather than the rule. In all markets a homogeneous title policy is offered with only minor variations as to exceptions in the 238 insurance contract. Regular and aggressive ctempts are made by sellers in all markets to differentiate their service from other sellers, but as shall be seen, this is a sign of competitive strength rather than of weakness. Sellers in particular and those choosing the source of title insurance for the ultimate buyer are generally quite well informed as to what is offered in the market. Those who actually pay for policies are as a rule notori ously uninformed as to the sellers and the services they offer. Potential competition is one of the most effective disciplinary forces in three out of our seven markets; in the remaining four markets, however, sellers said that there were already so many title offices that the possi bility of a few more entering the market made little or no difference in the behavior of existing firms. As was summarized on the tabular sheet in Chapter X, the typical market in our study provides a reasonably appropriate setting or structure for effective competition. Behavior. The ingenuity used in and the persistence of non-price competitive tactics in all seven markets would clearly indicate effectiveness. Aside from a condition 239 of increased price competition, one could hardly ask for more intense competitive behavior. No identifiable collusion was noted in any of the markets studied. Generally, speaking sellers responded quite rapidly to the moves of competitors. As indicated earlier, vigorous, open price competi tion is the exception rather than the rule. Considerable shading of prices, however, occurs where large liabilities and subdivisions are involved. The major aberration, of course, is market "B." Here prices are regularly "negoti ated" by most sellers. It is only the "uninitiated" who bear the burden of the scheduled price. Mergers are not uncommon in the majority of our mar kets. However, these mergers do not seem to have sub stantially reduced competition. In three of the markets mergers were regularly followed by the appearance of new sellers so that the number of sellers was only temporarily reduced. Attempts to differentiate and miscellaneous com petitive efforts comprised the most active battlegrounds. In general efforts in these areas substantially benefited the consumer without giving any of the sellers a very 240 significant advantage in the sense of having markedly, differentiated their product or service. Performance. The effectiveness of competitive performance has been disappointing. Following a rather careful analysis of the elements entering into unit costs-- salaries, office rental rates, number of title plant post ings required per day, initial plant investment, methods of doing business, etc.--the conclusion was drawn that these costs taken together need not vary from one of the markets to another by more than 30 per cent at the extreme. If these conditions in fact exist and if effective competitive pressures were tending to equalize profits, then prices should not vary much more than 30 per cent from market to market. In practice, however, there were many prices for substantially the same services and insurance coverage that varied by far more than this per cent. The conclusion that may be drawn is that the effectiveness of competitive performance in levelling prices and profits from market to market leaves something to be desired. This kind of inter market comparison in order to evaluate the effectiveness of competitive performance suffers from a number of weak nesses, however, and must therefore be used with caution. 241 Innovational activity, although some exists, was singularly disappointing in the industry, the title insur ance business has and is moving rather slowly in improving internal procedures. (On the other hand considerable effort is being devoted to new ways of doing or ’ ’control ling” business.) Diversification has been almost entirely of the geographic variety, and practically no title insurance sellers have moved into unrelated activities. Growth of the industry has occurred in the markets studied principally by virtue of population growth and accelerated real estate activity and not because of com petitive pressures and lower prices. In summary the performance in the various markets has been one of the lesser arguments in favor of effective competition. Structure, behavior and performances summarized. Taken together the structure, behavior and performance in the more typical market situations point toward effective competition as a general rule. In some markets there are structural and performance weaknesses to be sure, but on balance the results are satisfactory. The consumer’s 242 interest is being reasonably well represented and defended. More regulation or public utility status for the industry would hardly improve the situation as will be argued later. Most Typical Situation: Statutory Setting Laws affecting structure. State laws affecting entry are,designed to encourage the existence of finan cially responsible sellers and not to limit competition. Typically, the statutes affecting entry are reasonable and permit financially sound firms to enter the various mar kets . Neither the typical paid-in capital nor the paid-in surplus requirements have apparently deterred otherwise qualified sellers. As shown by our tabular summary neither a security deposit nor a title plant are required in the majority of cases. A premium reserve, which could be a barrier to entry because it limits the use of revenue, seems entirely reasonable from the standpoint of policy holder protection and not severely onerous to the new entrant. Laws limiting vertical integration are rather narrow in scope and do not generally limit vertical type monopo lies . As a consequence statutes of this kind have not been 243 too effective in maintaining or encouraging competition. Statutory attempts to improve buyer and seller knowledge or to establish a homogeneous policy have con tributed in a very, very limited way toward an effective competitive setting. There are some statutory limitations to entry, but they all seem to be in the interest of financial responsi bility and consumer protection. Attempts to limit vertical integration and to improve knowledge and homogeneity are not impressive. Laws affecting behavior. The statutory mode of our markets does not limit competitive behavior. In the majority of cases pricing is left to the market unhampered by state government control. The few exceptions to this rule are rather severe in the opposite direction. Summary on most typical situation. In Chapter IV it was suspected that statutory environment had a rather minimum impact on competition in the title insurance in dustry. These suspicions have been generally confirmed. As indicated in the tabular, comparative summary, there is at least one significant market exception to this rule. 244 Clark*s Regulation Criterion In both Chapters II and II J. M. Clark’s simple criterion of "workable” competition was noted, ”if competi tion cannot be improved by regulation, then it is work able."1 As has been observed a number of times, the sample of markets is a small one, and it would be dangerous to generalize from a study of only seven counties. By the same token it has been the intent of this paper to identify trends or characteristics observable from this limited s tudy. In Figure 1 (least control and best performance are both shown as "1st") if there is any correlation at all between statutory control and competitive performance, it is an inverse one. The more statutory control imposed in a market the poorer, the competitive performance, and con versely, the less statutory control, the better the com petitive performance. These tenuous findings would indicate that perhaps our title insurance markets tend to be "workable” because ^ohn Maurice Clark, "Toward a Concept of Workable Competition," American Economic Review, 30:241-256, June, 1940. STATUTORY CONTROL 2L5 f 7 th -1 6 t h - 5 th - 3 rd- 2 nd- I st - 1st 2nd 3rd 4 th 5th 6th 7 th PERFORMANCE FIGURE I STATUTORY CONTROL VS. COMPETITIVE PERFORMANCE 246 they have not been improved by regulation. On the contrary effective competitive performance seems to degenerate with greater statutory control. If there is in fact a cause and effect relationship here, it would seem to support Clark’s conment that "the areas in which free and competitive market adjustments have been displaced by direct controls do not offer examples of conspicuous success as to make us 2 eager to increase their number unnecessarily." Economic Goals To hold this analysis of title markets up against economic goals seems a bit remote for a study of one, rather small industry and perhaps smacks of a fruitless academic exercise. On the other hand, even to evaluate the effectiveness of one segment of the economic system, com petition, and one small industry, title services, without a reference to ultimate goals would leave the study incom plete. Freedom of choise. In the typical market which has been studied freedom of choice seems to be far more common 2 John Maurice Clark, Competition as a Dynamic Process (Washington, D.C.: Brookings Institution, 1961), p. 486. 