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How to bring COE prices down

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First, we should buy the good folk at the LTA a beer. Just make it a Corona. It could hold the key to a maverick solution for high COE prices.

SINGAPORE Back in 2012, two-thirds of all the beer sold in America were made by just two companies: Anheuser-Busch InBev and SABMiller.

If you like a frosty beer now and then, you’ve definitely given money to these guys.

AB InBev has 200 brands in its portfolio. 17 of them generate more than US$1 billion in sales every year. We’re talking about names like Budweiser, Stella Artois, Hoegaarden… you get the idea.

SABMiller’s brands are less well-known here — Nastro Azzuro, Grolsch, Foster’s, Miller and so on — but the group is still the world’s number two brewer.

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One day, bosses at AB InBev decided to buy Grupo Modelo, the company that makes Corona.

And that made the US government uncomfortable. The Department of Justice has 50 PhD-level economists on staff, and their job is to keep an eye on companies that grow too powerful. The DoJ generally believes that if some businesses grow too large, they then become free to set whatever prices they like, and customers simply have to pay.

In other words, the US government believes that competition is good for consumers because it helps to keep prices down.

Although Grupo Modelo was a small player, the DoJ had identified Corona as a “maverick” product. It had a big enough market share — around 7 percent — to keep the giants honest. That is, the US government felt that having Corona around made it difficult for AB InBev or SAB Miller to raise the prices for Budweiser, Foster’s and so on.

So the DoJ sued to block the purchase.

What does all this have to do with the Land Transport Authority? It seems like a similar idea could be put in place to keep COE premiums from climbing out of control.

That is, perhaps Singapore could use a maverick product to keep the market for COEs — which has only one seller — from being conducted in a way that makes consumers suffer.

There are two ready candidates to fill that role, and though neither is a perfect substitute for a new car, they might tempt enough people from new car showrooms to put out some of the flames currently heating up COE prices.

The first is used cars. At the moment the barriers to buying a second hand car are pretty daunting. You can only borrow up to 60 percent (sometimes 50 percent) of the car’s price, and have to pay that back within five years, or however many years remain on the car’s COE.

But if used cars were made more accessible than new cars by easing the financing restrictions on them, they would become a more viable option for people who need (or feel they need) a set of wheels.

Remember, competition helps to keep pricing down, so the idea is to make used cars compete with new ones.

If you could borrow, say, up to 90 percent of the price of a three year-old Teana over seven years, you might well skip that trip to the Nissan dealer and shop at the used car marts instead.

The LTA could implement a rule to make nearly-new cars (say, those less than two years old) ineligible for these bigger loans, to prevent people from buying new cars and then re-selling them immediately to those too cash-strapped to be able to meet the current, tight loan requirements.

MORE: How current COE prices mean big bucks for the LTA

All of this might raise used car values, of course, but at some point if an older car started to inch too close to a new one in terms of pricing, then buyers would simply take their money back to new cars.

It seems likely that prices would eventually migrate towards one another, but even if used cars do become relatively expensive, at least their loan structure would make them more affordable on a monthly basis.

Not everyone who needs to get around has a family to transport, of course, so the other maverick product that could be deployed to take demand away from new cars is the humble motorcycle.

The whole point of the COE system is to reduce congestion anyway, and many studies have shown that switching drivers to motorcycles is good for traffic flow.

As we’ve reported in CarBuyer, one way to eliminate congestion entirely is to switch commuters from cars to motorcycles.

Every bike on the road is one or two persons fewer in a car or, for that matter, inside a crowded bus or train.

And given how motorcycles have been shown to reduce congestion instead of adding to it, it’s tough to understand why there should be COEs for bikes at all.

Why not get rid of bike COEs, then, and see if the motorcycle develops into a maverick product that keeps car prices in check?

Perhaps because vehicles aren’t beers, and trifling with the market could well unleash the sort of congestion to paralyse the city, the way Jakarta’s traffic does.

Or perhaps because the only plausible solution to high COE prices will be some sort of economic shock that wipes out car demand, in which case many of us will be glad that stiff loan restrictions kept us from borrowing too heavily.

Or perhaps, above all, because the LTA and the US Department of Justice are two entities with vastly different missions, and there is one key difference between them: the DoJ is interested in keeping prices low.

Postscript: In case you’re wondering what happened in the matter of US Department of Justice vs AB InBev, the beer company won. Corona is now one of the AB InBev’s brands.