247 than uncommon. Consumers or representatives of consumers have chosen title insurance sellers on the basis of service or price and not because of some ownership tie between them. The fact that a number of sellers have existed in most markets has also given the consumer a range of choice in addition to the freedom of choice just mentioned. Because there have been successful new sellers in most of the markets during the last fifteen years, it can be concluded that factor-owners (owners of land, labor, capital or enterprise) have also enjoyed the freedom to enter the industry in metropolitan areas. Finally, competition seems to have prevented ex tremely hazardous or harmful moves of sellers (reduction in service level or unreasonable increases in prices) so that a workable discipline appears to have been maintained. Standard of living. The first element of living standard was identified in the "criteria" chapter as efficiency. This analysis of the title industry would indicate reasonable efficiency in some markets because of the reasonable profits arid prices observed, but a substan tial lack of efficiency in other markets. Innovations 248 to aid procedures have been slow as noted earlier, but this slowness may be the result of too much rather than too little competition (a position which will be advanced in detail later when the paradox of structure and performance is discussed). Competition in its rather ruthless sense tends, as has been noted, to eliminate highly inefficient firms or firms whose product is no longer in demand. Competition in the seven markets has eliminated a number of inefficient firms by way of merger and mas made practically obsolete earlier forms of title evidence, which are in very little demand, such as the abstract-opinion package and the "guarantee" (as opposed to the title insurance policy). Thus efficiency in the more ruthless sense seems to have been furthered by competition in the markets studied. Rapid and accurate allocation of resources, our second standard of living ingredient, can also be illus trated by the rapidity with which the title sellers have met legitimate consumer demands for insurance coverage, directly related services, and peripheral services. The protection needs of owners, lenders and lessees have grown rapidly in most metropolitan markets in the 249 nation, and the changes in the title insurance policy coverage would indicate reasonable responsiveness to these needs. The demands for speed and accuracy in processing orders and for the many free services required by those dealing in real estate and the promptness and completeness with which these demands have been met in our markets seem to support further the contention of rapid and accurate resource allocation. Neither full employment nor economic growth seems to be significantly encouraged by the competition in the title industry. Optimum distribution of income. Nothing of sig nificance can be offered here either. Consistency with economic goals. One might conclude that some facets of competition in the title industry are > certainly consistent with our economic goals. There are few aspects of the industry which are inimical to our goals and most aspects are merely neutral or too remote from our broad goals to be of any significance. 250 II. COMPETITIVE STRUCTURE, BEHAVIOR OR PERFORMANCE AS A FUNCTION OF STATISTICAL SETTING Not only have statistical settings been described to insure the choice of large, urban markets for this study, but some correlation was suspected, either direct or in verse, between (1) structure, behavior, or performance and (2) statistical setting. After careful study of the criteria and statistical settings, it can only be concluded that there is not even a hint of correlation between these two groups of items. This is not to say that there is no cause and effect rela tionship, but there is none that could be identified. III. COMPETITIVE BEHAVIOR AND PERFORMANCE AS FUNCTIONS OF COMPETITIVE STRUCTURE With most of the principal questions answered in the earlier part of this chapter one's curiosity as to this question can be satisfied. Has competitive structure--one of the simplest tests to apply to a given market and the one most frequently relied upon--encouraged effective com petitive behavior and performance? 251 Structure vs Behavior In the Chapter X tabular summary markets have been ranked by structure and behavior. As the footnotes indi cate, those markets ranked first are the most competitive structurally and behaviorally. Figure 2 shows that there is a direct correlation between structure and behavior. Where there are many sellers, a minimum of concentration, ease of entry, and a high level of market information, there also tends to be extremely active price competition (not low prices but much negotiating of prices and a good deal of variation from the printed schedule), strong attempts to differentiate ser vices, few mergers, and quick responses to competitor moves. Needless to say the direct correlation between structure and behavior is not perfect. There are excep tions, but the tendency toward direct correlation is clear. It is of great interest to note that a high level of competitive behavior does not necessarily benefit the con sumer. There is much motion but not necessarily any locomotion. There are many competitive moves but not necessarily any impressive results in favor of the con sumer. 1st 2nd 3rd 4th 5th 6th 7 th STRUCTURE FIGURE 2 STRUCTURE VS. BEHAVIOR 253 Structure vs Performance The lower graph on Figure 3, ’ ’Structure vs Perform ance, ” shows an inverse correlation between these two sets of criteria. Where there are few sellers, a maximum of concentration, and conditions making entry by sellers dif ficult, there tend to be lower prices, faster reporting on the condition of the title, and more innovational activity. Thus, in this study of seven metropolitan markets the consumer seems to benefit more under what are tradi tionally identified as the poorest structural circum stances. The reasons for this apparent paradox are a matter of conjecture, of course. However, the following explanations are offered. Where there are many sellers, each struggling to stay afloat, often because of a heavy, fixed or rising plant cost, efforts are made to keep prices high to permit ’ ’ breathing space” in what appears to be a jungle of com petition. Because the party ordering the policy of title insurance is not the same individual or entity who pays for the policies, the former (at least up to a point of unreasonableness) has little interest in the burden placed on the latter. Thus the ultimate consumer has no effective PERFORMANCE 6 th- 5 th- 3 rd- 2 nd- I st - 1st 2nd 3rd 4th 5th 5th 7th STRUCTURE FIGURE 3 STRUCTURE VS. PERFORMANCE 255 advocate. As a consequence, prices rise, and the fear of more sellers entering the market is practically non existent because "there are already so many, a few more will not hurt.” On the other hand, where there are only a few sellers each enjoying a reasonable profit, fear of poten tial competition seems to have kept prices down. In addi tion, the profits earned seem to be sufficient to permit rapid and accurate reporting of title. Profits are above the economises ’ ’ normal" level (that level which is just sufficient to draw forth the factors of production). More money can be devoted to speed and accuracy as opposed to short-run, stop-gap inducements to customers in the jungle of many sellers. Allocations to innovational activities can also be made. Conclusion. Thus, what has usually been identified as competitive structure has in this study been directly associated with competitive behavior and inversely related to competitive performance. Later under the heading, "implications for policy," recommendations in light of this apparent paradox will be made. 256 IV. IMPLICATIONS FOR PUBLIC POLICY As indicated by the findings in this chapter, com petition is tolerably effective in the seven markets of this study. Consequently the governmental administrative agencies and legislative bodies should not seek to inter fere unduly with competition and the market mechanisms as they are presently operating. Reasonable Balance and Moderation Periodic analyses by public bodies of these various markets have been made and will probably continue to be made. Evaluation criteria, however, should be similar to those used in this paper. A reasonable balance and some moderation among structural, behavioral, and performance characteristics ought to be the ultimate measure of effec tive competition. More of the facets of competitive discipline seem to become operative with reasonable balance and moderation among the structural, behavioral, and performance charac teristics . If there are too many sellers (twelve or more in each market) the discipline arising out of the fear of new sellers entering the market begins to subside. If there are too few sellers (one or two) the purchasers and 257 users of title insurance have made it abundantly clear that the competitive pressures for better service are insuf ficient . Where price competition is rampant, the unsophisti cated buyer may be charged higher premiums for policies than the knowledgeable purchaser or user. Where there is no price competition at all, price schedules may fail to reflect changes in costs or changes in market conditions over a period of time. Sellers should not be so large or so dominant as to prevent competitive moves by opponents, nor should firms be so small that none of their resources can be devoted to innovational activities. Thus, without rewriting the entire paper, public bodies should make their analyses and base their conclu sions on balance and moderation among the criteria we have used. Overemphasis on a single criterion or on too few criteria, would be extremely dangerous in this funda mentally competitive industry. A Public Utility? Finally, one might pose the question as to whether or not (with the lower prices appearing in markets with 258 the fewest number of sellers) this industry should be con sidered a public utility and regulated accordingly. A thoroughly satisfactory answer to this question might require hundreds of pages and would require many traditional public utility tests such as tendency toward monopoly, how necessary to existence is the service, and is there major resource waste resulting from the duplica tion of facilities under competition. Not being the funda mental question posed by this paper, it is feasible to devote only a few paragraphs to the subject, ’ ’ why the industry should not be controlled as a public utility.” Many industries which are faced with a significant fixed cost of operation have been subjected to this ques tion. More often than not the question has been resolved by the courts, the legislators, and the economists in favor of competition and the market mechanism. The reasons for such an answer are founded in the fundamental faith in a capitalistic system where competition has been demonstrated as the most balanced means of keeping prices down, innova- tional activities at a peak, and consumer preferences in the fore. In addition, the attempts at government-operated title evidencing enterprises such as the Torrens system 259 have--in spite of pressures, theories, and excuses to the contrary--simply never gained the acceptance and the popu larity in the United States enjoyed by the privately oper ated title evidencing enterprises. Finally, recent government studies of insurance and financial institutions appear by implication to reject the public utility concept for these types of enterprise. The committee on Financial Institutions mentioned earlier in this paper observed with reference to financial markets (which have a number of characteristics in common with title insurance markets): Although Financial Markets have special character istics, including limitations on competition it is important not to confuse banks and other financial institutions with public utilities. . . . Consider able leeway exists for the play of competition and, in fact, competition is relied upon as a spur to adequate service. . . . In the Senate Report of 1960 on the insurance in dustry Senators Dirksen and Hruska expressed these thoughts most of which are applicable to the title insurance in dustry: 3 Walter W. Heller, Chairman, Report of the Committee on Financial Institutions (Washington, D.C.: Government Printing Office, 1963), pp. 46-47. 260 Insurance differs from an ordinary commercial activity since it involves handling trust funds. However, it is not a public utility and the growth of individual insurance companies reflects an active competition between them in meeting needs of assureds. • • • Competition among insurance companies includes efforts for better service in prompt settling of claims as well as technical assistance to establish improved methods and procedures. In conclusion the soundest recommendation for public policy is to "leave well enough alone." Some guidance through state statutes and the administration of these statutes can enhance the effectiveness of competition in certain geographic and structural or behavioral areas. But the workability and effectiveness of competition in the metropolitan markets that have been studied would indicate to government a general "hands off" policy. V. SUMMARY Two reasonably clear cut conclusions have been drawn in this chapter. First, as measured by the three chosen criteria, competition in the metropolitan title insurance 4 U.S. Senate, Committee on the Judiciary, 86th Congress, 2nd Session, 1960, The Insurance Industry: Aviation, Ocean and Marine, and State Regulation (Washing ton, D.C. : Government Printing Office, I960),, p. 270. 261 markets of this study is ’ ’satisfactorily" effective. The consumer's interest is being reasonably well represented and defended. Comparisons with the principal set of criteria support this statement. Relating the "most typical situations" to Clark's Regulation Criterion and to economic goals also indicates satisfactory support for the same statement. Second, implications for public policy are quite uncomplicated. With the consumer's interest being reason ably well represented not very much government concern or involvement is called for. Furthermore because there is not necessarily any correlation between structure and per formance in a given title insurance market, government should carefully evaluate circumstances in light of at least all of the criteria used here before drawing conclu sions as to the effectiveness of competition. CHAPTER XII TRENDS AND IMPLICATIONS FOR THE FUTURE From the combination of facts and opinions gathered in this survey there are certain, apparent trends in metro politan title insurance markets. These trends imply a number of competitive characteristics for the future. Of course, any predictions can only be reasonable guesses because there are many forces--and some pressing in oppo site directions--at work in these markets. With the aid of the pattern used throughout this paper what is likely to be the typical structural, be havioral and performance situation in these markets between five and ten years hence will be examined. I. STRUCTURE Concentration Number of sellers. Probably the most significant and at the same time the most unpredictable characteristic 262 263 of competition in the future will be the number of sellers. There is hardly any question but that the trend will be toward more sellers of the service, but there certainly is a question as to ”how many sellers?” If the patterns of markets ”A,” ”C," ”D," ”F" and ”G” prevail, then there will be traditional title offices per the earlier definitions. These offices will maintain title plants and will search, examine and handle closing routines for real estate transactions. There is a maximum number of sustainable offices within this traditional framework. Market "B" has gone beyond this number, and it would seem that as in the past, the future will see a practical limit to the number of sellers. The limit is, of course, determined by the title insurance revenue available and this in turn is a function of the level of population, rate of population growth, real estate turnover, etc. If, on the other hand, the structural patterns of market "B" and ”E" spread in their own perimeters and into other markets, a very different future may emerge. In these markets there are many agents for title insurers, and the result is a segmentation of the title evidencing process and a vertical integration of the real estate 264 transfer process. It is certainly possible that many large lenders, builders, law firms, land developers, and real estate broker firms could perform a number of the modem title evidencing steps if state statutes and exist ing title offices and insurers condone such a development. The result could be hundreds of sellers in each market five to ten years from now. The future number of sellers in each market will depend largely on which of the above two patterns emerges. It is our prediction that the battle against segmentation of the title evidencing process (i.e., a vertical integra tion of all phases of the real estate transfer process) will be a hard fought one. Shares of the market. As the number of sellers increases in the future so each of the market shares will tend to become more equal. This kind of trend would be expected in most markets (whether title insurance or not) as the number of sellers increased and as competition, generally, intensified. Entry Entry will become more difficult in the next five to ten years for two reasons. First, unless title plant services are sold at wholesale (i.e., to retailers of abstract or title services), entry will become more diffi cult because of rising plant building costs. In metro politan markets of the type that have been discussed the increasing population and the rise in the number of instru ments recorded annually will force plant building costs up. Little is seen technologically speaking in the next five years at least which will materially shave this entry cost. Second, financial responsibility requirements will rise. Not only will the owners of and lenders on the larger metropolitan land development projects require more financial responsibility of title insurers, but statutory requirements will also stiffen. In a Proposed Model Title Insurance Code which has just been formulated by a special committee of the American Land Title Association the following recommendations have been made (which are more stringent than those analyzed earlier): 1. For all domestic title insurers a minimum paid-in capital of $250,000 plus a paid-in surplus of 50% of the capital requirement or a total of $375,000 for both items. 2. A deposit of qualified securities with the insurance commissioner in the amount of $100,000 plus an additional $50,000 for each 266 state other than the "home” state in which insurance is offered up to a maximum of $750,000.1 Even with the above limitations entry will continue to be made when prospects for profit appear promising enough. Parties making entry can come from many different areas--from sources of business like lenders, brokers, and attorneys, from groups splintering off from existing title offices and insurers, and from title offices or insurers expanding into areas they presently do not service. Independence of Rivals There will probably be little change in the future as to independence of rivals. Generally, sellers will operate independently as they have in the past. Future exceptions will not be serious from the standpoint of com petition. When sellers become too numerous as is the case of market MB,” there may be a great temptation--particu larly with those experiencing financial difficulty--to agree on the scope of certain competitive tactics (free services, for example). Area title associations will American Land Title Association, Proposed Model Insurance Code, January, 1964, p. 3. 267 continue to have a strong influence on the type of policy coverage and the general character of risk practices. V ert ic al Int egrat ion Under the earlier heading "Number of Sellers" the segmentation of the title insurance industry was discussed. If this s egmen t at ion occurs, it will be tantamount, of course, to a vertical integration in the real transfer process. There are strong arguments and growing forces opposing this integration. Of the many arguments two are among the more significant. First, because the interests of the insured, the examiner, and/or the insurer may periodically be at odds with one another, the interests of none (when processed by a single entity) will be im partially represented. Second, it is claimed that competi tion is lessened when a seller’s business is always assured him through financial control of buyer decisionmakers re gardless of the prices he charges or the services he pro vides . Significant pressures will come from the title offices and insurers themselves to repress vertical inte gration on the grounds that it is a restraint of trade. 268 In the Proposed Model Title Insurance Code this kind of vertical integration is attacked with the following section (a section which in substance is found at present in a number of state insurance codes): If the fees and charges for personal or controlled insurance from any one source so issued in any one calendar year received by a title insurance company or by a title insurance agent shall exceed twenty-five per cent (25%), or from all such sources shall exceed fifty per cent (50%) of the total fees and charges received by such title insurance agent for title insurance issued in the same year, the excess shall be deemed to be an unlawful rebate. Aside from new statutory controls, there will be attempts to enforce or to seek judicial interpretation of existing laws. In early 1964 two of the smaller title offices in Southern California brought a suit against par ties alleged to be vertically integrating the real estate transfer process. In general, the complaint focused on the integration of escrow companies, real estate lenders, title offices, and title insurers. The plaintiffs seek an injunction against this vertical integration along with treble damages suffered by them. Stated simply the two principal legal violations 2 Ibid., p. 20. 269 advanced are (1) a "secret rebate” to title insurance customers the purpose of which is to ’ ’lock in” title revenue (a possible violation of the State Insurance Code) and (2) a restraint of trade by the vertifically integrated entities (a violation of the State ’ ’Little Sherman Act” which is almost identical to the one quoted in Chapter V of this study). Besides the pressures from title offices and in surers there will be opposition to vertical integration from small businesses involved in the real estate transfer process. Small escrow companies, real estate lenders, and real estate brokers will oppose this movement as a force which could threaten their very existence. The small busi nesses feel that vertically integrated firms can reduce prices to the point that the small entities cannot operate at a profit. As we observed earlier, the growing arguments and forces opposing vertical integration portend a vigorous battle in defense of "open and fair" competition at each level of the real estate transfer process. 270 Product Differentiation and Homogeneity Pressures from regional and national lenders will continue to encourage homogeneity of title insurance poli cies both in given counties and across the nation. Future attempts to differentiate the services associated with the issuance of a title policy will be dis cussed under behavioral criteria. Market Informat ion Seller knowledge. Seller knowledge of market forces will improve in the future. Sellers will develop more and better intelligence as to competitor moves, as to buy decisionmaker*s and as to the insured’s needs. A new generation of managers is appearing among sellers of title services, a generation that is spending more time on the business aspects of their operations, and proportionately less time on the technical requirements for insuring inter ests in real property. This emphasis on business aspects will yield better techniques and more interest in gathering market information. Buyer knowledge. Buyer knowledge will also materi ally improve in the next five to ten years. The actual 271 buyer*s agent--the decisionmaker--will seek and obtain more knowledge about sellers and their services. There will be more efforts made by sellers to inform decisionmakers of the type and character of services available. Attorneys, lenders, brokers and escrow companies will, as competitive pressures intensify demands upon them for "service," in reacting to these pressures become more knowledgeable as to the speed and accuracy provided by each title service seller. As more off-record matters are covered by title insurance policies (and this is the predicted trend), more claims will be paid to insured lenders and owners. This trend will focus more attention on the speed, willingness, and capacity of sellers in responding to loss claims. More and more the actual purchaser--the insured owner or borrower--will become better informed as to the advantages of dealing with one seller over another. The better informed purchaser will come as a result of (1) national and local periodical articles (similar in coverage but perhaps not in bias to the recent Reader * s Digest expose) covering the costs of transferring interests in real property, (2) institutional efforts by sellers of 272 title insurance to inform better the public of (a) the need for reliable title evidence and (b) the processes connected with real estate transaction, and (3) conceivable efforts by traditional sellers of title services to acquire busi ness from sellers, buyers, and borrowers normally in the grip of a controlled or controlling title office or insurer (thus the traditional seller may try to break this con trolled business grip and to encourage the party paying for a title policy to exercise his right to determine the supplier of this policy). Probably one of the few exceptions to better buyer knowledge will come about if vertical integration in the industry becomes more prevalent. Where the controlled or controlling title office enters the picture, it is unlikely that the latter will want purchasers of title services to be better informed. Better information may cause the pur chaser of title services to wander out of the controlled title office's grasp. Potential Competition Discipline from potential, new competitors will con tinue to be a force in bringing about effective competi tion. It will not be a major force if the title industry 273 follows its more traditional development because so many sellers feel that the saturation point for numbers of sellers has already been reached. Potential competition stemming from a vertical integration trend in the title industry will provide more fear and discipline than will any prospective horizontal increase in competition. Summary on Structure Structurally speaking, competition will become more intense over the next five to ten years. Unless the trend toward vertical integration in the title industry gathers momentum, however, structural changes will be gradual and not sudden or drastic. II. BEHAVIOR Collusion Unless competition becomes intolerable in the sense of a number of sellers in a given market operating at below the breakeven point (unable to cover variable and fixed costs), collusion in terms of assigning each other shares of the market, severely limiting production or service, and specifically agreeing on price schedules will not develop 274 in the future to the extent of seriously limiting competi tion. Response Time As market information becomes more exact and more complete and as more sellers enter a given county, response time--where a seller is able to respond--will become shorter. Again, responses may not occur at all or will take longer, if controlled business becomes more prevalent. Where captive business is enjoyed, there is often no need to respond to the moves of other title service sellers. Price Moves Only a few aspects of pricing practices seem worth predicting. First, as the number of sellers in a market increases, it is likely that more complicated price sched ules will appear. These more complicated schedules will reflect concessions to varying costs of production. The re-issue rate in title insurance markets is a concession to lower costs of production. It is possible that where re-issue rates are not in effect, they will begin to appear. Other price concessions and complications will 275 also result from better identification of costs and keener competition among sellers. Because the title insurance market (unless the in dustry becomes severely ’ ’segmented” in any given area will continue to be an oligopoly, in the future it is likely that price competition where legalized by state law will be more covert than overt. Scholarly discussions of oli gopolistic behavior seem to emphasize the futility of overt price competition. Known price moves of one seller are (1) typically matched by other sellers immediately (where product or services are reasonably homogeneous) or (2) the first step in a price war bent on wounding competitors. It is only where the price moves are not well-known or not easily identified that an oligopolistic seller may increase his share of the market. The resulting condition is the well-known "kinked demand curve.” Mergers Whatever mergers may occur in the next five to ten years will generally not involve sellers operating in the same county. Unless such a marriage is designed to save one or both of the sellers from failure (this has occurred in market ”B”)* 276 Future mergers will tend to involve sellers in dif ferent markets with the objectives of achieving greater financial responsibility as ’ ’ backing" for title insurance policies, more geographic diversification as a hedge against regional real estate cycles, better service to national buyer decisionmakers or beneficiaries, the flexible application of financial and skill resources to areas from which the greatest returns will be forthcoming, and finally whatever economies of scale that may be avail able to sellers. Product Standardization As indicated under the "product differentiation" heading earlier in this chapter, there will continue to be more title insurance policy coverage standardization. Attempts to Differentiate Speed and accuracy. As long as no serious vertical integration obtains, the next decade will see ever more intensive efforts to improve the speed and accuracy in reporting the condition of title and in issuing the policy of title insurance. The enhancement of accuracy and speed will come primarily through the improvement of internal 277 procedures, the improvement of selecting and training title office personnel, and the more intense use of management control techniques. Free services. It is probable that as profit margins stabilize or shrink following continued new entries into the industry, that the character of free services may change. Instead of the more institutional type services (such as free record land-owner information to all comers) those services directly associated with the acquisition of title premiums will become more popular (aids to land developers, messenger service from buyer decisionmakers1 offices to title offices, etc.). Retrenchment on any kind of free services will be difficult. In the minds of the buyer decisionmakers services once offered and accepted become near necessities. Building constructive, personal relationships. Ingenuity in building constructive, personal relationships will intensify in the future. Barring vertical integration this means of acquiring title premiums will continue to be popular. More ingenious personal relation approaches on the part of not only customer relations and management 278 personnel will abound, but on the part of all title office employees dealing directly with the buyer decisionmaker as well. A friendly and helpful attitude on the part of the title office employee will become a necessity for survival in the future. Miscellaneous Competitive Efforts As might be expected, some of the miscellaneous competitive efforts described earlier will wither and disappear. Loans by title associated entities to de velopers for land acquisition will fade as money continues to become more plentiful generally and as government regu lations ease. Federal Home Loan Bank requirements relating to Savings and Loan Associations lending for land acquisi tion purposes are being relaxed. There are so many possible future competitive efforts that it would not be sensible to attempt an identi fication of all of them. Just a few are worth mentioning for the sake of projecting trends. Generally, with more scientific management tech niques creeping into the title insurance industry, these types of activities may appear (1) attempts at more effec tive merchandising, (2) new schemes to motivate employees 279 as sales people, and (3) possible purchase of raw land later to be made available to builders. . Community activi ties by employees of title offices will continue but will be questioned as competition intensifies. Summary on Behavior Having (1) observed in Chapter XI the correlation between competitive structure and behavior and (2) pre dicted in this chapter a more competitive structure in the next five to ten years, it is understandable that one can also foresee more intense competitive behavior during the same period. It would appear that the rate of intensi fication of total competitive behavior will be even greater than that of total competitive structure. III. PERFORMANCE Profit Levels In accordance with expected results of competition in a market, profit margins for each firm will shrink, and total profits for the industry will rise moderately in the next decade. (See ’ ’ Rate of Growth” heading in this chap ter. ) Profits as measured by return on investment calcula tions are now beginning to reach a plateau. No change in 280 this picture is expected until and if major technological changes occur in the procedures employed in the industry. Prices Insurance rates for existing policy coverages will not change significantly in the near future. Added struc tural and behavioral competitive forces will maintain a fairly firm lid on rates. Only through increases in policy liability amounts will revenues rise significantly for present types of insurance policies. However, as more "off record" matters are offered under new types of poli cies (an expected trend), higher insurance rates to cover additional work and greater risk will emerge. Quality of Service Predictions on this subject were treated earlier under the heading, "attempts to differentiate." Innovations and Progressiveness Pressures for innovations and for progressiveness will come from two principal sources in the metropolitan title insurance markets. First, the larger sellers across the nation backed by adequate financial resources will allocate substantial sums of money for the study of 281 automating or improving internal procedures and for the study of new, more effective ways to conduct their business and sell their services. Second, the many sellers of all sizes in their zeal to enlarge their portion of the market will search endlessly and energetically for new ways of wooing or controlling sources of title orders, for new approaches to pricing which may win them prestige and title premiums, and for revolutionary approaches to merchandising their service. Although many new approaches to conducting the title insurance business will be attempted over the next decade, a relative moderate number will stand the test of market combat and of time. Diversification As already observed in this chapter, geographic diversification by title insurance sellers will continue in the future. Firms in unrelated industries will periodi cally seek diversification by purchasing sellers of title insurance. Both of these trends are already under way. Functional diversification by present sellers of title in surance will probably be slow and will be attempted by very few existing firms. 282 Rate of Growth As the population of the nation grows and assuming it continues its present rate of mobility, and as housing starts to rise (knowledgeable forecasters say the number will exceed 2,000,000 annually before 1970), the number of real estate transfers will increase and so will the number of title insurance policies issued. More important from the standpoint of competitive performance, the number of title insurance policies across the nation will rise particularly in those areas where other forms of title evidence exist. The title insurance policy will become more popular because of pressure from real estate lenders for uniformity in title evidence and because the price will be hardly any more than for the uninsured abstract and opinion. IV. SUMMARY Between 1969 and 1974 competition in metropolitan title insurance markets will be more intense both struc- turally and behaviorally than it is today. Competitive performance will reflect this growing intensity. The num ber of sellers will increase but the rate of increase will 283 depend on the wax or wane of forces for vertical integra tion. If the forces opposing this movement prevail, the present structural and behavioral characteristics will be recognizable but intensified. Were forces encouraging vertical integration to emerge victorious, the market for title insurance as it exists today may evolve into some thing much changed. The market may be one of a complete ’ ’one stop” real estate service. At the extreme, land de velopment, lending, building, real estate brokerage, escrow, title, and all related services may be offered by large, vertically integrated entities. The result will be a single new market for the package of services rather than the many markets that exist for each of these components today. There will be few, large sellers under such condi tions. On the other hand there is another possible result of segmentation of the title industry which is an integra tion of only some of these services with the result being more sellers of a less complete package. As mentioned earlier, however, the battle opposing segmentation will be a hard fought one. Assuming no significant segmentation, more intense competitive behavior will evidence itself in more com- 'plicated price structures and continued attempts to differentiate services through improved internal proce dures, better intelligence systems, more sophisticated methods of merchandising and tighter management controls. Mergers, though they will probably continue to occur across county lines, will enhance rather than lessen competition. Performance results will pinch profit margins and decrease the rates of both price and profit increases for the in dustry as a whole while innovational efforts of all kinds will continue to grow at an even faster pace. BIBLIOGRAPHY BIBLIOGRAPHY A. BOOKS Baldwin, William Lee. Antitrust and the Changing Corpora tion. Durham: Duke University Press, 1961. Berle, A. A., and G. C. Means. The Modem Corporation and Private Property. New York: Macmillan Company, 1932. Burns, Arthur R. The Decline of Competition. New York: McGraw-Hill Book Company, 1936. Chamberlin, Edward H. The Theory of Monopolistic Competi tion. Cambridge: Harvard University Press, 1933. Clark, John Maurice. Competition as a Dynamic Process. Washington, D.C.: Brookings Institution, 1961. Due, John F., and Robert W. Clower. Intermediate Economic Analysis; Resource Allocation, Factor Pricing and Welfare. Homewood, Illinois: R. D. Irwin, 1961. Massel, Mark S. Competition and Monopoly: Legal and Economic Issues. Washington, D-C-: Brookings Institu tion, 1962. Mund, Vernon A. Government and Business. New York: Harper and Brothers, 1955. Roberts, Ernest F., Jr., editor. Public Regulation of Title Insurance Companies and Abstracters. Philadel phia: Villanova University Press, 1961. Robinson, Joan A. The Economics of Imperfect Competition. London: Macmillan & Co., 1933. 286 287 Smith, Adam. Wealth of Nations. New York: Modern Library Edition, 1937. Stocking, George W. Workable Competition and Antitrust Policy. Nashville: Vanderbilt University Press, 1961. Ulmer, Melville J. Economics. Theory and Practice. Boston: Houghton Mifflin Company, 1959. B. PUBLICATIONS OF THE GOVERNMENT, LEARNED SOCIETIES AND OTHER ORGANIZATIONS American Land Title Association. Proposed Model Insurance Code, January, 1964. Federal Trade Commission v. National Casualty Company; Federal Trade Commission v. American Hospital and Life Insurance Company, 357 U.S. 560, 1958. Report of the Committee on Financial Institutions. Washington, D.C.: Government Printing Office, 1963. U.S. v. South-Eastern Underwriters Assn., 322 U.S. 535, 1944. United States Bureau of the , Census. County and City Data Book, 1962. Washington, D.C.: Government Printing Office, 1962. United States Congress, Senate, Committee on the Judiciary. The Insurance Industry: Aviation, Ocean and Marine, and State Regulation. Hearings before Sub-Committee, 86th Congress, 2nd Session, I960. Washington, D.C.: Government Printing Office, 1960. Webster^ Collegiate Dictionary. Springfield, Massa chusetts: Meriam Company, 1948. 288 C. PERIODICALS Clark, John Maurice. ’ ’ Toward a Concept of Workable Com petition,” American Economic Review. 30:241-256, June, 1940. James, Eliot. ”Is Competition in Industry Ruinous?” Quarterly Journal of Economics, 34:473-519, May, 1920. Sheridan, James E. ’ ’ Titles to Real Property,” Title News. 26:4, September, 1947. D. NEWSPAPERS Los Angeles Times, November 11, 1962. APPENDIX 290 QUESTIONNAIRE FOR USERS OF TITLE INSURANCE Structure of the Market Sellers a. Number of title firms (1) How many separately owned companies are offer ing Title Insurance services in the county? (2) What are their names? _______________________ (3) If these companies are not qualified title insurers, by whom are they underwritten? (4) How many firms or entities offered title insurance services in the county five years ago? _________ ten years ago? ___________ fifteen years ago? _________ b. Attorney services (1) What percentage of recordings covering specific real estate interests are examined by non-title company attorneys? ____________ (2) What percentage of the attorney examinations in question b (1) are also covered by title insurance policies? ■ ________ 291 Service similarity and service differentiation a. Differentiation in quality of service provided by title companies: If there appears to be real competition in the components of service shown in Exhibit "A" attached, please rate the companies 1st, 2nd, 3rd, etc. by the components of service. b. Competition in coverage 1• Printed insurance policy: (a) Are the same policy coverages offered by each firm? YES NO (b) If "NO, " could you describe how the policies differ? __________________________ - (c) May I have copies of the most common types of policies issued? 2. Policy exceptions: (a) Is elimination of exceptions in the policy used frequently as a competitive weapon? YES NO (b) Are extra hazard fees usually charged for eliminating these exceptions? ____________ EXHIBIT "A" RANKING OF TITLE COM PANY SERVICES . Enter names of companies in these blocks Component of Service 1st 2nd 3rd 4th 5th 6th Speed in Processing Typical Orders . • . ■ • . . ' • Accuracy in Processing Typical Orders - - • • , •- . ■ - • • % * • Competency in dealing vith complicated title questions - ■ Personal qualities of employees dealing directly with the customer - ----- . •s ■ - ... .. • Willingness to help the customer achieve his objective - . - ' - ... • .. . . . . • 293 QUESTIONNAIRE FOR USERS OF ABSTRACT COMPANY SERVICES Structure of the Market Sellers a. Number of abstract firms (1) How many separately owned companies are offer ing abstract services in the county? ________ (2) What are their names? (3) How many firms or entities offered abstract services in the county five years ago? ____ ten years ago? _________ fifteen years ago? b. Attorney services (1) What percentage of recordings covering specific real estate interests are examined by non-title company attorneys? ___________ (2) What percentage of the attorney examinations in question b (1) are also covered by title insurance policies? ___________ Facilities 1. Complete Plants How many firms have relatively complete title plants? ___________ 294 2. Modified Plants How many firms have modified title plants (i.e., records going back only five or ten years or records covering only part of the property in the county)? ____________ 3. No Plants How many firms have no title plant at all (i.e., operate entirely or almost entirely from the public records)? ____________ Service similarity and service differentiation 1. Differentiation in quality of service provided by title companies: If there appears to be real competition in the components of service shown in Exhibit MA" attached, please rate the companies 1st, 2nd, 3rd, etc. by the components of service. EXHIBIT "A" HANKING OF ABSTRACT COMPANY SERVICES Enter names of companies in these blocks Component of Service 1st 2nd 3rd 4 th 5th 6th Speed in processing Typical Orders ’ • . ■ * • • Accuracy in processing Typical Orders - - - Competency in dealing with complicated - - - ......... - title questions Personal qualities of employees dealing directly with the customer • • Willingness to help the customer achieve his objective • ■ - • 295 296 QUESTIONNAIRE FOR THE ABSTRACT MARKET I. Structure of the Market A. Number of buyers and sellers of abstract services 1. Buyers a. Number and sources of Buyers; Approxi mately how many entities or firms that order or use abstracts are there in each of the following classifications? Lenders (commercial banks, savings and loan associations, etc.)___________ Attorneys___________ Escros Companies Real Estate Brokers__________ Builders and Subdividers Large Land Owners. b. Number of Large Buyers: (1) In your estimation how many of these entities or firms order more than 1% of the abstracts issued per month in the county? ___________ (2) How many of these entities or firms order more than 370 of the abstracts issued per month in the county? 2. Sellers a. Number of abstract firms (1) How many separately owned companies are offering abstract services in the county? _________ (2) What are their names? 297 (3) How many firms or entities offered abstract services in the county five years ago? _______ ten years ago? ___________ fifteen years ago? ___________ B. Facilities 1. Complete Plants How many firms have relatively complete title plants? __________ 2. Modified Plants How many firms have modified title plants (i.e., records going back only five or ten years or records covering only part of the property in the county)? ___________ 3. No Plants How many firms have no title plant at all (i.e., operate entirely or almost entirely from the public records)? ___________ C. Service similarity and service differentiation 1. Differentiation in quality of service provided by title companies: If there appears to be real competition in the components of service shown in Exhibit "A" attached, please rate the companies 1st, 2nd, 3rd, etc. by the com ponents of service. 298 D. Market Information 1. Knowledge of competitor activity a. Knowledge of competitive moves: Do you feel that you are reasonably well informed of your competitors* moves to gain or to keep customers? YES NO b. Competitor Knowledge: Do you feel that your competitors are reasonably well informed of your firm’s moves to gain or to keep customers? YES NO c. Identification of tools and tactics: Are there certain competitive tools or tactics that can be used without com petitors ’ ’ catching on, M at least for a limited period of time? YES NO d. Description of tools and tactics: What are these tools or tactics? ___________ e. Record keeping: Do you keep regular, accurate records (from recordings in the Recorder's or Registrar's Office) of the percentage of available business acquired by your own company and by your com petitors? YES NO 2. Buyer Knowledge: a. Knowledge of advantages and disadvantages: Do you feel that your customers and those of your competitors are aware of the ad vantages and disadvantages of dealing with each abstract firm in the county? YES NO 299 b. Efforts to improve knowledge: If "NO," are efforts made to improve customer knowledge of these advantages and disad vantages? ___________ c. Description of these efforts: Would you describe these efforts? ________________ II. Behavior of Participants in the Market A. Price Behavior 1. Pricing methods: May I have a copy of price schedules which have been in effect since 1945? B. Competition through Alternatives to Price 1. Free Services: Please indicate which of the following services are used as competitive tools by abstract companies in the county: a. In connection with a specific abstract order: (1) Pay-Off Escrow YES NO (2) Brochures to Subdividers YES NO (3) Please describe others_____ b. Without reference to a specific abstract order: (1) Information (ownership, mailing addresses, etc.) from your title plant. YES NO (2) Please describe others______________ 300 2. Customer Relations Representatives; Are the number and quality of customer relations representatives a significant competitive factor in the county? YES NO a. Number of customer relations representa tives . How many representatives do you have ? ___________ 3. Gifts and Entertainment: Are gifts to and entertainment of customers considered a sig nificant competitive factor in the county? YES NO 4. Surveys of Customer Preferences: In the last five years, have abstract companies directed formal written or oral questionnaires to customers in an attempt to determine why they buy from a particular abstract company? YES NO a. Copy of questionnaire. Is a copy of this questionnaire available? YES NO 5. Real Estate Loans: Are real estate loans available to builders and subdividers from abstract companies or their subsidiaries? YES NO 6. Community Activities: Do you seriously attempt to win the favor and confidence of your present and prospective customers by encouraging participation by your employees in community affairs? YES NO 7. Office Location: Does your office location have any competitive significance in the county? YES NO a. How is location significant? 301 8. Other forms of non-price competition: What other forms of non-price competition exist or do you expect will exist within the next five years in the county? ________________ _ III- Performance in the Market A. Financial Data 1. Copies of balance sheet and P/.L Statements: May I have a copy of your published balance sheets and your published profit and loss statements for as many years as possible from 1946 through 1962? B. Research and Development 1. Dollars Involved: What percentage of abstract income is devoted to finding ways to reduce costs and to improve service to your customers? _________________ _____________ 2. Specific types of activities: Would you describe the types of things you are doing to improve service and/or to reduce costs in the following areas: a- "Take-Off" of instruments recorded in the Recorder’s or Registrar*s Office: _______ b. Plant Posting Procedures: c • Mapping Procedures for either your plant or the plant maps which may be supplied to customers: ________________ d. Searching Procedures: e. Examining Procedures: f. Typing Procedures: g. Escrow Procedures: Geographical Diversification: Into what new counties has your company moved from 1946 to 1962? ______________________________ EXHIBIT "A" RANKING OF ABSTRACT COM PANY SERVICES Enter names of companies in these blocks Component of Service 1st 2nd 3rd 4th 5th 6th Speed in Processing Typical Orders . Accuracy in Processing Typical Orders . - Competency in dealing vith complicated title questions personal qualities of employees dealing directly vith the customer • s ■ • Willingness to help the customer achieve his objective • - - ^ ■ . . . • . • 304 QUESTIONNAIRE FOR THE TITLE INSURANCE MARKET I. Structure of the Market A. Number of buyers and sellers of the title insur ance company services. 1. Buyers a. Number and sources of Buyers: Approxi mately how many entities or firms that order or use title insurance are there in each of the following classifications? Lenders (commercial banks, savings and loan associations, etc.)___________ Attorneys___________ Escrow Companies ___________ Builders and Subdividers __________ Large Land Owners___________ b. Number of Large Buyers: (1) In your estimation how many of these entities or firms order more than 1% of the title policies issued per month in the county? ___________ (2) How many of these entities or firms order more than 3% of the title poli cies issued per month in the county? 2. Sellers a. Number of title firms (1) How many separately owned companies are offering Title Insurance services in the county? __________ (2) What are their names? , _______________ 305 (3) If these companies are not qualified title insurers, by whom are they underwritten? ____ (4) How many firms or entities offered title insurance services in the county five years ago?___________ ten years ago?___________ fifteen years ago? ___________ b. Attorney services (1) What percentage of recordings cover ing specific real estate interests are examined by non-title company attorneys? _______ (2) What percentage of the attorney examinations in question b (1) are also covered by title insurance policies? ___________ B. Service similarity and service differentiation 1. Differentiation in quality of service pro vided by title companies: If there appears to be real competition in the components of service shown in Exhibit "A" attached, please rate the companies 1st, 2nd, 3rd, etc. by the components of service. 2. Competition in coverage a. Printed insurance policy: (1) Are the same policy coverages offered by each firm? YES NO (2) If "NO," could you describe how the policies differ? _____________________ , j . . . .... t l 306 (3) May I have copies of the most common types of policies issued? b. Policy exceptions: (1) Is elimination of exceptions in the policy used frequently as a com petitive weapon? YES NO (2) Are extra hazard fees usually charged for eliminating these exceptions? C. Market Information 1. Knowledge of competitor activity a. Knowledge of competitive moves: Do you feel that you are reasonably well in formed of your competitors* moves to gain or to keep customers? YES NO b. Competitor Knowledge: Do you feel that your competitors are reasonably well informed of your firm's moves to gain or to keep customers? YES NO c. Identification of tools and tactics: Are there certain competitive tools or tactics that can be used without com petitors ’ ’ catching on, ” at least for a limited^period of time? ^ YES NO d. Description of tools and tactics: What are these tools or tactics? 307 e. Record keeping: Do you keep regular accurate records (from recordings in the Recorder's or Registrar's Office) of the percentage of available business acquired by your own company and by your competi tors? YES NO 2. Buyer Knowledge: a. Knowledge of advantages and disadvantages: Do you feel that your customers and those of your competitors are aware of the ad vantages and disadvantages of dealing with each title firm in the county? YES NO b . Efforts to improve knowledge: If "NO," are efforts made to improve customer knowledge of these advantages and disad vantages? _________ _ c. Description of these efforts: Would you describe these efforts? ________ II. .Behavior of Participants in the Market A. Price Behavior 1. Pricing methods: May I have a copy of price schedules which have been in effect since 1945? B. Competition through Alternatives to Price 1. Free Services: Please indicate which of the following services are used as competitive tools by title companies in the county: a. In connection with a specific title order: (1) Fay-Off Escrow YES NO (2) Brochures to Subdividers YES NO (3) Please describe others b. Without reference to a specific title order; (1) Information (ownership, mailing addresses, etc.) from your title plant. YES NO (2) Please describe others_____________ Customer Relations Representatives: Are the number and quality of customer relations representatives a significant competitive factor in the county? YES NO a. Number of customer relations representa tives . How many representatives do you have? ___________ Gifts and Entertainment: Are gifts to and entertainment of customers considered a sig nificant competitive factor in the county? YES NO Surveys of Customer Preferences: In the last five years, have title companies directed formal written or oral questionnaires to customers in an attempt to determine why they buy from a particular title company? YES NO a. Copy of questionnaire. Is a copy of this questionnaire available? YES NO 309 5. Real Estate Loans: Are real estate loans available to builders and subdividers from title companies or their subsidiaries? YES NO 6. Community Activities: Do you seriously attempt to win the favor and confidence of your present and prospective customers by encouraging participation by your employees in community affairs? YES NO 7. Office Location: Does your office location have any competitive significance in the county? YES NO a. How is location significant? ___________ 8. Other forms of non-price competition: What other forms of non-price competition exist or do you expect will exist within the next five years in the county? ______________ III. Performance in the Market A. Financial Data 1« Copies of balance sheet and P/L Statements: May I have a copy of your published balance sheets and your published profit and loss statements for as many years as possible from 1946 through 1962? B. Research and Development i f 1. Dollars Involved: Whaf percentage of title premium incoi^ib is devoted to finding ways to reduce costs/and to improve service to your customers? ? 310 2. Specific types of activities: Would you describe the types of things you are doing to improve service and/or to reduce costs: C. Geographical Diversification: Into what new counties has your company moved from 1946 to 1962? __________________________ __________ IV. Government Intervent ion A. State Government: Does State Government through the insurance commissioner or other agency generally permit title companies to make their own business decisions or does state government play a dominant role in title business decision making? __________________________________________ V. Nature and Costs of Typical Real Estate Transaction A. Title Insurance premium payment: Who pays for the Title Insurance policy in the typical sale of a $20,000 house? BUYER SELLER B. Other costs associated with a transfer of real estate: Other costs associated with the sale of $20,000 house include: 1. Escrow Fee YES NO 2. Points paid to new Lender YES NO Prepayment penalty paid to old Lender Reconveyance or release fee Charges for recording documents ;•; ^ ■:: EXHIBIT "A" •/’ - ‘ ' ' - RANKING OF TITLE COMPANY SERVICES . . i • •- * , . ’ ^ . 1 Enter names of companies in these blocks Component of Service 1st 2nd 3rd 4th 5th 6th Speed in Processing Typical Orders ■ • - • • • • ; • . . - 0 ..V • • • •' - • . v . . -t t . . ... ■ ■ • » • Accuracy in Processing Typical Orders ' - • • ; ;r ■ ■ - ** Competency in dealing tilth complicated title questions / * r • Personal qualities of employees dealing directly with the customer ■ •" ■ " . • • - 4 r , , ; . Willingness to help the customer achieve his objective ■ „ 312
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Asset Metadata
Creator
Brown, Joseph Real, Jr.
(author)
Core Title
An Analysis Of Competition In The Title Insurance Industry
Degree
Doctor of Philosophy
Degree Program
Economics
Publisher
University of Southern California
(original),
University of Southern California. Libraries
(digital)
Tag
Economics, General,OAI-PMH Harvest
Language
English
Contributor
Digitized by ProQuest
(provenance)
Advisor
Anderson, William H. (
committee chair
), Elliott, John E. (
committee member
), Martin, Preston (
committee member
)
Permanent Link (DOI)
https://doi.org/10.25549/usctheses-c18-342515
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UC11358922
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6413488.pdf (filename),usctheses-c18-342515 (legacy record id)
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6413488.pdf
Dmrecord
342515
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Dissertation
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Brown, Joseph Real, Jr.
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texts
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(contributing entity),
University of Southern California Dissertations and Theses
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